Business Loans for Bad Credit

business loans for bad credit

When applying for a traditional business loan at a bank or credit union there are many reasons you could potentially be denied. One of the most common reasons for being denied a loan is your business credit profile. Even businesses with strong growth and profit margins can be denied a loan if the lender isn’t comfortable with the business’s credit score. When business owners are turned down for loans based on their credit, they have a few options.

While some are tempted to use their personal assets like home equity and retirement funds to keep their businesses going, it isn’t always your best bet. Before you risk losing such important things, consider some of these business financing options that don’t require flawless credit.

Best Small Business Loans for Bad Credit

Business loans come with all sorts of terms, requirements, and repayment periods. Because of this, many of these funding options do not place as high of an importance on credit score as others. We pulled together some of the best funding options for businesses with bad credit to help you find a funding option that best suits your needs

1. Merchant Cash Advance

If your business typically has a high volume of debit and credit card transactions, you may be a good candidate for a merchant cash advance. With a merchant cash advance, you sell a portion of your future credit or debit card sales to a third party in exchange for money you can use right away.

The third party then collects a percentage of your daily credit card sales until the total amount of the advance with the factor amount is satisfied. Since merchant cash advances are viewed as being a transaction rather than a loan, they can be an option even for businesses that don’t have the best credit scores.

2. Invoice Factoring

Do you have a business that typically deals with long billing cycles? Many businesses that need to wait 30, 60, or 90 days for customers to pay their bills end up encountering temporary cash flow shortages while they wait. If this is a situation you find yourself in, invoice factoring is something you could consider.

With invoice factoring, some or all of your outstanding invoices can be sold at a discount to a third party known as a factor, who then collects from your customers. Since this arrangement hinges on your customers’ ability to pay their bills, your business’s credit score is less of a factor.

3. Invoice Financing

Invoice financing is similar to invoice factoring, but it isn’t exactly the same thing. While invoice factoring involves selling your unpaid invoices to a factor, invoice financing is simply a loan based on the amount of your unpaid invoices. Your customers continue to pay you as they normally would.

tea shop with smiling female owner

4. Equipment Financing

All businesses need equipment to be able to operate. Equipment loans are a great way for businesses to get the equipment they need without being hit with a large upfront cost. Since these loans can be secured by the equipment itself, lenders are able to be more flexible about their requirements, including the borrower’s credit score.

5. Microloans

Sometimes, a business only needs a small amount of money. While many types of business loans are intended for established businesses with strong credit scores, microloans are an option for startups, young businesses, and businesses that have never borrowed from a bank before. Since microloans are for such small amounts of money, they are a type of short-term loan.

6. Equity Financing

Instead of dealing with banks or credit unions to get the funding they need, some business owners choose to pursue equity financing instead. Equity financing is when you find investors for your business, who then become part owners in your business. Investors are going to be more interested in your business plan and your long-term goals rather than your credit score.

How to Get a Business Loan with Bad Credit

Bad credit will certainly make it more difficult to get a business loan, but this doesn’t mean it isn’t possible. It is important to understand that bad credit business loans often come with less favorable terms, as there is a lot of risk for the lender. However, if you do your research, keep an open mind to the lender’s point of view, and work to repay your loans and improve your credit score, you are well on your way to obtaining a loan.

1. Research Bad Credit Business Loan Options

Finding a business loan with poor credit can be difficult, so it is crucial to do your research. You will save a lot of time by understanding what loans you qualify for, so you can only apply to the ones that you have a realistic shot at getting. Consider looking at a variety of loans, to compare interest rates, fees, and other important aspects of the loan. Even if it is harder, you should still play around with the options you have to set your business up in the best possible way.

2. Understand Lender Conditions

Understanding lender considerations will go a long way in getting a loan for your business. Some aspects that a lender would most likely consider include revenue, cash flow, amount of existing debt, and loan usage. Many loans for bad credit are secured with physical equipment or receivables to protect the lender. Any potential lender will only give out a loan if they feel they can make a profit in the long run.

3. Apply for a Small Business Loan

If you’re interested in applying for a merchant cash advance, invoice factoring, or invoice financing, you’ll have a faster, simpler application process to deal with than you would with a regular business loan. Short-term loans typically require applicants to provide things such as:

  • Past bank statements and business tax returns
  • Your business license/certification
  • A copy of your driver’s license/other government-issued identification
  • P&L statements

Equity financing and microloans are going to require more time and effort to prepare for. Anyone who may be interested in investing in your company will want to see a very detailed business plan. And although microloan lenders are typically more willing to give loans to new businesses and businesses that aren’t able to get loans through a bank, that doesn’t mean microloans are necessarily easy to get.
If you’re applying for a microloan, the lender will also want to hear about your business plans, how you plan to use your loan, and how exactly it will help you become more profitable in the long run.

4. Repay Your Loan

Above all else, make sure you can pay back your loan. Repaying a loan obligation on time is a great way to improve business credit score for future financing needs. Also, the longer you take to pay back a loan, the more interest will accrue and the more money you will ultimately end up having to pay. Repaying a business loan on time will also help you build relations, and possibly work together in the future.

Pros and Cons of Business Loans for Bad Credit

Many types of loans that are the most accessible to businesses with bad credit scores are short-term loans. Since these types of loans have shorter terms than traditional business loans, they have higher interest rates and are for smaller amounts of money.

Although the funds you receive from a short-term loan can generally be used for many different purposes, the fact that they are short-term loans means they’re best suited for handling temporary cash-flow interruptions like crowdfunding and short-term expansion projects, not making major investments.

It is very important to consider whether adding more debt to your business is wise. If cash flow is already tight, taking on a loan can add additional stress. Think about if the business loan is really worth it, and if you will be able to repay it in a timely manner. Only take the loan if you feel that the temporary cash influx will help your business expand and grow down the line.

Even if the types of business loans for bad credit don’t have the best terms, paying them off as scheduled can help improve your credit score, which would make it possible for you to get a larger loan with better terms later on.


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