Bad Credit Loans for Small Businesses

If you have a checkered credit history, traditional banks or credit unions may be unwilling to approve a business loan. Luckily, alternative lenders, which provide options outside of conventional banks, offer small-business loans if you have a bad credit score.

Some of these lenders set no minimum credit score requirements and consider factors such as revenue or time in business for approval.

When you know how bad credit small-business loans work, you can find the best bad-credit business loan to start or expand your small business. What you’ll learn here:

• What is bad credit?
• Can you get a business loan with bad credit?
• How can you get a small-business loan?

What Is Bad Credit?

Bad credit is a FICO score that falls below 670, which is a fair or poor credit score. You typically need a FICO score of at least 530 to qualify for a bad credit business loan, but you could get better terms with a good credit score of 670 or higher.

Bad credit business loans are generally aimed at business owners with low credit scores.

Not only your personal credit score but also your business credit score may be a factor in whether you get a loan, particularly from traditional lenders.

As with personal credit scores, business credit scores have distinct scoring ranges and interpretations. Your business credit score reflects your payment history on accounts associated with your business.

However, your personal credit will be used exclusively to measure the risk of a loan if your business has no credit history, as with a startup.

What Small-Business Financing Can You Get With Bad Credit?

Small-business loans come in many forms, and some are easier to qualify for than others. Alternative lenders, including online lenders, may offer bad credit small-business loans that are more accessible than loans from traditional lenders.

Alternative lending refers to the broad range of loans for consumers and business owners made outside of traditional financial institutions. Alternative lenders fill a gap left by risk-averse banks that may turn away certain borrowers – especially as many traditional lenders tighten credit standards in the wake of the coronavirus pandemic.

Usually, alternative lenders make loans online and may not have brick-and-mortar branches like many traditional banks.

Alternative lenders and traditional lenders specializing in bad credit provide these types of loans for small businesses:

Term Loans

Term loans are lump sums of cash you borrow from banks and pay back, with fees, over a certain period of time. You can choose from secured or unsecured business loans, but secured business loans require collateral, such as equipment. Unsecured business loans primarily rely on your credit but may need a personal guarantee.

Lines of Credit

Business lines of credit are similar to business credit cards and can help when you’re in a cash flow crunch. With a business line of credit, a lender approves you for a pool of funds, also known as a revolving line of credit.

Just like a business credit card, a business line of credit has a credit limit, which is the maximum amount you can borrow. You will pay interest only on the portion of money that you borrow from your business line of credit.

Equipment Loans

With equipment loans, lenders typically finance 80% to 100% of the cost of your equipment. The equipment acts as collateral for the loan. Alternative lenders may be more likely than traditional lenders to offer equipment loans to small businesses with poor credit.

Invoice Financing or Factoring

If your small business struggles with cash flow issues because customers do not pay their balances in full, invoice financing – or invoice factoring, which is closely related – is an option.

With invoice financing, you sell your invoices to a lender at a discount and receive an advance on them. The lender pays you most of the amount owed on the invoices upfront and keeps a portion – usually 20% – until the invoices are paid.

Invoice financing can be a risky choice. Borrowers pay a factoring fee based on a percentage of the invoice, plus interest charged on the cash advance until it is paid off.

The fees can quickly add up, and with invoice factoring, you hand control of the invoices and collections to a factoring company. You’ll need to carefully weigh the pros and cons before choosing invoice financing or factoring.

Merchant Cash Advances

A merchant cash advance, or MCA, is an advance on your firm’s future sales and can deliver quick access to capital. You’ll often repay the advance as a percentage of your daily credit card and debit card receipts, plus fees.

Lower-risk borrowers will have lower fees and more favorable borrowing terms than higher-risk borrowers. Still, a merchant cash advance is often a poor choice for a business.

Beware the long-term financial implications of using merchant cash advances.

“It’s almost like a drug,” says Kevin Monahan, area director for the Florida Small Business Development Center at the University of North Florida. “Small-business owners need the money desperately, resort to paying high interest rates, and find themselves with less and less money.”

How Can You Get a Small-Business Loan?

Getting a business loan means preparing a solid application, especially when you have bad credit. Before you apply for a small-business loan, take these steps to boost your odds of approval:

1.    Improve your personal credit. Present your personal finances as attractively as possible, recommends S. Michael Sury, lecturer in finance in the McCombs School of Business at the University of Texas at Austin. If you have a bad personal credit score, you can get a higher credit score by making on-time payments, dealing with delinquencies and paying down balances when possible. Dispute and fix errors, such as incorrect balances.

2.    Build your business credit score. If you want to establish a business credit history, consider opening small-business credit products, such as a business credit card or line of credit. If you need to improve your business credit score instead, the steps are similar to how you would rebuild your personal credit score, explains Rod Griffin, senior director of public education and advocacy for Experian, one of the three major consumer credit bureaus. Catch up on any late loan payments, and make sure your vendors are paid on time to give your business a higher credit score.

• Write a solid business plan.  A well-thought-out business plan with a mission and strategy to boost your odds of securing financing. Your business plan should include projected financial statements. If you have a strong management team, you can highlight its background, experience and creditworthiness.
• Find other ways to boost your creditworthiness. If you have a bad credit score, you can improve it by asking for reference letters indicating timely payments from personal and business creditors as well as vendors.

When you’re ready to start a business loan application, make sure you can answer these questions:

• Why do you need this loan?
• How do you plan to use the loan proceeds?
• What collateral, such as business equipment or other assets, will you pledge?
• Has your business applied for other loans?

You will likely need to provide personal information, such as your Social Security number, home address and phone number, along with your resume. Any sound loan program will also require your business and personal financials and legal documents, such as articles of incorporation. Get Pre Approved and sign up for our informative newsletter.