Businesses struggled over the last 2 years through a pandemic, then, as things began to return to normal, inflation, high gas prices, and supply chain slowdowns crippled your recovery. You may need hardship loans to cope with the economic hardship you face, having blown through everything you had on hand and government subsidies during your efforts to stay open during the pandemic.
When you need a business loan, the last thing you want to hear is that you can’t qualify for one or can’t get the amount you need to keep things going. Consider sources of guaranteed loans to small businesses or the SBA loan program (see info in the next section). But what are your options if your credit history isn’t up to par or you don’t have sufficient collateral to secure your loan? Enter hardship loans. These no-collateral loans can help fill gaps in cash flow and keep businesses afloat when needed. However, there are some steps you should take before applying for one so that you get the best deal possible on your loan amount and interest rate:
What are hardship loans?
In the past, financial help for small businesses was more readily available. For instance, the SBA (US Small Business Administration) offered guaranteed loans to small businesses underwritten by the strength of the US Treasury. A series of defaults, however, greatly curtailed the program, making it much harder for small businesses, especially new businesses to qualify for the loans. To qualify, you need cash flow, 2 years of business history, and much more.
During the pandemic, the federal government offered PPP loans available to small businesses as a means to help them keep their employees paid. Many of these loans were then forgiven if you kept the conditions required for forgiveness. If you didn’t have employees but needed the money, you were out of luck.
In contrast to these federal programs, hardship loans are backed by financial institutions. They are easier to get, involve faster disbursement and lower interest rates, and often feature deferred repayment in cases of hardship, such as conditions during the pandemic.
Getting a hardship loan
Know your options for no-collateral business loans
There are a variety of business loans available. Some business loans require collateral to secure the loan, while others do not. A personal guarantee may be required if a business owner does not have enough assets to secure the loan. Other times, a UCC lien will be required in addition to a personal guarantee or even solely as its own requirement for approval of certain types of loans (for example, small-business lines of credit).
If you’re trying to get funding for your startup or business and don’t meet these requirements because your startup has no equity yet (or is just getting started), then hardship lending might be right for you!
Be prepared for a personal guarantee or UCC lien instead
You may be asked to provide a personal guarantee or UCC lien. A personal guarantee is a promise from an individual who agrees to pay off the loan if the borrower does not pay it back. A UCC lien is similar, except that it’s against the borrower’s property instead of just their person.
What happens if your loan isn’t repaid? This can vary depending on state laws and how much time has passed since your last payment was late. Still, in most cases, lenders will sue individuals with personal guarantees and those with UCC liens to recover their losses as quickly as possible.
Clean up your credit history and credit score
If you have bad credit, it’s important to clean up your credit history. If you have good credit, this step is not necessary.
To clean up your credit history:
- Pay off all of the loans you owe
- Pay down any outstanding debt on cards or lines of credit
- Stop using credit cards for purchases (if possible)
Consider the terms carefully before signing
Before you sign, make sure to read over the loan contract carefully. What are you getting into? Is this a good deal for you? If you don’t understand what’s written down on paper, ask questions until it all makes sense. Don’t sign anything without consulting a financial advisor first—and make sure that person is not making money off of recommending whatever the lenders presented options. You need someone who has no stake in whether or not they recommend one option or another. As per the experts at Lantern by SoFi, “While repayment will vary by lender, you generally can expect to have to pay back the money you borrow in one to three years.”
Hardship loans are not a miracle cure, but they can help when you’re having trouble making ends meet
Hardship loans are not a miracle cure, but they can help when you’re having trouble making ends meet. They may be the right choice for you if:
- You need to pay for unexpected expenses like medical bills or car repairs
- Your income has dropped due to a layoff or other reasons outside your control
- You’re struggling with credit card debt and want to get rid of it
If your situation fits these criteria, there are three things that you need to know about hardship loans before applying:
- They’re personal loans
- You can qualify even if your credit isn’t good
- You don’t need sufficient collateral
In the end, hardship loans are a tool for small businesses and other borrowers who have fallen on hard times. With the right strategies in place, these types of loans can be useful tools that allow you to bounce back from an unexpected hardship without worrying about ruining your credit score or closing down your business altogether.
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