Getting a business loan with bad credit to buy a business is challenging and requires the business to have enough assets to meet the lender needs.
Your Credit Profile
Before you jump into applying for loans to buy a business, examine your own credit. You may assume you have bad credit, but it might not be as bad as you think. Take the opportunity to clean up any errors or pay down other debts to improve your credit profile.
Personal credit reports are available through any of the three reporting agencies: Experian, Equifax and TransUnion. You can also check with an existing bank or credit card company to see if it offers free credit reports. Review the report for any errors. Contact reporting companies about errors with proof of payment, such as a receipt for having paid a bill on time.
If there isn’t much you can change in the report, prepare to explain negative issues on the report, why there was a problem and what you have done to rectify it. If you were ill and out of work for a period of time and were late on payments, an explanation might help during the loan underwriting process.
The Business Credit Profile
Gather all the financial information about the company you are purchasing. An owner who is reluctant to provide information may be hiding something. Obtain bank records, merchant services, account transactions, inventory numbers, vendor sheets and tax returns. Look back at least two years, longer if possible.
Request budget items such as payroll and lease information. Gather any existing debt owed on the business including open lines of credit. You need to know what the business pulls in and what its expenses and liabilities are.
Write a business plan detailing the successful history of the business and project the growth out for the next five to seven years. The business plan helps lenders get a real picture of what the loan is used for. Most business loans are unsecured, meaning there is no collateral. All of these records help you and the lender see if there is an asset to tie the loan to – perhaps real property, inventory or merchant receipts.
Applying for Credit
Whether you are starting a new business or buying an existing business, make an appointment to review the entire plan with a Small Business Administration counsellor. This person may be able to improve the plan so it better suits what a lender seeks. The counsellor also has relationships with lenders who specifically provide SBA loans.
Whether you go through the SBA or go directly to a bank or credit union, make your package as professional as possible and look like a business owner when you meet with lenders. While you are a customer, lenders view their role more as investors and want to work with professionals. Complete the application and present the entire package as supporting documentation.
If you are denied a loan, ask the lender about having a credit partner. A credit partner is a co-signer to the loan, using their positive credit and maybe industry experience as a mentor to the company. You will probably need to give up a percentage of ownership to get a credit partner, but this might be the only way to establish the credit to buy the business. If you still can’t get a loan, look to private investors within your network or microlenders involved with local economic development agencies in your area.
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