Getting a loan can be a difficult process if you are struggling to build credit for the first time or if you have had financial woes in the past that hurt your credit scores.
This is especially true if you are attempting to secure financing for your new or small business.
Banks and other lenders will see you as a high risk option when you have low or no credit, and most of the time they won’t be willing to help you out. If you are starting a small business, or your current small company is struggling financially, this too makes it difficult to secure a loan.
Having poor credit usually means you have missed payments or defaulted on loans before and they don’t want you to do the same to them. You either won’t fit the lending guidelines of traditional banks or you will have to pay steep sub-prime interest rates. However, there are a few alternative options to consider.
Use a Home Equity Loan
After the collapse of the housing market many homeowners now owe more than their home is actually worth. One way to get a tax deductible and low interest line of credit is if you have any equity in your home. The only downside is that if you can’t repay the debt then, because you used your home equity, you risk losing your house. But if you are disciplined about paying off the equity line of credit, and you have a steady and reliable source of income, then this is a cheaper option no matter what your credit score is.
Apply to Credit Unions
Credit unions work a lot like banks, but they are also nonprofit organizations that are owned by their supporting members. These members usually live in the same geographical location or are employed in similar lines of work. What these members receive by being a part of credit unions are lower fees and a higher emphasis placed on customer service. Credit unions will also work to help people with bad credit get the loans they need. Before you sign any contracts or agree to any terms and conditions, make sure you shop around at multiple lending institutions to know that you are getting the best deal.
Get a Peer to Peer Loan
This type of loan option has only been around for a relatively short time and the whole process is done on the Internet. Peer to peer (or P2P) lending allows you to borrow straight from an individual person instead of a bank or other lending group. This method of borrowing and lending has been growing in popularity because of the ability to skip all the legal hassle and go straight to the loan. Also it is an option where both parties in the transaction win. Borrows can pay low interest rates and investors can earn high interest returns.
How it works is you have to sign up on a peer to peer website. Then you post a loan listing where you describe the reasons why the loan is being requested and the amount you are looking for. Lenders browse through the listings and choose the ones that meet their criteria or look beneficial to them. Investors still have to screen potential customers and check their credit. Though credit scores are still a factor an individual lender may be more sympathetic to your specific situation than a big bank.
Borrow from Family or Friends
If you don’t have any luck with these first three options, then you can try and ask a close friend or family member. Despite the familiarity of the lender, you have to clearly document and legally record the transaction as serious business. Make sure you write up an agreement between the two parties that includes things like payment terms, interest rates, any collateral you may put up, and what will happen if you are unable to repay the debt.
This will help you avoid any complications later on. Choosing this type of loan should benefit all parties involved and really should only be used as a last option. You wouldn’t want a legal misunderstanding or a bad debt to ruin your close relationships with these people. The NFIB is a good resource for businesses in need of financing.
Appeal to a Co-Signer
You may not be able to find any friends or family members that are willing to directly give you a loan, but you may be able to ask one with good credit to co-sign on a loan with you. Once again, it would have to be someone who knows you personally and trusts that you will be able to repay the debt you owe, because if you miss payments or default then the lender will be looking to the co-signer for full compensation. Also, both of your credit reports will have the payment history on them, so any fault on your part will negatively affect your co-signer’s credit as well.
If none of these possibilities work for you then you just need to work on rebuilding your credit so you can apply for traditional loans through banks. Check your credit reports for errors and immediately start to pay bills on time and not over borrow on credit cards so that your current credit levels won’t drop any further. However, it is very likely that those with poor credit scores will be able to a secure a loan via one of the options above.