Yes, some lenders will issue loans to small-business owners with low credit scores. But there are several other qualification factors that lenders consider, including how long you’ve been in business, cash flow, annual revenue and payment history.
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.
- Lines of credit. With a business line of credit, a lender approves you for a pool of funds, also known as a revolving line of credit. 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.
- Invoice financing or factoring. With invoice financing, you sell your invoices to a lender at a discount and receive an advance on them. You hand control of the invoices and collections to a factoring company.
- Merchant cash advances. A merchant cash advance 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.
Pros
- Get the money you need. If you’re in need of equipment, marketing funds, inventory or cash to manage seasonal sales fluctuations, a bad credit business loan can provide you with the money you need to help your business.
- Potentially raise your credit score. Making on-time payments each month may raise your credit score and potentially qualify you for additional funds in the future.
Cons
- Expect to pay more. Lenders charge more in interest when you have a lower credit score, which will make the overall cost of your business loan more expensive.
- Face more scrutiny. A lower credit score means a closer examination of your business, its cash flow, financial history and other factors.
- You’ll qualify for less. Borrowers with lower credit scores will not be eligible for business loan amounts as large as those with better credit.
Before you apply, take these steps to help qualify for a small business loan with bad credit:
- 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.
- Build or improve your business credit score. Consider opening small-business credit products, such as a business credit card or line of credit.
- Write a solid business plan. Sury recommends 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.
- 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.
For in-depth information on the business loan application process, read the U.S. News Small-Business Loans guide.
When choosing a lender for your small business, pay close attention to the lender’s:
- Loan options. Look for a lender that provides the type of loan you need, such as a business line of credit, invoice financing or term loan.
- Eligibility requirements. Find out what a lender expects as a baseline for approval before you apply. Ask about minimum personal credit score, years in business and annual revenue.
- Costs. Seek a lender with the lowest costs for things such as annual percentage rate, down payment, factor rate, origination fee, underwriting fee, closing costs and additional fees.
- Customer service. Two good review sources for alternative lenders are Trustpilot, which rates companies based on an aggregate of customer reviews, and the Better Business Bureau.
If you aren’t approved for a small-business loan or can’t secure enough financing because of poor credit, you have a few options:
- Lower the loan amount. You may need to work with less financing than you had anticipated, says P. Simon Mahler, a business mentor with SCORE, a nonprofit that offers free mentorship and education to small businesses. Reassess your business plan and look for areas where you can reduce expenses.
- Add business partners. This move can strengthen the creditworthiness of your business, as lenders may consider the total personal income and collateral of all owners.
- Seek creative funding. Think about asking friends, family members, private investors and potential customers to invest in your business. You can seek funding through a crowdfunding campaign using Indiegogo, Kickstarter or GoFundMe.
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.
While not all lenders will consider giving a loan to someone with bad credit, there are those who will. Consider the following:
- Online lenders.
- Banks.
- Credit unions.
- Microlenders.
- Community Development Financial Institution.