Is Your Business Trying To Secure
Bad Credit Financing?
The good news is that there is such a thing as bad credit financing. The bad news is that it usually comes at a cost and still be hard to qualify for.
To be classified as having bad credit, there are a number of things a lender can look at. But what a lender actually uses to make a decision on your credit worthiness can vary considerably from lender to lender.
If you were in search of business financing, you would normally go to the cheapest source first, that being one of the Chartered banks. These institutions tend to be very focused on your credit score and the credit score of your business if it’s been around long enough to have one.
Your credit score is a numeric result generated from an algorithm used by the credit reporting agencies to determine an overall level of credit worthiness. The algorithm takes in multiple factors that contribute to your overall score.
To gain a better understanding of how the credit scoring system works and how to get your own credit score, go to the credit rating page on this web site.
For the Chartered Banks, a score below a certain level can immediately disqualify your application for financing.
For other types of lenders, your personal and business credit score will still be important, but not to the same degree as the Chartered Banks.
Other elements of credit that may cause you to require bad credit financing include:
• NSF Checks
• Recent Late Payments
• Historical Bankruptcy
• Loan Write-offs and Settlements
• Credit In Arrears
• Numerous Credit Inquiries
The more recent your inability to make required payments on time, the more difficult it will normally be for you to acquire any type of financing.
There are many cases where someone may have a low credit score, but they still have several financing options because their recent repayment history is clean with everything paid up to date and payments made on time.
By its very nature, bad credit financing is provided by asset based lenders or cash flow based lenders.
Cash flow based lenders that would consider sub par credit would include factoring companies and certain subordinate debt lenders. But even for these individuals, they want to be able to see near term credit responsibility in the credit reports.
As I have mentioned previously, despite what most borrowers would like to think, lenders are not really interested in taking risk. They are risk adverse by nature, so the more ugly your credit looks; the less likely you will be to find a cash flow based lender.
For many asset based lenders, the same logic applies in that there are some willing to look at fair to bad credit if the near term performance of the potential borrower shows improved credit responsibility.
The worse you credit gets, the fewer bad credit financing options that are available to you.
But even in cases where the credit is really bad with no real short term improvement, there are still asset based lenders that provide financing. These are the real hard money lenders that provide financing on their assessment of the value of assets that can be pledged as security, usually real estate or large, difficult to move machinery.
Bad credit financing from these lenders tends to be very expensive and very unforgiving in that if you miss your payments, they will seize the assets pledged as security as quickly as the law allows and liquidate the assets to get repaid.
The degree to which you are successful securing bad credit financing depends on the following factors:
- Your ability to explain the issues or events that created the bad credit in the first place can have a significant impact on establishing your credit worthiness in the eyes of a lender. Sometimes things can go against you despite your best efforts, and if you have done everything possible to reduce the damage caused by your past circumstances, a lender may see their way clear to granting you credit.
- Your near term demonstration of credit management and repayment. If you can bring everything up to date and pay everything on time for a year or more, then some lenders will look more favorably on your credit application.
- The type and quality of the assets and/or cash flow you have to pledge to the lender. If you have bad credit, you will get no where with a lender unless you have something of significant value to pledge. The worse your credit is, the more your bad credit financing sources will be limited to asset based lenders, mostly focused on real estate. And depending on the amount of money you are looking for, the only assets that may be of interest to a lender will be your home.
Because Bad Credit cannot be corrected overnight, you can improve your bad credit financing options by just starting to pay everything you owe on time and reducing as much debt as you can through cost reduction and operational streamlining of capital assets.
In many cases, trade credit references can also provide value to certain types of asset based lenders that are having a hard time determining if your credit history is something they can live with before providing you with some amount of bad credit financing.
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