In our everyday life, we meet certain obligations at the end of every month, quarter, or even annually. These obligations can take the shape of bills, loan repayment, and debt clearances. Unfortunately, there are times when we are unable to meet specific deadlines due to various reasons. Not meeting these responsibilities in their due time causes our credit (financial reputation) to take a drastic hit. Companies and people are in a vicious cycle of having to acquire further loans to pay back their previous ones. But before you opt for any kind of loan as a business, you should be able to calculate operating cash flow.
Typically, when businesses apply for loans, they face challenges of all types. One of the most common, and widespread complications is having a bad credit history.
What is this ‘credit’?
The term credit score and credit reports derive from your history with money and information that helps lenders and businesses understand how you manage your credit.
Credit refers to the amount of money you owe, why you owe them money, and how efficient you are at paying off the debt on time. it is calculated to conclude your credit, i-e if you have ‘good credit’ or ‘bad credit.’
How does ‘bad credit’ occur?
Bad credit refers to the failure to pay back a debt in the agreed-upon time and amount. It is usually accompanied by a score that indicates how at risk the lender is if the borrower has a bad credit score. Bad credit can occur through various scenarios, for example, not meeting your payables on time, maxing out your credit cards, or even bankruptcy can cause your credit score to plummet.
How do you ‘score’ credit?
Companies like FICO, which analyze data to help make consumers make better decisions, evaluate credit, and give out ‘scores.’ FICO’s assessment of determining good credit is the most popular and widely used credit score. The score assists in helping lenders understand accurately how realizable and likely their customers are at returning their credit requirements on time.
FICO’s scoring system ranges from 300 to 800+ points for poor credit scores and exceptional credit scores, respectively. It looks something like this
Very Good: 740–799
Poor: 579 and lower
People and companies with scores in the range fair and poor will have trouble acquiring loans and will often be looked over by lenders.
What is a payday loan?
Payday loans are very costly short term oriented loans which typically last a month, or as it suggests until the next pay date.
According to this 2016 report, that the average borrower cannot afford to pay back the loan while also attending to their necessary expenses, research suggests they can pay back no more than 5% on average. Due to which, they tend to extend or renew their loans with 80% of the new loans taken out within two weeks of repayment of the previous one.
It might be a lucrative alternative to seek out lenders that do tend to people with bad/poor credit scores. Some lenders cater to bad credit business loan options, and it is worth seeking them out because they offer various forms of services to help businesses and people combat lousy credit situations.
But can someone apply for a loan with bad credit?
It may start to seem that due to lower-end credit scores that securing a loan is no longer an option, and that seeking out alternatives like payday loans would guarantee a higher success rate. While true, payday loans are short term and typically do not require a credit score check which may make them seem like the more plausible option. But these types of loans can get expensive in the long term.
What would a typical loan cost with bad credit?
While there isn’t anything stopping lenders from taking a chance on giving a lousy credit business a loan, they would be entitled to stick a very high-interest rate on it. For example, this article from the simple dollar suggests, you may be able to acquire a loan, but it might not be the ideal scenario. But it is still better than the option for payday loans.
Looking at a future with bad credit
Even though the situation may seem fragile and dire, a bad credit score need not be a permanent mark on your life. There are still specific steps you can take towards bettering your credit score.
You are starting with knowing what factors come into play, calculating the credit scores. By figuring out how to make adjustments to these factors, your credit lifeline could improve. It indicates making your payments on time and paying back on your debt. Steps like these go into improving your score profoundly.
Secondly, revise your credit reports. The Federal Trade Commission stated that ¼ consumers face an error in their credit reports. Analyzing your statements, and fighting for these corrections is a reliable way of improving your credit score.
Things may look rough, but there is always a silver lining. Even though it may be a challenge to secure a loan but finding out reputable lenders can be worth the effort, as they might be willing to take a gamble on lower credit score costumers. Even though the interest rates may be high, it is worth it considering the alternatives.
Taking out loans on a poor credit score but making your payments on time can help your score improve, and make life more comfortable moving forward.