Your FICO score reflects your predicted ability to pay back a loan, based on your own credit history. In general, if you’ve borrowed often before and paid each one on time, then your FICO score will usually be very high. You’ve demonstrated that you are responsible enough to pay back the money you’ve borrowed promptly.
However, if you have a low FICO score because you used to pay late or you never really borrowed money from financial companies before, then convincing a traditional lender such as a bank to provide a loan will be a futile undertaking. Banks nowadays are notoriously tight-fisted when it comes to lending money to high-risk borrowers.
Still, that doesn’t mean that you can’t get the loan you need for your small business. But you may have to consider another approach.
- Friends and family. This type of small business loan is very common. After all, you already have a connection with friends and family, and if they trust you then your low FICO score is irrelevant. For small amounts, friends and family may suffice to get you the loan you need.
But there are inherent drawbacks to this type of loan. In general, it’s not always wise to mix business and personal relationships. Your friendships and familial relationships may be damaged should you encounter any difficulty in paying back the loan.
- Borrowing with a Co-Signer. If your FICO score is preventing you from getting the small business loan you need, then perhaps you need the assistance of someone who trusts you who has a much higher FICO score than you. Your Co-signer usually agrees to cover the loan amount should you prove unable to pay back the loan according to the agreement with the lender. In this type of loan, it’s as if your co-signer is the one asking for a loan, except the money goes to you.
- Using your credit cards. Some people who have a small business simply use their credit cards to fund their operational expenses. The main advantage of this approach is that the money is already available to you, so you can get it quickly and without a fuss. And as your credit card is like a line of credit, you can just borrow the exact amount you need.
However, you’re bound by the credit limit of your credit card. There’s also the inherent danger of mixing your personal and business finances. Your personal credit can take a beating if you are unable to pay your business loan.
- Specialty lenders. If you can’t get the loan you need from a bank, you may want to approach specialized lenders who focus on borrowers with poor credit. Often the interest rate can be very high. Also, you may be required to offer some collateral for the loan, such as your car or even your home.
You may get the money you need for your business, but you pay dearly for the privilege and you risk a lot should you fail to repay the loan on time.
These days, banks are no longer your sole source of funding should you need a loan for your business. You can still get the loan you need, even if you have a poor FICO score.
