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Business Loans: Is Having Bad Credit the End of the Road?

Running any business—small, medium, or big—is never easy. Besides all the dedication, passion, and hard work you’ll need to put in every moment, you should have constant access to capital or funds to grow your business successfully.

Bank loans are one of the most common financing sources for businesses around the world. In fact, banks in Europe have provided loans to the tune of about 1.4 trillion euros to small and medium enterprises. But, this doesn’t mean that every loan application from a bank gets approved.

In the United Kingdom alone, the rejection rate for business loan applications varied between 33% and 19% from 2013 to 2016. According to the Federal Reserve’s 2016 Small Business Credit Survey, less than half the number of loan applicants received the financing amount they sought. The rest got lesser than what they wanted or nothing at all.

Getting a Small Business Loan

Most of these loan applications were rejected because of the borrower’s poor credit. In truth, bad credit can be your downfall if you’re looking for a traditional bank loan. But, it doesn’t necessarily mean it’s the end of the road for you as a borrower.
From finding alternate lending sources to boosting your creditworthiness, a little groundwork can go a long way in increasing your chances of approval. Read on to see how you can go about applying for a business loan if you have bad credit:

Building Personal Credit

A good place to start when you’re looking for a business loan is building your personal credit score. Ensure you’re making all payments on time and keep a tab of how much you owe.
If you’re in debt, tackle the bigger payments first. You could try the snowballing method, a balance transfer card, or even a loan to consolidate your debt into more manageable payments.

Making a Business Credit Profile

A separate business credit profile is advantageous to have, especially when your personal credit is bad. It gives credibility and improves your chances when you need financing.
It also works much the same way as your personal credit score if there’s ever a need to rebuild it. Just make sure all your payments are made on time.

Creating a Strategy

For a business to be successful, creating an effective business strategy is highly important. From developing a vision statement to identifying strategic objectives, you’ll need to know where you’re headed and what you need to do to make it big.
You could also try your chances at enhancing your creditworthiness. All you need is a letter of reference from your personal or business contacts.

Preparing the Required Documentation

Getting the right documents in order is another important step to applying for a business loan. Along with the letter of reference, it’s important that you keep your personal information, resume, bank statements, and business plan handy.
You should also have your income tax returns, debt schedule, loan application history, and other legal documents in place.

Finding the Right Lender

Traditional bank loans aren’t the be all and end all of business financing. You could try direct lenders like equity firms and investment banks or peer-to-peer lenders. You could also try term loans, equipment loans, invoice financing, microloans, or merchant cash advances.

The advantage of seeking alternate financing is that you get comparatively lesser approval criteria and quicker funds disbursement. On the flip side, you may have to deal with higher interest rates and personal guarantees.

To stand the best chance of finding a business loan that works perfectly for you, you’ll need to compare multiple offers. In addition, remember to factor in loan costs, repayment period, eligibility criteria, and the lender’s reputation before you take the next step of application.
So, don’t lose heart if your bad credit score is stopping you from getting your business off the ground or taking it to the next stage. Following the steps above will help you work around your credit situation and get the required financial assistance.

Source: FinSMEs

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Scots’ SMEs turns to crowdfunding after ‘systemic’ bank failures

Entrepreneurs and small businesses are turning their backs on scandal-hit traditional banks and are using risky, unregulated online crowdfunding platforms in growing numbers to raise capital, an MP has warned.

Issuing a call for more regulation of crowdfunding and better protection of small businesses from predatory banking practices, East Lothian MP Martin Whitfield warned banks “are so close to losing the confidence of people, full stop”. Mr Whitfield warned that distrust and bureaucracy is leading to small business lending being choked off in the decade since the financial crash, contributing to run-down high streets and depressed economic growth outside of major cities.

In a Westminster Hall debate today, the Labour MP and members of the All-Party Parliamentary Group on Fair Business Banking will call for an independent, low cost tribunals system similar to employment tribunals that clients can turn to when they believe they have been mistreated by their banks. It follows recent scandals over the way banks have treated business customers, including claims that RBS’ Global Restructuring Group exploited 12,000 of its own customers.

The GRG allegations are the subject of a Financial Conduct Authority probe, and the bank has set up a £400m compensation scheme. Two former Bank of Scotland staff were also convicted last year over their role in a £1bn criminal scheme at its business turnaround unit.

Lending to small businesses has continued to fall since the financial crash, and many are now wary of even approaching their bank. A British Chambers of Commerce survey last month revealed that 63 per cent of small firms with fewer than ten employees have never sought finance, compared to just 39 per cent of companies with more than 50 employees.

A report from the Fair Business Banking APPG published on Wednesday concluded that there was a “systemic failure” in regulation of business banking.

“Entrepreneurs are not automatically looking to the banks, because entrepreneurs view is that the banks are going to treat them badly, so they’re increasingly looking at alternative finance,” Mr Whitfield said.

“One of the things small businesses say is, ‘look, we’re spending all our time trying to gain access to finance, when actually what we should be doing is improving the business and making it grow’.

“High street banks, working on the classic banking model, are so close to losing the confidence of people, full stop.”

Mr Whitfield claimed that with the biggest high street banks slashing their branch networks, “the whole idea of going to speak to your local bank manager about a loan – it just does not exist anymore.

“The demands that the banks are putting on to drive their profit are driving our entrepreneurs away, so they’re turning to crowdfunding 
and other means, but the problem is that regulation is lacking in that area, so there’s the potential for people to be exploited.”

As well as a tribunal system for bank clients, MPs are demanding a cross-government inquiry into banking regulation and additional funding for investigation of financial crime. “One of the problems is that the police forces don’t have the expertise to do it,” he said.

Source: Scotsman