How to get a business loan with bad credit

In the world of business loans, a bad credit score can mean anything less than a FICO score of 670. But that doesn’t mean you can’t qualify for a business loan with a lower score. The right lender and type of bad credit business loan should provide you with the funding you need.

Unfortunately, you can’t expect the most ideal interest rates and terms. Lenders may offset the extra risk with rates up to 99 percent or short terms of 24 months or less.

Let’s look at strategies that help you get a business loan with bad credit.

What is bad credit?

Lenders often use a business owner’s personal credit score to determine creditworthiness, especially if the business is new. But as you grow your business payment history, lenders may rely on the business’s credit score.

Let’s look at what is bad credit from personal and business credit rating systems.

Personal credit score

Because lenders and credit bureaus consider a FICO score of 670 or higher to be good credit, anything less than 670 can be considered bad credit. The FICO system breaks down credit score ranges further to define fair and poor credit:

• Bad credit: 300 to 579
• Fair credit: 580 to 669
• Good to excellent credit: 670 and above

Business credit score

Business credit scores use different factors and are reported through different credit bureaus than personal scores. The credit score also looks different, typically ranging from 0 to 100.

Dun & Bradstreet is the most common business credit bureau. It provides a PAYDEX score, which mainly reflects your payments to business suppliers and vendors. PAYDEX scores run from 1 to 100:

• Bad credit: 1 to 49
• Fair credit: 50 to 79
• Good credit: 80 to 100

Can you get a small business loan with bad credit?

You can get a small business loan with a FICO score of less than 670. But you may end up settling for high interest rates or a bad credit business loan, even if you technically have fair credit.

Because your credit score reflects your history of paying debts and expenses, it’s an indicator of how you might handle repaying a business loan. Having fair or bad credit will limit your loan options as well as the lenders willing to take on the risk of lending to you.

The lowest FICO scores in the 500s may need to go with alternative business financing, such as merchant cash advances.

Types of business loans for bad credit

You can either go with a loan from a bad credit lender or try specialized bad credit business loans for the best chance of getting approved. Types of business loans to consider:

Term loans

A business term loan offers a sum of cash up front that your business repays over a fixed amount of time. These repayment terms can range from six months to two years for short-term loans or up to 10 years for long-term loans.

Payments are typically monthly, and lenders calculate interest on the outstanding loan amount before each payment. Online lenders may offer term loans to owners with a FICO score between 500 and 650, depending on the risk level they’re willing to take.

Business lines of credit

A business line of credit is a business loan that preapproves you for a loan amount. You can draw from that loan amount at any time, triggering the repayment term.

Many online lenders offer business owners lower eligibility requirements for lines of credit, such as those with a FICO score in the low 600s and annual business revenue of $100,000. But repayment terms are short: usually six to 24 months. Some lenders charge draw fees of 1 percent to 3 percent when you tap the borrowing limit. As you repay the loan, the credit line replenishes so that you can borrow funds again as needed.

SBA microloan

An SBA microloan is a business loan that limits its loan size to $50,000 or less. It’s offered through approved community-based lenders and, like all SBA loans, is partially guaranteed by the U.S. Small Business Administration.

One of the best features about SBA loans is that they have capped interest rates. This typically makes SBA loans the best option for business owners with bad credit who want low-interest business loans.

This loan is geared toward underserved businesses, such as those owned by women or minorities. Lenders often provide extra resources to help businesses flourish and stand the tests of the market and time.

In order to help underserved businesses, lenders relax credit requirements to qualify. But you might have to provide plenty of financial documentation or be willing to go through a mentorship program.

Working capital

Working capital loans are designed to cover small or emergency expenses, such as equipment repairs or a seasonal drop in revenue. These tend to be unsecured, short-term loans since they’re meant to cover day-to-day expenses.

Some lenders offer loans specifically named working capital loans. But you can use many types of loans to boost working capital, as long as the lender approves the reason you need the funds. Loan requirements vary based on the lender and type of working capital loan you choose.

For example, a working capital loan from National Funding requires a FICO score of 600, six months in business and annual revenue of $250,000.

Equipment loans

Equipment loans are one of the easiest business loans to qualify for. These loans lower the risks of lending to a bad credit business owner because the loan is backed by the equipment. If you were to default on the loan, the lender could sell the equipment and repay the debt.

Many equipment loans drop the minimum FICO score down to 600 and allow businesses with less than two years in operation.

Invoice factoring or financing

Invoice factoring is an alternative type of business financing that weighs the credit history of your clients and suppliers more than your business’s. That’s because the factoring company buys up any invoices from slow-paying clients and forwards you up to 90% of the total invoices. It then takes on the responsibility of collecting payments from your clients.

Once the invoice is paid, the factoring company takes out factoring fees, which are a percentage of total invoices. Your business gets paid any remaining amounts.

Invoice financing is similar to factoring, except that the financing company gives you a loan based on unpaid invoices. You repay the company once your clients pay up. But you’re in charge of getting the payments, keeping you in control of important business relationships.

Merchant cash advances

A merchant cash advance is an alternative type of financing that often helps those with bad credit. It offers a lump sum of cash dependent on how much you make in future sales.

These are traditionally designed for businesses with credit or debit card sales. But MCA funders may use other types of sales to secure the funding. Most MCAs have you make payments daily or weekly from a percentage of sales.

But MCAs charge a factor rate and may come with other hefty fees that make this an expensive option. A factor rate is a number multiplied by the amount borrowed at the beginning of the MCA agreement. You pay the entire fee whether or not you pay off the advance early.

How to get a business loan with bad credit

You can take smart steps to improve your chances of getting approved for a business loan with bad credit.

1. Update your business plan

A business plan is a document that outlines your strategy for growing your business long term. Many lenders require a business plan, especially if you’re just starting out.

If you’re not writing your business plan for the first time, you’ll want to update the plan you already have. Common areas to focus on include:

2. Choose the right type of bad credit business loan

You have a wealth of business loan options at your fingertips, and different types of loans can be used for multiple purposes. When choosing the best business loan for bad credit, think about:

• Why you need the loan or what it’s for
• Which loans will give you the best interest rates
• What collateral you have if you’re securing the loan
• The repayment length you need

3. Choose the right lender

Different lenders tighten or loosen credit requirements based on their mission and the risk level they’re willing to take. Here’s what to look for when trying to choose a bad credit business loan lender:

• Traditional banks and credit unions. Traditional lenders offer low interest rates for business loans, but also have the strictest lending criteria. If you have fair credit, you might qualify for a line of credit or equipment loan. Otherwise, your best bet is to find banks with community programs like Huntington Bank’s Lift Local Business Loan.
• Online lender. You’re most likely to find a lending home with an online lender. These tend to lower FICO score requirements to 600 or lower.
• CDFIs. Community Development Financial Institutions (CDFIs) are organizations certified to support the development of certain communities, typically minority and low-income areas. Their mission is to offer banking and loan services to underserved businesses.
• MDIs. Minority Depository Institutions (MDIs) are banks and financial institutions that are mostly owned by minority individuals. They’re usually located in minority areas and offer resources like language services.

4. Find a co-signer

A co-signer is someone who signs the loan contract, agreeing to repay the loan if the business owner can’t make payments.

Finding a co-signer improves your chances of getting approved for a loan if your credit isn’t strong enough to qualify on your own. They can also help you get a lower interest rate since the lender will consider their credit history alongside yours.

While co-signing may help the borrower, the co-signer takes on a huge responsibility and potential burden if they have to make good on their promise.

5. Show strong annual revenue

Lenders look at your past credit history to predict how you might handle loan payments. But your business finances play just as important a role in getting approved as your credit.

If you can prove a strong flow of revenue and haven’t recently defaulted on a loan or missed vendor payments, some lenders might approve a loan.

You may also have to meet time in business requirements to show stability. These are typically two years for traditional lenders and six months to two years for online lenders.

6. Improve your credit score

If you’re looking to get a business loan in the near future but can wait, take the time to build your credit score. After all, a higher score leads to more favorable business loan interest rates and terms.

A few strategies to improve your personal and business credit scores:

• Mind your credit utilization. How much credit you use makes up nearly a third of your FICO score. The rule of thumb is to keep your credit usage to 30 percent of available credit. Work to pay down debts such as credit cards or lines of credit, or request a credit limit increase if you can.
• Make payments on time. Set up automatic payments for all loans, utilities and business suppliers. That way you don’t risk missing a payment by accident.
• Apply for a credit card. Getting a business credit card can jumpstart your positive payment history. You can put everyday expenses on the card and pay them off within the grace period to avoid interest. Not every card accepts bad credit, but the Spark 1% Classic is designed for credit-building with no annual fee to boot.
• Open trade credit. Some commercial vendors let you open a credit line with them when buying supplies. This builds your business credit if the vendor reports your payments to the credit bureaus. You’ll need to pay back borrowed amounts within 30 to 90 days.

Alternatives to business loans for bad credit

If you don’t qualify or need an option other than a bad credit business loan, you could go with these alternative funding options:

• Business grants. A business grant gives businesses free money that doesn’t require repayments or interest. They can come from federal or local governments, nonprofits and corporations. But you’ll have to compete with other businesses to get awarded the grant.
• Crowdfunding. Crowdfunding gives you a way to raise business funds, usually without having to repay. But you might need to offer incentives to investors, like products or even equity in your business.

The bottom line

Having bad credit doesn’t automatically disqualify you from getting a business loan, though it may make it harder to qualify. You may have to find workarounds to conventional loans like applying for lenders with lenient requirements or going for an alternative loan.

You can also boost your chances of getting approved by taking several steps, including revamping your business plan and improving your credit score.

Frequently asked questions

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  Can I get a startup business loan with a 500 credit score?

  Yes, startup business loans offer lenient credit requirements as low as the 500s, but your options will be limited. Most startup loans have a minimum FICO score of 600 or higher and require at least six months in business.
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  What credit score do you need for a business loan?

  Most lenders consider a FICO credit score of 670 or higher to be good credit, offering the most favorable interest rates and terms. Online lenders often require a minimum score of 600, while some go as low as 500.
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  Is it hard to get an SBA loan?

  SBA loans are designed for businesses that can’t get conventional loans. But because they offer competitive interest rates and long repayment terms, they tend to be competitive. Lenders often keep tight requirements for SBA loans, such as a minimum credit score of 650. But nonprofits and Community Development Financial Institutions (CDFIs) may offer SBA microloans or Community Advantage loans, which have relaxed eligibility requirements.