Taking out a business loan can help your business launch, grow, or sustain itself during a slow period. However, credit is the cornerstone of qualifying for a low-interest loan, and not every business (or business owner) has great credit.
Does that mean your business is unable to take out a business loan? Not necessarily. There are many options for financing your business, even with bad credit.
Let’s explore how to get a business loan with bad credit so that you can get the financing your business needs to thrive. We’ll look at small business loans for poor credit and other options and how to maximize the chances of getting approved for financing.
Understanding Bad Credit in Business Financing
Before diving into how to get a business loan with bad credit, let’s first look at what bad credit is.
Your business has a credit profile, history, and score. This is built over time and is based on whether you pay your debts on time and your debt ratio, which compares your business’ total debts to total assets.
Brand-new businesses may have no credit history, making it challenging to be approved for a loan. Established businesses that have missed payments for loans or a high amount of debt may likewise not be approved for a business loan because these factors can cause the business’s credit score to drop below what’s required for most loans.
This financial data is reported to credit bureaus like Dun & Bradstreet, Equifax, and Experian. When a lender wants to assess a loan applicant's risk (risk being defined as how likely it is that this applicant will be able to repay the loan), it will look at one or more of these credit profiles. The lender may reject the application if the credit score is low or the report has derogatory marks.
Some lenders also look at the business owner's credit history and scores since the owner is ultimatelyresponsible for paying back the loan. If your personal credit score is low, this may prevent you from qualifying for business loans with low interest rates.
Fortunately, there are small business loans for poor credit.
Types of Business Loans for Bad Credit
For companies with bad credit, there are a fewbusiness financing options. Remember that each lender will have different requirements to qualify for financing, and depending on your business’ credit situation, you may not qualify for each of these.
Short-Term Loans
While many business loans have a repayment period of several years (or even as many as 20, in the case of a Small Business Administration, or SBA, loan), a short-term loan must be repaid within a few months. The interest rates may be high for these loans, but they are usually easier to qualify for, even with bad credit.
Business Lines of Credit
Unlike with a small business loan, you don’t receive a lump sum all at once. Instead, you have access to a maximum line of credit that you can borrow against. Repay what you borrow, and the funds are available to borrow again.
SBA Microloans
Among other types of small business financing, the SBA offers microloans up to $50,000. These have to be repaid within six years. The requirements for approval may vary from one lender to another.
Bad Credit Business Loans
Additionally, some lenders offerbad-credit business loans to businesses that don’t qualify for other types of financing because of low credit scores or spotty credit history. The lenders may look at other factors, such as revenue over the past few years or the total amount of debt a business carries. Note that the interest rates on these loans may be higher than other options.
Strategies to Improve Loan Approval Odds
Even if a lender doesn’t require a high business credit score, you’ll want to do everything possible to improve business loan approval. Part of learning how to get a business loan with bad credit is planning months in advance to ensure your business is the ideal candidate. Give yourself time to improve your finances and credit to qualify for loans with better terms and rates.
Start by updating your business plan. Lenders want to see that you have a direction and objective for your business, and the business plan can help them understand what you sell, who your customers are, and how you reach them via marketing.
Shop around for a loan. Every lender has different requirements to qualify an applicant and has different financing options. Spending a little time doing research can ensure you choose the right loan and lender.
Consider adding a co-signer to your application. If your personal credit isn’t great, adding a co-signer can strengthen your application, particularly if that individual has a strong credit history.
Look at your business finances from a lender’s perspective. Business loan providers want a steady revenue and/or growth history. If your business has struggled financially over the past few months, this might deter you from qualifying for a loan since you can’t provide evidence that you will be able to repay the loan in the near future.
Evaluating Lenders for Bad Credit Business Loans
As you look for the right lender, you’ll want to consider several things in your research.
First, you’ll want to know what different lenders offer and what you qualify for. Start by comparing interest rates and terms. Also, look at any additional fees a lender might charge, such as an origination or early repayment fee.
Next, understand the lenders’ credit requirements. Some may publish the business credit score they require on their website; others may not. If business credit scores aren't available, some will look at the owner’s personal credit scores, so consider your personal credit situation.
Also, you’ll want to ensure you only work with trustworthy loan providers, as there are less-than-reputable companies in the bad-credit loans space.
Gerri Detweiler, coauthor of "Finance Your Own Business: Get on the Financing Fast Track," says artificial intelligence is making it easy to imitate legitimate companies, which means you must be especially cautious when evaluating lenders catering to bad credit. “If you have bad credit, you’re an easy target for scammers. These companies can make their offers look very legit, but their goal is to get money from you before you ever see a penny from them.
“If they ask for any kind of upfront fee, whether for ‘insurance’ or a couple of monthly payments upfront, there’s a good chance you’re dealing with a scammer," Detweiler says. "Look at the company’s website and determine if they are licensed in your state. You can search to see how old the website domain name is and where it is registered.”
Additional Financial Tools and Alternatives
There are business financing options that don’t require good credit. "These include business cash advances, invoice factoring, and some online business loans, Detweiler says. "These types of financing usually rely on revenue instead of credit to make a decision.”
Merchant Cash Advances
If you accept debit or credit cards at your business, you may qualify for a merchant cash advance. This isn’t a loan but rather an advance on future sales. This can be convenient when you need cash quickly and don’t qualify for other options but realize that the card processor does take a hefty fee for the service.
Invoice Factoring
This could be a helpful solution if you send clients invoices and sometimes struggle financially while waiting for payment. Invoice factoring involves selling your outstanding invoices to a third party in exchange for up to 90% of the invoice value.
The factoring company is then responsible for collecting payment on the invoice. Once they do, they give you the rest of the value of the invoice minus their fees, usually 1%-5% of the invoice value. A benefit of invoice factoring is that it is not considered a loan and won’t appear on your credit report as a debt.
Alternative Financing Options
In addition to small business loans for poor credit, merchant cash advances, and invoice factoring, there are other ways you can get the capital you need for your business. These include:
Using a credit card.You could charge expenses on a credit card, such as one with rewards. Every time you make a purchase, you’ll earn points you can redeem for cash back, travel, or other perks.
Applying for peer-to-peer loans.There are lending platforms online where groups of investors provide financing to businesses that might not otherwise qualify for loans.
Asking for less stringent financing terms.If you order supplies from a vendor, you could ask for financing terms allowing you to pay invoices within 30 to 90 days. This can help free up cash flow.
Borrowing from friends and/or family.Should you opt for this, be sure to treat this transaction as a business loan. Agree on repayment terms and honor them.
Dipping into home equity or retirement income.This should be a last resort since this is financing that will greatly impact you and your family personally, should you not be able to repay it.
A business with bad credit isn’t prevented from being able to take out a loan. Once you understand how to get a business loan with bad credit, explore your options, and choose the one that’s right for you, you’ll be on your way to rebuilding (or building) your credit, which can help you qualify for better options in the future.
Bottom Line
Securing a business loan with bad credit is challenging but not impossible.
Understanding your credit situation is the first step. Explore various financing options such as short-term loans, business lines of credit, and SBA microloans that cater to businesses with poor credit. Strengthen your loan application by improving your credit score, updating your business plan, and considering a co-signer. Evaluate lenders carefully to find trustworthy ones with favorable terms. Additionally, explore alternative financing methods like merchant cash advances, invoice factoring, and peer-to-peer loans.
By preparing thoroughly and choosing the right option, you can secure the funding your business needs to thrive.
