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What is a bad credit business loan and how it works

Small Business
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Key takeaways

  • Bad credit business loans are a great financing option for businesses with poor credit
  • These types of loans are widely available through online lenders
  • Compared to traditional business loans, bad credit business loans have higher interest rates

Getting approved for a business loan when you have bad credit can be challenging. Lenders typically want to see a good-to-excellent credit score and a solid track record of responsibly managing debt repayment.

But even with a credit score that is less than ideal, it’s still possible to obtain a loan for your business. The catch is that it will likely be more expensive, and you may need to provide an asset that acts as collateral.

Here’s everything you need to know about bad credit business loans, including how to find the best, most affordable one for your business.

What is a bad credit business loan?

A bad credit business loan is any loan product designed for business owners with poor credit. They have lower credit score requirements and more relaxed eligibility requirements. Since the lender is taking more risk to lend money, bad credit business loans come with higher interest rates and fees and may require more assurances that you won’t default on the loan.

There are many different types of small business loans for bad credit.

Loan type Description
Term loans A loan used for various business expenses that is repaid according to a fixed schedule.
Microloans A small business loan of $500 to $50,000 provided by a local non-profit organization and backed by the SBA.
SBA Community Advantage loan A small business loan of up to $350,000 for businesses in underserved communities and backed by the SBA.
Secured loans A business loan secured by collateral, often an asset such as property or equipment.
Invoice factoring A short-term loan that requires a business to sell its invoices to receive 85 percent to 90 percent of the invoice value.
Invoice financing A short-term loan that uses accounts receivables as collateral for an advance of 85 percent to 90 percent of the invoice amount.
Equipment financing A loan used to purchase business equipment.
Merchant cash advances A short-term loan that pays a lump sum based on the business’s future debit and credit card sales.
Working capital loans A loan covering day-to-day operating expenses.

What is a bad credit score?

A bad credit score depends on the scoring model used by the lender. For personal credit, a bad credit score is often categorized as a FICO score of 300 to 579.

Lenders may also look at your business credit score if you have one. There are a handful of different business credit score providers. They include the FICO Small Business Scoring Service (FICO SBSS), Equifax Business, Experian Business and Dun & Bradstreet.

Each agency has its own business scoring models and may include multiple scores and ratings to assess creditworthiness. Some, like Experian and Dun & Bradstreet, provide scores that range from 1 to 100, with 1 to 49 suggesting high risk to lenders.

How a bad credit business loan works

Like any small business loan, a bad credit business loan provides funding that must be repaid over time and with interest. Some loans provide a lump-sum payment or a line of credit.

Some banks and credit unions provide bad credit business loans, but these are more widely available from online lenders.

You may also be able to obtain a loan with bad credit from community development financial institutions (CDFIs). CDFIs are specifically designed to provide credit and other financial services to underserved markets and populations to stimulate growth in these communities.

Funding times for bad credit business loans vary. Depending on the lender and their underwriting requirements, you may be able to obtain funding for a bad credit loan quickly, in some cases in as little as 24 to 72 hours after receiving approval.

The APR for bad credit business loans can be as high as 35 percent or more. But not all small business loans charge interest. Some charge a fee instead.

To get the best rates for a bad credit business loan, you may need to provide business collateral.

Bankrate insight

Lenders that offer small business loans for bad credit may use factor rates instead of interest rates. Make sure to convert factor rates to interest rates to see the true cost of your loan and easily compare options.

What is business collateral?

Business collateral is an asset your business can use to secure a business loan. This could be property, equipment, inventory or even outstanding invoices. Should you default on the loan, the lender can take that asset as payment.

For an asset to be eligible to be used as collateral, it must be owned outright by your business and not used as collateral for any other borrowing or debt you may be responsible for.

The amount and type of collateral you’re required to provide will vary based on many factors, including credit score, the loan amount you’re seeking and your ability to repay the debt. But when applying for a loan with bad credit, it is not unusual for lenders to require assets equal to the amount of the loan you seek.

The main advantage of collateral is that it can help you secure a business loan and possibly one with better rates and terms. As Michael Stone, Senior Vice President of Commercial Lending for Georgia’s Own Credit Union notes, collateral can increase “the likelihood of approval and can support longer repayment terms and lower interest rates.”

Pros and cons of bad credit business loans

Before proceeding with a bad credit business loan, consider the benefits and drawbacks carefully.


  • Flexible qualification criteria. Bad credit business loans often feature more lenient eligibility requirements.
  • Fast funding. Depending on the lender, you may receive funding in as little as 24 to 72 hours after being approved.
  • Helps establish credit. For new businesses that have little-to-no credit history, a bad credit loan can be one way to establish or improve your credit profile as long as your lender reports your payments to one or more credit bureaus.


  • Higher interest rates. With a subpar credit score, you will generally be required to pay far higher interest rates than other borrowers to help offset the risk lenders take.
  • Risking your collateral. Putting valuable assets on the line as collateral to obtain a loan can be risky. If you are unable to continue making payments on your loan, you may lose those assets.
  • Lower loan limits. You may only qualify for business loans for under $100,000 when you have a bad credit score.

How to get a business loan with bad credit

When you’re ready to get a bad credit business loan, here are the steps to follow.

1. Check your credit scores

Lenders may look at both business and personal credit reports. So pull both and see what lenders will look at. If there are any errors, you’ll have to notify the bureau reporting the incorrect information.

2. Improve your credit scores

If you have time, improving your credit could go a long way to helping you save money. Some of the most common steps to take to build credit include making loan and credit card payments on time, correcting negative information in your credit reports, and maintaining a low credit utilization ratio.

3. Determine what you can afford

It’s important to determine how much you can afford before taking out a business loan. Assess your long-term business debt, cash flow and projected revenue to ensure you can comfortably meet repayment requirements. An extra step you can take is calculating your debt-service coverage ratio (DSCR). Remember, being realistic about your financial capacity will keep your business from defaulting on the loan, which can ruin your credit score.

Bankrate insight

Use a business loan calculator to figure out how much you can afford and see how much you will end up paying over time.

4. Look at lender requirements

It’s best to review lender requirements before applying for a loan. Ultimately, this helps you assess your odds of approval and how a lender may view you and your business. Aim to understand their criteria for credit score, income, debt-to-income ratio and other factors.

5. Consider a co-signer

Applying for a loan with a co-signer with good or excellent credit can significantly improve your chances of being approved and receiving a better interest rate and loan terms. But before taking this step, be sure your co-signer understands the risks associated with this type of agreement.

6. Organize and prepare documentation

As part of the application review process, a lender will thoroughly review your business and personal financial picture. Be prepared for this step by getting all of your financial documentation in order.

Be prepared for this step by getting all of your financial documentation in order.

  • Common business loan documentation includes:
    • Business licenses and registration
    • Legal documents (leases and contracts)
    • Business bank statements
    • Personal and business tax returns
    • Business plan
    • Balance sheet
    • Income statement
    • Cash flow statements
    • List of current accounts receivable
    • Schedule of business debts

If your business plan is not up to date or as complete as it should be, spend some time polishing this document.

7. Shop around and compare lenders

In order to secure the best loan offer possible, take the time to do your due diligence. Shop around and look for prequalification from multiple lenders. Compare offers carefully including interest rates, loan initiation fees and prepayment penalty fees.

8. Apply for a loan

Once you’ve identified a lender you think is a good fit, it’s time to submit your application. Often this can be done online, though you may be required to participate in a follow-up phone call with the lender to answer additional questions or provide additional information.

Bottom line

Even with bad credit, getting a loan for your business is still possible, though the process may be slightly more challenging. You’ll need to shop around and explore the different options to determine what makes the most sense for you and your business.

Frequently asked questions

  • Yes, it is possible to get a business loan for bad credit. Online lenders and even local community development organizations may provide to small business owners with poor credit. But you will likely pay more for the loan than applicants with good credit and may also have to provide collateral.
  • Though requirements vary from lender to lender, you’ll generally need a score of at least 500 to get a bad credit business loan.
  • Yes, even applicants with bad credit can qualify for a Small Business Administration (SBA) loan. SBA loan approval is generally based on such factors as how you make money, a character evaluation of ownership and where your business operates.
  • If you have bad credit and need fast financing, there are a few options to consider. Some alternative small business lenders offer business lines of credit and equipment financing to business owners with bad credit. These will likely be secured business loans, which require you to put up an asset as collateral that can be taken, should you default on the loan. Your business may also be eligible for invoice factoring, which focuses more on the creditworthiness of your invoiced clients than on your business. It’s possible to get funding for any of these loans in as little as 24 hours, depending on the lender and how quickly you can provide the required information.

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