When Are Business Loans A Really Bad Idea?

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By Dzhingarov

The fact that business loans are easily available can easily make entrepreneurs rely on them. However, in many cases taking out a business loan is in reality a very bad idea. It is really important that you do things right as an entrepreneur. There are times when there are other options that are better. You want to be sure that you properly understand the situation you are in and that you take out the business loan just when it is a good idea.

Fortunately, there are some clear signs that business loan applications should not actually be considered. This is what we will highlight in the following paragraphs.

Venture Type

A business loan is often used to fund products or companies. In the event that the venture is high risk, it is much better to directly talk with investors so that company equity is gained. In the event the venture fails, debt will not be on you. Preparing for pitching to venture capitalists or angel investors is a much better investment of your time than researching business loans.

Is Your Personal Credit Score Bad?

If the answer is yes, you want to be careful. Before applying for the business loan people consider business credit scores but it is also important to consider personal credit score. Get your credit report to see exactly where you stand since the lenders will surely analyze this to see your current financial situation before giving you money.

If your credit score is low, getting a business loan is not going to be easy. Even if you do get one, the interest rates will be higher and terms will not be as advantageous as they could be. This is why you want to seriously consider cleaning up your own credit before you look for external funding.

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Do analyze your credit report from the leading agencies and check all records. See if there are credit reporting errors present and do contest them. Remember that 1 in 5 people have credit report errors that have to be corrected. Some are not important but many are quite serious.

Is Your Business Credit Score Bad?

The personal credit score usually ranges between 300 and 850 but the business credit score has a range of 0 to 100. The businesses that have a lot of debt when correlated with credit limit will have a lower credit rating. Although a business might have a credit line of $100,000, using a fraction of it is better than using most of it.

Other factors also influence business credit score, including:

  • Payment history
  • How many times the credit score was pulled
  • Business structure

Improving business credit score should be a priority before you look for business loans.

Innovation Versus Conventional Business

One thing you might not know is that the innovative startups will always have things much tougher when they look for business loans. Creating something that is new or innovative means there is not much documentation available when seeing if the business idea is viable or not. This is why lenders will see the business loan as risky. In this case the credit score of the individual requesting and the business credit will be incredibly important.

Think About Potential Collateral Damage

It is important to think about what you will lose when you take out business loans. You have to be objective. If you decide that too much collateral damage appears, it is better to look for other options.

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A business loan administrator will have owners collateralize loans against business assets. When you put up way too much collateral to secure the loan, take a step back. That is especially the case if the business venture is really high risk and you put most of what is available on the line.


You have to be sure that the business loan is a good idea and you need to consider everything that was mentioned above. Think about all the options the venture has and choose the one that has the most advantages.