What does Bad Credit means?
Bad credit is when you have a poor credit score or rating. When you take out a loan or credit facility, this is registered with credit agencies or bureaus. These agencies score you on the amount of credit you have, types of credit and most importantly, how you repay your debt.
Late payments or non-payment of debt reflects poorly on your credit rating or score resulting in bad credit. Loan providers use your credit score to predict the risk that they are taking in offering you a loan or credit facility. If you have bad credit, you present a greater risk that the loan or credit provided will not be repaid and you are therefore less likely to be approved for a loan.
So how do you get finance for your business if you have bad credit? A collateralized loan is often the best solution.
What Is A Collateralized Loan?
A collateralized loan offers up collateral as security for the loan. If the borrower fails to meet their financial obligation to repay the loan, then the loan provider can repossess the collateral in order to recover the principal loan amount or the outstanding balance if the loan was partially repaid.
This means that the lender is taking little to no risk in offering a loan even if you have bad credit.
What Are the Types Of Collateral available?
There are many different forms of collateral that can be offered up as security for a business loan. Basically, any asset that has an equivalent value to the amount of the loan can stand as collateral. However, in most cases, collateralized loans are for the purchase of an asset that has value.
For example, a house or property stands as collateral for a mortgage and a vehicle is collateral for car finance. For businesses, equipment, stock, property, a vehicle or other asset that is being purchased with the funds from the loan can stand as collateral.
If you are unable to repay the loan within the term or repayment period that is specified in the loan agreement, the lender will take the collateral and sell it to recover the outstanding or full loan amount.
Why A Collateralized Business Loan Is The Best Solution?
Lenders won’t simply deny a loan because you have bad credit. they will however assess the risk and you may end up paying much more in interest and other charges if you don’t have an ideal credit score.
A collateralized loan does not always take into account your credit history because the risk is reduced due to the security that the collateral offers. This means that you will be paying less in interest than you would if you took out a regular business loan with bad credit.