Business loan

How to get a business loan with bad credit

A business loan is a great way to help your business grow. But what do you do if you have bad credit? Fortunately, there are steps you can take to increase the chances of getting approved for small business loans, which we’ll discuss here.

What do lenders consider bad credit?

Many of us have had a fight with credit at some point in our lives. Maybe you missed a payment on a bill, maybe you had an unexpected expense and couldn’t afford your regular monthly payments. Or maybe you just made bad financial decisions in the past. Whatever the reason, if your credit score is low, it will likely affect your ability to get a business loan.

Bad credit can range from having no debt (a good thing!) to late payments on utility bills or rent. It could also include bankruptcy, which can limit your small business financing options. So what do lenders consider bad credit? Basically anything that would make you a high risk borrower, like a low credit score or no credit history.

To get a loan from these places, you will need to do everything in your power to increase your chances of being approved.

What is the minimum credit score for a small business loan?

There is no single approach to an ideal business credit score for a business loan that opens the door for lenders to approve your application. The minimum credit score (FICO) required depends on several factors, including the size and purpose of the loan, the amount of collateral available, and whether or not it is an unsecured loan. Generally, you will need a minimum personal credit score of at least 600 to be approved for a small business loan from banks or credit unions.

Is it possible to obtain a loan without a credit check?

Certainly! Traditional lenders look at your credit history to see how well you’ve managed your debts in the past. If there are any red flags, you won’t get the business loan. However, there are loan options if you are determined to be a business owner and cannot meet the minimum credit score requirements.

One of these loan options is a lending institution that does not check your credit. Unfortunately, there is usually a big compromise in the way of high interest rates when you go that route. Additionally, these bad credit commercial lenders don’t normally accept applicants with scores below 500, and many require borrowers to have a minimum FICO score between 580 and 600.

Types of business loans for bad credit

There are different types of bad credit business loans you can apply for if you have bad credit (629 or less FICO). They understand:

1. SBA loan

The Small Business Administration offers a variety of loan programs for businesses with bad credit, including the microcredit program and the CDC/504 loan program.

2. Merchant Cash Advances

A merchant cash advance (MCA) is a short-term loan based on your future credit card sales. These loans are often unsecured, have high interest rates and do not have fixed repayment terms.

3. Commercial lines of credit

A business line of credit is similar to a personal line of credit, but is for your business. These loans are unsecured and usually have variable rates tied to an index like prime or LIBOR.

4. Equipment loan

If you need to buy equipment for your business, you can get a loan specifically for that. These loans are generally unsecured and have a shorter repayment term than traditional loans.

5. Microcredits

These loans come from microlenders who offer small loans to business owners that traditional banks have turned down. However, the average loan size is $35,000 and the interest rates are incredibly high. Therefore, it is important to shop around to find the best deal.

6. Peer-to-peer lending

Peer-to-peer lending is a relatively new concept that connects borrowers with investors willing to lend money. Instead of going through a bank, you can use your bad credit business loan application to connect you with one or more lenders based on the amount you need and their rates.

7. Loans from the guarantor

These are unsecured loans where someone else co-signs the loan with you and guarantees to pay it back if you cannot. Your guarantor must have good credit (a score of 700 or higher) and be prepared to put their assets on the line.

8. Invoice financing or factoring

This option is another type of high-risk loan that allows businesses with strong revenues but low credit ratings to get cash for unpaid bills. The company sells its unpaid accounts receivable (A/R) at a reduced price.

9. Business Credit Cards

A business credit card will charge a high APR, but it’s an option if you have bad credit and need cash fast. Compared to other loans for business owners with no or poor credit, the rates for these cards are generally lower.

10. Crowdfunding

Crowdfunding is a way to raise funds from a large number of people, usually via the Internet. Some crowdfunding platforms specialize in loans for business owners with bad credit.

How to get a small business loan with bad credit

As you can see, if you have bad credit, there are options for getting a small business loan. Here are some tips and ideas to use when you’re ready to do so:

  • Make sure you fully understand the terms of the loan before signing anything. This includes the interest rate, monthly payments and repayment schedule.
  • Shop around for the best deal. Rates and terms can vary widely from lender to lender, so it’s important to compare offers.
  • Be prepared to provide collateral. Many lenders require collateral in case you cannot repay the loan. It could be your house, your car or your business assets.
  • Prepare a solid business plan and financial statements. Lenders will want to be sure that you fully understand your business and are able to repay the loan.

Business start-up loans with bad credit

Startups with bad credit will most likely have to turn to online lenders to fulfill their entrepreneurial dreams. These alternative lenders offer different types of business loans that you can use to fund your startup, including:

1. A business line of credit

Online lenders like Lendio offer flexible lines of credit to start-up businesses with bad credit. With Lendio, you only need a minimum credit score of 560. Plus, you only pay interest on the funds you use. One of the downsides of using Lendio is that you need $50,000 or more in annual income

2. Short term loans

You can borrow up to $250,000 with one of these loans as long as you have a 600 credit score. They can come with high interest rates, but they are a good option for a specific one-time purchase. OnDeck is one of the alternative lenders that offers short term loan with bad credit.

3. Equipment loans

Currency Finance is a good alternative lender if you need equipment and have less than stellar credit. They often provide equipment financing in as little as 24 hours. To qualify for equipment financing from Currency Finance, you will need at least $120,000 in annual income and a credit score of at least 620.

4. Microcredits

Microcredit companies offer bad credit loans, often lending amounts as small as $500 to help entrepreneurs start or grow a business. The non-profit organization Accion offers microfinance of up to $50,000 to small business owners with a minimum credit score of 550. The organization has more than 50 lending partners in the United States, Canada, Mexico and Latin America.

5. Invoice financing

Invoice factoring companies like FactorTrust and BlueVine offer quick cash in exchange for your unpaid customer invoices. This is a great option if you have a solid business but need help covering your expenses until you get paid.

6. Merchant Cash Advance

With an MCA, small businesses with bad credit can get up to $100,000 in fast financing. If you need cash fast and have a good sales volume and stable income, this could be an option for your business. Companies that offer them include Payability and Kabbage.

7. Commercial loans

If you have a less than stellar business credit score, business financing from Rapid Financing could be the answer. RF looks at your overall business credit health and not just your credit score to determine if you qualify for financing. It is one of the best companies to use for long-term financing, and funds can be available within hours of loan approval.

8. Business Credit Cards

A business credit card is a good option for small businesses with bad credit, as long as you use it responsibly. Some good options to consider are the American Express Plum Card, which has no annual fee and a 0% APR for the first nine months, or the Chase Ink Business Preferred Credit Card, which offers 80,000 bonus points if you spend $5,000 in the first three months.

9. Personal loans

A personal loan can be a good option for small businesses with bad credit, but it’s important to remember that you’ll likely have a higher interest rate. You can use a personal loan to cover all business expenses, such as inventory or marketing costs.

10. Working capital loans

If you need cash quickly to cover day-to-day expenses like payroll or rent, consider a working capital loan. These are easy to qualify for and usually come with low interest rates. Credibility may be best if you have a very bad credit score, as their working capital loans and MCAs have a minimum required credit score of just 500.

Don’t let bad credit stop you

As you can see, if your credit isn’t perfect, there are options to help your business get the money it needs. Seeking to repair your credit is also a great option for your long-term financial health. Whether you need long-term financing for equipment or are looking for short-term cash flow until receivables catch up, these lenders can be a great source of funds for small businesses with a bad credit. Keep in mind that loan repayments can be a significant burden for businesses with tight cash flow. It is therefore important to find a loan whose payments are manageable and which does not charge exorbitant interest rates.

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