A business loan is a great way to help your company grow. But what do you do if you have a bad credit score? Fortunately, there are steps you can take to increase your chances of getting approved for small business loans, which we’ll discuss here.
What do lenders consider bad credit?
Many of us have faced a run with credit at some point in our lives. Maybe you missed paying a bill, or maybe you have unexpected expenses and can’t afford your regular monthly payments. Or maybe you just made some bad financial decisions in the past. Regardless of the reason, if your credit score is low, it will likely affect your ability to obtain a business loan.
Bad credit can be anything from having no debt at all (a good thing!) to late payments of utility or rent bills. It can 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 having a low credit score or no credit history at all.
To get a loan from these places, you will need to do everything in your power to increase your chances of getting approved.
What is the minimum credit score for a small business loan?
There is no one-size-fits-all approach to getting the perfect business credit score for a business loan that opens doors for lenders to approve your application. The minimum required credit score (FICO) depends on several factors, including the size and purpose of the loan, the amount of collateral, and whether or not it is an unsecured loan. In general, you will need a personal credit score of at least 600 to be approved for a small business loan from banks or credit unions.
Is it possible to get a loan without a credit check?
surely! Traditional lenders look at your credit history to see how well you’ve handled debt in the past. If there are red flags, you will not get a 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 such loan option is a lending institution that does not check your balance. Unfortunately, there is usually a big trade-off in the way of higher interest rates when you go this route. Additionally, these bad credit business lenders typically do not 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 several different types of bad credit business loans that you can apply for if you have bad credit (629 or less FICO). They include:
1. SBA loan
The Small Business Administration offers a variety of loan programs for businesses with bad credit, including the Microloan Program and the CDC/504 Loan Program.
2. Commercial cash advances
A Merchant Cash Advance (MCA) is a short-term loan based on your credit card sales in the future. These loans are often unsecured, have high interest rates, and do not have specific repayment terms.
3. Business lines of credit
A business credit limit is similar to a personal credit limit, but it is intended for your business. These loans are unsecured and usually have variable rates linked to an index such as the base rate or LIBOR.
4. Equipment loan
If you need to purchase equipment for your business, you can take out a loan specifically for that. These loans are usually unsecured and have a shorter repayment period than conventional loans.
5. Small loans
These loans come from microlenders who provide small loans to business owners who have been rejected by traditional banks. However, the average loan amount is $35,000, and the interest rates are incredibly high. Therefore, it is important that you shop around for the best deal.
6. Peer-to-peer lending
Peer-to-peer lending is a relatively new concept that matches borrowers with investors willing to lend money. Instead of going through a bank, you can use your bad credit business loan application to match one or more lenders based on the amount you need and their rates.
7. Guarantor loans
These are unsecured loans where another person co-signs the loan with you and guarantees you to pay it back if you can’t. Your sponsor must have good credit (score of 700 or higher) and be willing to put his or her assets on the line.
8. Invoice financing or factoring
This option is another type of high-risk loan that allows companies with strong revenue but low credit scores to get cash for unpaid bills. The company sells its accounts receivable (A/R) at a discount.
9. Business credit cards
A business credit card will get you a steep APR, but it’s an option if you have bad credit and need some quick cash. Compared to other loans for business owners with no credit or poor credit, the rates on these cards are usually lower.
Crowdfunding is a way to raise money from a large number of people, usually over the Internet. Some crowdfunding platforms specialize in providing loans to business owners with bad credit.
How to get a small business loan with bad credit
You see, if you have a bad business credit score, 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 understand the terms of the loan before you sign anything. This includes the interest rate, monthly payments, and repayment schedule.
- Shop around for the best deal. Prices and terms can vary greatly from lender to lender, so it is important to compare offers.
- Be prepared to put up with guarantees. Many lenders ask for collateral in the event that you are unable to repay the loan. This could be your home, car, or business assets.
- Have a solid business plan and financial statements ready. Lenders will want to know that you have a good understanding of your business and are able to repay the loan.
Business loans with bad credit
Startups with bad credit will most likely need to turn to online lenders to realize their entrepreneurial dreams. Alternative lenders offer different types of business loans that you can use to fund your startup, including:
1. Business line of credit
Online lenders like Lendio offer flexible business lines of credit to startups with bad credit. With Lendio, you only need a minimum of 560 credit score. In addition, you only pay interest on the money you use. One of the disadvantages of using Lendio is that you need $50,000 or more in annual revenue
2. Short term loans
You can borrow up to $250,000 from one of these loans as long as you have a credit rating of 600. They may come with high interest rates, but they are a good option for a specific one-time purchase. One of the alternative lenders that offer short term loan with bad credit is OnDeck.
3. Processing Credits
Currency financing is a good alternative lender if you need equipment and have less than excellent credit. They often provide financing for equipment in less than 24 hours as well. To qualify for equipment financing from Currency Finance, you will need at least $120,000 in annual revenue and a credit score of at least 620.
Small loan companies offer loans for bad credit, often lending small amounts of up to $500 to help entrepreneurs start or expand a business. The non-profit Accion offers microfinance up to $50,000 to small business owners with a minimum credit score of 550. The organization has more than 50 lending partners throughout the United States, Canada, Mexico, and Latin America.
5. Invoice financing
Billing companies like FactorTrust and BlueVine offer fast cash against unpaid customer invoices. This is a great option if you have a solid business but need some help with your expenses until you get paid.
6. Merchant cash advance
With a Millennium Challenge Account, small businesses with bad credit can get quick financing of up to $100,000. If you need money quickly and have a good sales volume and steady revenue, this could be an option for your business. Companies that offer them include Payability and Kabbage.
7. Business Loans
If you have a business credit score of less than excellent, Rapid Financing Business Finance may be the answer. RF looks at the credit health of a business in general and not just your credit score when determining if you qualify for financing. It is one of the best company that can be used for long term financing, funds can be available within hours after 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 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 a poor credit score, but it is important to remember that you will likely have a higher interest rate. You can use a personal loan to cover any business expenses, such as inventory or marketing costs.
10. Working capital loans
If you need quick cash to cover everyday expenses like salaries or rent, consider a working capital loan. They are easy to qualify for and usually come with low interest rates. It can be best if you have a very poor credit score, as working capital loans and MCAs have a minimum required credit score of only 500.
Don’t let bad credit stop you
You see, if you have less than perfect balance, there are options out there to help you get the money your business needs. Looking at how to fix your balance 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 you catch up on receivables, these lenders can be an excellent source of money for small businesses with bad credit. Keep in mind that loan payments can be a huge burden for businesses with tight cash flow, so it’s important to find a loan that has manageable payments and doesn’t charge exorbitant interest rates.