How To Secure a Business Loan With Bad Credit

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There are many reasons lenders might deny your application—one of the most common of which is your business credit score. However,  business loans for bad credit do exist, and a less-than-ideal credit history shouldn’t deter small business owners from trying to secure the funds they need to help their businesses reach its full potential.

Before exploring how to secure business loans with bad credit, it’s important to establish what actually constitutes “bad” credit. Most traditional banks will look for a minimum credit score of at least 650 to 700. The closer a business owner is to a score of 750, the more likely it is that banks will approve your loan and offer favorable terms.

Lenders might even reject businesses with strong growth and profit margins, and a large annual revenue if they aren’t comfortable with its credit history. That can leave even established businesses scrambling to secure the cash flow they need.

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Unlike traditional banks, the business financing options offered by an online lender for small business may offer more flexible terms, and repayment or remittance periods, and may accept applicants with a personal credit score as low as 500.

Before you gamble with your future, consider some of these business financing options that don’t require flawless credit or massive collateral—regardless of what your credit report says.

What Is a Bad Credit Score? 

A bad credit score refers to a low credit rating assigned to individuals or businesses by credit reporting agencies. It indicates a higher level of credit risk, suggesting a history of late payments, defaults, or other financial difficulties. Lenders and financial institutions use credit scores to assess the likelihood of repayment and determine the terms and conditions of loan approvals.

How to Improve Your Chances of Approval for Business Loans with a Bad Credit Score

Improving your chances of approval for business loans with a bad credit score requires proactive steps to rebuild your creditworthiness. Some strategies include:

  1. Review and understand your credit report: Identify any errors or discrepancies and address them promptly.
  2. Pay bills on time: Consistently making timely payments can help rebuild your credit history.
  3. Reduce outstanding debt: Lowering your debt-to-income ratio demonstrates responsible financial management.
  4. Establish positive credit history: Consider opening a secured credit card or obtaining a small loan to build a positive credit track record.

How to Find the Best Small Business Loan if You Have a Bad Credit Score

Finding the best small business loans with a bad credit score requires careful research and consideration. Here are some tips:

  1. Explore alternative lenders: Alternative lenders often have more flexible requirements and consider factors beyond credit scores.
  2. Seek out loan options for bad credit borrowers: Some lenders specialize in providing loans to individuals with poor credit.
  3. Consider collateral or personal guarantees: Offering collateral or a personal guarantee can strengthen your loan application.
  4. Compare loan terms and rates: Evaluate different lenders’ offerings to find the most favorable terms and rates for your situation.

7 Business Loans and Financing You Can Get With Bad Credit

1. Merchant Cash Advances

If your business typically deals with a high volume of debit and credit card transactions, you may be a good candidate for a merchant cash advance (MCA).

This funding option allows you to sell a portion of your future credit or debit card sales to a third-party lender in exchange for capital that you can use right away. The lender then collects a percentage of your daily credit card sales until you satisfy the total amount of the advance plus the factor.

This takes the stress out of both applying for financing and repaying (or in this case, remitting) it, since the remittances are automatic. MCAs are especially ideal for businesses that face fluctuating revenues throughout the year, as your remittances are tied to your receivables.

Merchant cash advances are transactions rather than a loan, which means they’re not subject to the same strict requirements as traditional loans. Best of all, you can use your merchant cash advance as you wish—you’re not committed to spending it a certain way.

2. Invoice Factoring

Business Loans and Financing You Can Get With Bad Credit

Does your small business typically deal with long billing cycles? If you’re among the many business owners that need to wait 30, 60, or 90 days for clients to pay your invoices and suffer cash flow issues as a result, you may want to consider invoice factoring.

With invoice factoring, you can sell some or all of your outstanding invoices at a discounted rate to a third party—known as a factor—who then takes over the responsibility of collecting from your clients.

Invoice factoring is optimal for businesses that are primarily looking to solve day-to-day cash flow problems. Because this arrangement involves “selling” your invoices to the factor, your own credit score is less of a consideration.

3. Secured and Unsecured Business Lines of Credit

Business lines of credit work in a similar way to business credit cards, in that they allow you to access capital as needed. You can withdraw as much as you need in one go, and you’ll only pay interest on that amount. Once the debt is repaid, you can withdraw up to your credit limit again (which is why it’s called revolving credit).

You don’t need to provide collateral for a line of credit, but if you do have collateral to put down you might be eligible for a secured business line of credit.

Unlike an unsecured line of credit, which doesn’t require collateral, secured lines of credit depend more on what assets a business owner can pledge than what their credit history looks like.

4. Inventory Financing

Like secured lines of credit, inventory financing also relies more on collateral than credit history. In this case, your business’s inventory is the collateral. The lender will provide a loan that accounts for a percentage of the value of your inventory, which they can take possession of if you fail to satisfy your repayment terms.

This type of loan involves more risk on the part of the lender, who might face a gap between the amount of the loan and the collateral if the value of the inventory depreciates, but it’s still a decent option for small business funding for those with bad credit.

5. Equipment Financing

small business funding for those with bad credit

All businesses need equipment to operate, and equipment loans are a great way for businesses to obtain this equipment without having to shell out more than they can afford.

As a borrower you don’t have to provide security. Instead, the equipment itself serves as collateral. That allows lenders to be more flexible about their requirements, including the borrower’s personal credit score.

6. Microloans

Sometimes, a business only needs a small loan amount to fulfill its needs. Traditional banks make it difficult for businesses to secure these so-called microloans (loans of <$100,000), as they’re not seen as being worth the energy.

Online lenders are a great source of microloans, which average around $10,000 to $13,000 and are great for small startups and other young businesses. A microloan is considered a short-term loan, as lenders generally expect borrowers to repay them within a year.

Because of the size of the loans, lenders are more likely to focus on the future goals and potential of the business.

7. Equity Financing

Instead of dealing with banks or credit unions to get the funding they need, some business owners choose instead to pursue equity financing. Equity financing involves selling shares of your company in exchange for capital. Once again, the business’s future is more important for such funding than the business owner’s past.

As this type of funding is more of an exchange than a “loan”, it’s an obtainable form of business funding for owners with bad credit. One downside is that you may lose some control over your business to investors.

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While some owners may be tempted to use their personal assets—like home equity and retirement funds—to keep their businesses going, this option can prove unnecessarily risky. If your business can’t pay its debts, you may end up losing your personal assets too.

How To Get a Small Business Loan With Bad Credit (In 4 Easy Steps)

Bad credit certainly makes it more challenging to get a small business loan, but that doesn’t mean it’s impossible—especially if you have a strong business plan and a credit score that’s still in the 500+ range.

It’s important to understand that the terms and rates associated with bad credit business loans might not be as favorable as those associated with traditional loans, given the risk that the lender has to assume. Still, there are many  online lenders and financing options to choose from nowadays, so it is easier than ever to obtain fair business loans, bad credit or not.

If you’re wondering how to get business funding with bad credit, the following four steps are a great start.

1. Research Business Loans For Poor Credit

You’re currently reading this article, which means you’re already well on your way to completing step one of figuring out how to get small business loans for a low credit score!

You’ll save a lot of time in your quest for funding by understanding which business loans you qualify for with bad credit. Consider looking at a variety of possible loans and make sure you compare the interest rates, fees, repayment length and other important aspects of each.

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2. Understand Your Lender’s Conditions

Answering the question “how can I get a business loan with bad credit?” depends entirely on the conditions of the lender you plan on working with.

Some aspects that lenders tend to consider include annual revenue, cash flow, existing debt, and loan usage.

Also, don’t think it’s impossible to get secured business loans with bad credit. Many quick business loans for bad credit are secured with physical equipment or receivables to protect the lender, and are typically only offered if lenders feel they can make a profit in the long run.

3. Submit Your Application

business funding for owners with bad credit

It’s easier to seek out a lender online for small business loans with bad credit than it is to obtain a traditional loan with bad credit—in more ways than one.

Applying for funding with an online lender tends to involve a faster, less involved application process, and it’s common to hear back about your financing request within hours.

Despite the relative ease of applying for the aforementioned funding types, you’ll typically still have to provide certain documents, 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

Out of the funding types that have been mentioned in this article, equity financing and microloans will require the most 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 to determine your potential.

If you’re applying for a microloan, the lender will also want to know how you plan to use your loan and how exactly it will help you become more profitable in the long run.

4. Repay Or Remit Your Loan

Above all else, make sure you can pay back your loan.

Repaying or remitting your loan or funding in a timely manner is a great way to improve business credit score and avoid costly penalties. It also enables you to build a solid relationship with a lender that you might want to work with again in the future.

Pros and Cons of Business Loans For Bad Credit

Get a Small Business Loan With Bad Credit

Many small businesses have secured business loans with bad credit scores and gone on to become great successes while improving their credit in the process. Still, like any loan, they come with risks and downsides that you must consider.

As a business owner with poor credit, any business loan you obtain will likely be short term. Although such loans can generally be used for any business-related purposes, the fact that they are short-term does mean that they’re best-suited for dealing with temporary cash-flow interruptions. That includes things like buying new equipment, minor expansion projects, day-to-day expenses, etc. Put another way, these financing options are less ideal for making major growth investments.

It’s also very important to consider whether adding more debt to your business is wise. If your cash flow is already tight, taking on a loan can add additional stress, so you must think about whether your loan or financing is absolutely necessary and worth the possible stress.

It’s a good idea to only obtain funding if you’re sure that the temporary influx of capital will help your business expand and thrive down the line.

Luckily, reputable online lenders will make sure that this is true before entering into an agreement with you.

What to consider before applying for a small business loan with a bad credit score 

Before applying for a small business loan with a bad credit score, consider the following factors:

  1. Loan affordability: Assess your ability to repay the loan and ensure it aligns with your business’s cash flow. If you default on a payment, it can make your credit score worse.
  2. Loan purpose: Clearly define the purpose of the loan and how it will contribute to your business’s growth or financial stability.
  3. Alternative funding options: Explore other financing avenues, such as grants, crowdfunding, or friends and family loans.
  4. Loan terms and conditions: Review the terms, interest rates, fees, and repayment schedule to make an informed decision.

By considering these aspects, you can make more informed choices and increase your chances of securing a suitable small business loan despite having a bad credit score.

FAQ about Business Loans for Business Owners with Bad Credit Scores

If you have a bad credit score, certain types of business loans may be more suitable for your situation. Here are some options to consider:

  1. Alternative lenders: Alternative lenders, like Credibly, are more flexible in their credit requirements and may offer options such as short-term loans, invoice financing, or merchant cash advances.
  2. Secured loans: Securing a loan with collateral, such as real estate, equipment, or inventory, can improve your chances of approval and may result in better terms and rates.
  3. Peer-to-peer lending: Peer-to-peer lending platforms connect borrowers with individual investors who are willing to fund loans. These platforms often consider factors beyond credit scores.
  4. Microloans: Microloans are small, short-term loans offered by nonprofit organizations or community development financial institutions (CDFIs). These lenders often prioritize supporting small businesses and may be more lenient with credit requirements.

Yes, it is possible to get a business loan with a bad credit score, although it may be more challenging. 

While traditional banks and lenders typically have strict credit score requirements, there are alternative lenders who specialize in providing loans to businesses with less-than-perfect credit. 

These lenders consider other factors such as business revenue, cash flow, and the overall financial health of the business. Additionally, offering collateral or a personal guarantee can increase your chances of securing a loan.

Obtaining a business loan with a bad credit score can be more challenging compared to borrowers with good credit. 

Traditional banks and lenders may be hesitant to approve loans due to the perceived higher risk. However, alternative lenders and specialized lending programs are available to cater to businesses with bad credit. 

While the loan approval process may be more rigorous, demonstrating the financial stability of your business, providing collateral, or seeking loans from lenders that consider additional factors beyond credit scores can increase your chances of obtaining a business loan.

Don’t Let a Bad Credit Score Hold You Back

Struggling to get a small business loan with bad credit? We know your business is much more than just a credit score.

Talk to a loan expert to find funding options you are eligible for even with bad credit and get funds in as little as 48 hours.

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