If you have bad credit — often defined as a FICO score lower than 669 — it can be challenging to qualify for a business loan. But the good news is that it’s not impossible. Some lenders might approve you with a bad credit score, especially if your business meets other eligibility requirements.

Getting a small business loan with bad credit involves the same process as applying for any other kind of business loan, just with more challenges. Read on to learn about common types of business loans for bad credit, some steps you can take to boost your approval odds and alternative options.

Can you get a small business loan with bad credit?

Getting a small business loan with bad credit is possible, but you may have a more difficult time qualifying for one than someone with good credit. 

When you apply for a small business loan, lenders generally consider your personal credit score and other factors to assess how likely you are to repay the loan. Some lenders may also review your business credit score, especially if you’re pursuing a large loan. 

Low credit scores can indicate a history of late payments or even a past default on a debt. The lower your credit score, the riskier the loan is to the lender. As a result, a lender will likely charge you a high interest rate if approved.

6 ways to get a business loan with bad credit 

Getting a business loan with bad credit can be difficult, but there are actions you can take to improve your chances of qualifying for one. 

1. Consider whether you meet other loan requirements 

Your credit score is a crucial loan requirement, but it’s not the only factor lenders consider. A lender might be willing to overlook a bad credit score if your business meets other small business loan requirements.

  • Time in business. Businesses that have been operating for a long time have better approval odds. Requirements vary, but traditional banks generally require you to have at least two years in business.
  • Annual revenue. Lenders usually have annual revenue requirements. Review your bank statements and tax returns to confirm how much your business earns annually.
  • Industry. Lenders also typically consider your business’s industry to assess how risky it might be to lend you money. Some lenders aren’t allowed to lend to companies in specific sectors, like adult entertainment, firearms and gambling.

2. Work to improve your credit 

If you don’t need money immediately, you may be able to improve your credit score before applying. Here are some steps you can take:

  • Lower your credit utilization ratio. Your credit utilization ratio — the amount of available credit you’re using — accounts for 30 percent of your credit score. Paying down credit card debt or lines of credit lowers your credit utilization ratio, which can boost your credit score.
  • Pay all of your bills on time. Payment history is the most important credit scoring factor — representing 35 percent of your FICO score. If you miss a payment, it can cause severe damage to your credit. 
  • Review your credit reports for inaccuracies. Credit reporting mistakes happen. A negative mark — for example, a paid-off account is reported as unpaid on your credit reports — can lower your credit score. You can review your credit reports from the three major credit reporting agencies — Equifax, Experian and TransUnion — for free through Dec. 2023 by visiting AnnualCreditReport.com. If you catch any mistakes, dispute them with the respective credit bureau.

In addition, it’s a good idea to separate your personal and business finances by creating a separate business entity, such as an LLC or other type of corporation, and opening separate business bank accounts. You can request a Dun & Bradstreet DUNS number to start building business credit.

3. Consider secured business loans

A secured business loan requires you to pledge collateral, such as accounts receivable or equipment, a lender can take if you default on the loan. 

Pledging collateral may make a lender more comfortable with lending you money since it’s less risky than an unsecured loan. Collateral may make it easier to qualify for a bad credit business loan — or even get you a lower rate.

4. Polish your business plan

A business plan is a written document that outlines how you plan to operate and grow your business. It should include how you intend to repay the loan and use the funds. Traditional business plans generally include these elements — along with some others, according to the U.S. Small Business Administration (SBA):

  • Executive summary. An executive summary introduces your business plan. You should include your business’s mission statement and information about your company’s product, employees, and location.
  • Description of your business. This section should include a detailed description of your business, including information about your ideal customer and what organizations your business will serve. Plus, it should include any competitive advantages your business has over other companies.
  • Market analysis. The market analysis section should include an industry outlook and any research you’ve done on your competitors and how you plan to compete against them.
  • Financial projections. Provide information on how your business earns money — or how it intends to do so in the future. If you’re an established business owner, include the business’ last three years of tax statements, financial statements and bank statements. Also, include revenue projections for the next five years.

5. Find a cosigner

If you apply for a business loan with a cosigner who has better credit than you, it can boost your chances of qualifying and securing a lower rate. When searching for a cosigner, make sure that they understand their rights and responsibilities

Explain to them that cosigning the loan means they agree to repay it if you can’t make payments. Also, let them know that if you make a late payment, it can affect your credit and theirs. 

6. Consider alternative lenders

Non-traditional lenders are sometimes more likely to work with business owners with bad credit than traditional lenders, like banks and credit unions. Some common alternative lending options include microloans and online loans.

For example, the SBA microloan program offers microloans of up to $50,000 to businesses through intermediaries that often have low or no minimum credit score requirements. You can also get a microloan from nonprofit organizations or online lenders.

In general, online lenders — and especially financial technology companies — typically set lower credit credit score requirements. They may also weigh factors other than credit score, such as your business’s potential profitability, more heavily than traditional lenders.

Types of business loans for bad credit 

Qualifying for a business loan with bad credit can be difficult, but many borrowing options are available. Below are some popular types of business loans to consider:

Term loans

A business term loan is a lump sum of cash from a bank, credit union or online lender. You then repay the loan in installments, including interest.

While traditional banks generally have strict eligibility requirements, some online lenders have minimum credit score requirements as low as 500.

However, the downside is that you’ll likely have to pay a high interest rate and fees.

Merchant cash advances

A merchant cash advance allows you to receive an advance on future profits from a financing company based on your business’ credit card sales. With this option, you receive a lump sum of money. You then repay the amount owed based on a percentage of your daily credit card sales, plus interest or a factor rate.

An MCA allows you to access cash quickly. The tradeoff is significant fees.

Invoice financing and factoring 

Invoice financing allows you to borrow against your business’s unpaid invoices. A financing company issues you a lump sum of money equal to a percentage of your outstanding invoices. You then repay the loan, plus interest, once your clients pay the invoices.

Invoice factoring is similar to invoice financing, but instead of collecting invoices yourself, you sell them to a factoring company. The factor gives you a lump sum — generally up to 90 percent of your invoice amount upfront. The factoring company collects the invoices and keeps a percentage, then sends the remaining amount to you.

Both of these options allow you to receive funds quickly — in some cases, as soon as the next business day. And your own creditworthiness is less important than your customers’ creditworthiness. Invoice factoring companies don’t care about your credit score, just whether your clients can be counted on to pay their invoices.

The downside is that some factoring companies and lenders charge substantial fees. Plus, this kind of alternative financing doesn’t build your credit score.

Business loan alternatives for bad credit

Bad credit business loans have pros and cons. If you don’t believe a bad credit business loan is the right fit for you, consider these alternatives:

  • Business grants. A business grant is funding awarded to a business owner or organization. Unlike business loans, you don’t have to repay grants. Various institutions offer grants, including the federal government, state and local governments and private corporations. Grants tend to be highly competitive.
  • Crowdfunding. Crowdfunding is a way to raise capital for your business through small constitutions from multiple people. In exchange for contributions, you can give away business equity or offer rewards, such as a discount on a good or service or the ability to pre-order a product.

The bottom line 

Although getting a business loan with bad credit can be challenging, it’s possible. You can combine the above strategies to boost your approval odds. If you decide to take out a business loan with bad credit, explore several financing options and compare rates and terms from as many lenders as possible.