Bad credit score business? How to cope with debt now

Business couldn’t be tougher at the moment. Whilst we’re not experiencing a full blown, deep economic recession, we are seeing huge restrictions for businesses. Cities going into lockdown, preventing certain services and restricting foot traffic has been the number one threat to cashflow during the pandemic.

Melbourne for example are currency in stage four lockdown. This means that the public, aka consumers, can only leave the house for one of four reasons: essential item shopping, car, exercise, or work. Restaurants, cafes and many high street businesses are forcibly closed down. Forgetting the politics of the decisions, this unequivocally hurts economic productivity. 

Of course, Costco, Aldi, Woolworths and Coles are still operating, along with the large construction companies, financial services and so on. So, what does it tell us? It tells us that large firms dominate the space for supplying customers with essential items and services, whilst smaller firms, such as cafes, are the one’s restricted under the lockdown rules.

The issue is that small businesses account for 97% of all Australian businesses by employee size. Or in other words, like most economies, small businesses make up the vast majority of the economic output. This is why recession looms over Australia, because small businesses have been struggling to pay staff and make sales, which is slowing down the amount of money being spent in the economy. 

Because of the struggle for small businesses, business funding for bad credit businesses is on the rise. With the lack of cash reserves and the ability to attain credit, unemployment has risen to 6.9%. June 2020’s reports found GDP to have shrank by a huge 6% in the three months following the pandemic. It’s a vicious circle, because COVID-19 is hitting SMEs hard, which is worsening credit scores due to things like missing repayments. This makes acquiring any more debt more difficult, which further threatens cash flow.

Banks aren’t fond of small businesses

High street traditional banks tend to have a distrust for small businesses in favour of mortgages and large business dealings. The reason for this is that they are so established and by-the-book, that they uphold very high standards of creditworthiness. It’s often the case that small business owners cannot convince them that their credit score is good enough.

This is detrimental for small businesses because it’s the first place to look for bad credit business funding. Bank loans are always touted as the best, cheapest and safest place to get credit. Whilst this may be the case, it’s far from the only place. And, being rejected from loans can often further impact your credit score in a negative way, putting small businesses off the idea of credit altogether.

If you’re lucky enough to have meetings for a business loan, there’s another hurdle: time. Banks take weeks, and often months, to process loan applications. Conversations, credit checks, business plans, financial reports and so on are expected to be presented as if you’re on an episode of Shark Tank.

Of course, the businesses most in need of small loans are small businesses, given cash flow is always a concern. During a pandemic, this is even more vital for survival. Yet, COVID has made it even more difficult for small businesses to get a bank loan because sales are low for many sectors.

There has been some efforts to easen bank lending, which Treasurer Josh Frydenberg claims will simplify bank lending rules. This loosening in regulation should reduce the time and cost of small businesses in getting a loan, but we’re yet to see the tangible differences it’s made. 

Alternatives to loans, when shopping around a high street bank, are business credit cards. Many banks however are not accepting new customers for the credit cards during this unstable pandemic, and certainly not those with poor credit. This leaves small businesses with very little choice. The next two sections will cover one possible alternative, and knowing whether to take it or shut-up shop.

Online lenders: an alternative to high street bank loans

Online lenders take the approach of serving business funding for bad credit businesses. Now, this comes with some caveats, but let’s first take a look at what online lenders are. 

Analysing the diff companies, what they are. 

Online lenders are generally defined as alternative lenders. These are in opposition to banks, and are trying to supply small businesses with funds who do not have the time or credit score to acquire a bank loan – which happens to be most Australian businesses right now.

Such online lenders are usually offering small, unsecured loans, though there can be options for medium-sized secured ones too. They’re often smaller fintechs themselves, so there’s a lot of automation surrounding the application process. As a result, approval can come within a few hours to a few days – as do the funds.

Instead of meetings and business plans, you’re presenting more cold hard facts. Just some recent financials will usually do – some may want your credit score, whilst others aren’t too interested. Either way, credit standards will be lower than banks.

There’s no doubt that COVID-19 hasn’t affected online lenders though, as even these have gone a little shy. CEO and founder of IndiaLends, Gaurav Chopra, states “Lenders are concerned about the ability of people to repay loans. A major part of the lending used to happen through physical means for banks, but that has dried up. The six-month moratorium has also put a question mark on how far borrowers will be able to repay”.

This means that for many, there are no options left other than to pray for government help. For those that can get an online loan, which may be the best option available, it’s worth knowing that you will be paying a lot more interest than a bank loan, albeit less than a payday loan company. 

How to decide whether to stay solvent or close down?

It’s difficult to know if there’s a way out or not when your small business is really struggling along the breadline. COVID-19 is surely a temporary halt to our economy, but for how long? And how are we supposed to know if taking more debt is better than shutting down temporarily, or even permanently?

Can you close down temporarily?

Some businesses have strict leases contracts for businesses, as well as other commitments such as staff, perishable inventory and so on. This is your moment to consider if shutting down temporarily is possible, and if that will help weather the storm a little.

It’s not conceding defeat to temporarily close down in such difficult times, and it may actually protect losses. If you cannot close down temporarily, then of course the decision is a black and white one: to fold or to further leverage the business.

Can you make the repayments?

The number one rule here is that you should never take out a bad credit small business loan if you believe you cannot make the repayments. If you’re in doubt, spend some time forecasting your cash flow, or outsource this to a professional, and really understand if repayments can be met. 

The worst decision you can make is to not only further worsen your cash flow, but to worsen your credit score. This could render any future business even more difficult for the sake of trying to stay solvent during a pandemic. 

Is the loan growing or progressing your business?

This is the most contentious point, but generally, you do not want to take out a loan for the sake of it. Make sure that the reasons to get a loan are worth it. That is, even if you can make the repayments, are you just prolonging your suffering for something that has already rendered unviable?

Usually, you want to only take out debt if it has a meaningful purpose, other than stagnating. You want to be able to automate part of the business with it, make it more productive, or use it to pay off a higher interest debt which will then continuously improve cashflow.

The reason why this is contentious is because the survival spirit is important, it’s just that you don’t want it to hurt you more than it helps. So, by all means all of your effort should be put into survival mode, but don’t recklessly accumulate more debt when you deep down know there’s no end goal.

Furthermore, this is to encourage a different mentality too: using COVID-19 to your advantage. You may have been looking at bad credit business funding as a means for survival, but what if there’s an alternative? If you have access to credit, it may be better spent on something proactive as opposed to reactive. Why not diversifying your revenue streams with it into something more suitable for a lockdown environment, or transition to eCommerce?

Be accurate with your timeframes and forecasting

Many people, and thus small businesses, are under the illusion that COVID-19 is a 2020 phenomenon. As we can, the virus is certainly not slowing down when heading into 2021. It would be unwise to make a decision under the presumption that things will be getting better in 2021, as they in fact are likely to look much worse.

Government loans cannot last forever, so if lockdown restrictions continue into 2021, it’s likely to see unemployment skyrocketing, which hurts consumption, along with businesses running out of government cash. This isn’t the time to be an optimist. Be realistic and informed about the pandemic, as well as your finances. 

Furthermore, it’s not just the case numbers that you need to be realistic about or the recession, but the government loans themselves. You can’t rely on the future possibility of funding, as nothing is concrete yet. 

Likewise, it would be unwise to take out 6 month loans under the presumption that by the time the loan matures, the world will be back to normal. As mentioned before, things may be worse.