During these financially unstable times when the dollar is devaluating and the oil prices are rising, some people may find it attractive to establish their own small businesses. A small business decreases the reliance on employers who, at any time, could implement lay-offs.
The possibility of unemployment and the appeal of controlling your own time is enough incentive for putting up a small business. But a business cannot begin without capital and this where small business loans come in. Obtaining small business loan demands many hours of detailed preparation such as making a realistic plan of paying back the loan and setting up collateral.
The most important consideration that banks look into is the reputation of the loan applicant as a borrower. This is when the banker look into the credit score of the loan applicant. If the credit score is blemished, the application for the small business loan will be denied. Does this imply that a person with bad credit can no longer establish a small business?
There are small business loans that are available to people with bad credit but the usual first step is to establish a business credit which is separate from the bad personal credit. This can be done by creating a legal identity that represents the business and this is paired with a tax ID number. This signals the financial world, especially the credit bureaus, that a new business credit is being formed.
The legal identity and the tax ID will not attract banks which can provide low-interest business loans, but the legal identity will make the businessman eligible for small credit lines from various suppliers and vendors. Paying the bills from these suppliers and vendors will establish good business credit and high business credit scores. Eventually, the person will be eligible for small business loans.
Another method available for people with bad credit to establish a small business loan is to engage in trade credit. Trade credit is an agreement between the businessman and the supplier to delay payment for certain products being supplied. For example, if the small business is a souvenir store, the businessman can establish trade credit with the manufacturer of a souvenir items. The souvenir items are delivered with the agreement that these will be paid within a certain period of time, such as two months. If the souvenir items are paid in less than two months, there is a 15% discount and if the items are paid in less than one month, there is a 30% discount. In this manner, the businessman can have more savings when he manages to pay earlier.
And still another method is to obtain funds through signature loans or home equity loans. Since the businessman already has a bad personal credit, the interest rates for such loans are high. But if a good budget and payment plan is strictly enforced, this method has chances of success.