What to Do if You Have Less Than Stellar Credit

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Recovering From Having Less Than Stellar Credit

What do you need to do if you have less than stellar credit? If you would like the answer to that question keep reading. Every business has set backs. Each has to break free from their past in order to maximise its potential. This requires fixing past missteps and learning new skills.

We want to introduce you to Ivan.  This case is a good example of how to recover from set backs. In order to grow, Ivan needed to take a step back so he can move forward. He had to recover from a few early missteps and events outside his control.  This case outlines his journey.

Ivan's Story

“The business is doing fine and needs to expand, but banks keep turning me away. I’m frustrated and angry. I know that I didn’t always make the right decisions, but that was then. Why do I have to keep paying for it now?”

Ivan a boutique fitness studio that has been successful in recent years. To continue to grow, Ivan needed to expand beyond his current location. Ivan is a people person, who has a lot of friends and had a lot of fun. He wasn’t always careful with his credit, so he’d taken some hits. He got his current location from a friend, but when he came to us, he needed capital to grow. Banks weren’t willing to work with him, so he felt stuck and frustrated.

Many small businesses don’t realize that their personal credit can have a negative impact on their ability to get a business loan especially if they are new and do not  have sufficient assets to use as collateral. This was the issue that Ivan was facing.

How We Helped Ivan

The front of the tile describes the problem. Flip it to see the solution.

Personal Credit Matters

Ivan's case is all too common. Personal credit score impacts access to business capital for owners, an unfortunate truth in small business lending. Ivan wasn’t in terrible shape, but it was going to take a few years before he would be able to reach the magic 700 number. Why is personal credit such an important factor, even if the company has a good track record? It’s all about risk. Can the person be trusted to repay the debt.

Started Fixing His Credit

There are a number of things you can do to improve your credit score, but they all boil down to a few major themes: pay your bills on time, consistently and don't try to take on more personal debt until the old debt is paid down. This process takes time, between 6 to 12 months. Ivan need cash before then, but that didn't stop him from taking action now so he could show a positive trend.

Banks Were off the Table

Since Ivan didn't have a credit score that would be acceptable to major banks, he only hurt himself by applying. Each application will show up on your personal credit report. Banks will require credit check for anyone who owns more than a 20% interest in the company. These checks are hard pulls on your credit report. Hard pulls will lower your credit score.

Alternative Lending Was the Solution

Even if your small business has been denied a loan, you may still have a good chance of obtaining funding form alternative lending sources. These alternative sources of funding with less strict requirements. 54% of business with credit scores less than 700 are more likely to apply to an alternative lender, according to the Federal Reserve. Ivan was no different. The trade-off here is that while they accept these than stellar credit, the charge more in interest. They are usually don't the first choice, but they are not a bad choice if you have a rapidly growing business.

We Had to Make Tradeoffs

We needed to make some trade-off decisions so we could get the cash we needed at blended interest rate we could afford. We need to decide how much we could raise vs. how much was absolutely critical. Rent and labor were his two largest expenses. As such, we had to make some compromises. The first was to reduce the square footage he needed, and by doing so, it cut back on the labor costs as well.

Affordable Blended Rate

We got 1/2 the loan from an alternative lender. It was a steep APR of 17%. But, we could offset the impact of this rate through the peer to peer effort. We received 15% from 0% APR non-profit lender, and 35% from a 10% Peer-to-Peer group. The net rate was 12%, which near the upper end of the SBA range at that time. Ivan secured the loan and was able to expand.  He was able to grow at 50% over the time period, so he more than recouped the gain from the loan.

If you are like Ivan and have less than stellar credit, the options are out there if you are able to make trade-offs and get creative with funding solutions.  If you’re business isn’t quite like Ivan, please take the Business Assessment to be guided to a guide that is right for your business. Otherwise, you can contact us directly and we can have a chat about how to help you succeed!