Business Loans with Bad Credit

What is a Bad Credit Business Loan?

Like the name suggests, a bad credit business loan is a loan product designed for business owners with credit scores that fall below typical eligibility requirements. The credit score in question could be a business owner’s personal credit score, or a business’s credit score, or some combination of both.

Generally speaking, a bad personal credit score is categorized as a FICO score of 300 to 579. Businesses that have taken out loans or credit cards in the past may also have a business credit score. There are several different business credit score providers, each with different scoring systems, but those that offer scores in the 1 to 100 range deem scores of 1 to 49 as a high risk to lenders.

If you’re a new business owner with a low personal credit score or a seasoned one whose business has struggled with credit in the past, you can still get a business loan with bad credit.

However, bad credit business loans tend to come with higher interest rates, fees, and assurances that you won’t default on the loan since the lender is taking on more risk.

Types of bad credit business loans

Like any loan, there are several types of bad credit business loan products on the market.

Business Term Loans

Term loans are likely what comes to mind when you think of a traditional loan. A bank or online lender gives you a lump-sum payment in exchange for repaying the principal loan amount, plus interest, according to a fixed schedule.

If you have good credit, term loans have somewhat negotiable terms. If you have bad credit, however, you’ll likely have to make some concessions like accepting a higher interest rate or putting up collateral to secure the loan. If your credit score is below 650, it’s less likely you’ll be able to get a conventional business loan.

Learn more | Apply

Revenue-Based Financing

While not a loan, this type of financing is all about investment capital In most cases, revenue-based financing will bypass the credit checks. . Investors who believe in your business idea give you money in exchange for a percentage of revenues generated by the business. It’s not a loan that you have to pay back, it’s an investment that you reward with the success of the company. Most investors care more about your idea than your credit score.

Learn more | Apply

Business Line of Credit

A business line of credit is somewhat between a business loan and a business credit card. With a business line of credit, you’re approved to borrow up to a certain amount of money, and you’re only charged interest on the amount borrowed if you don’t pay it back within a statement window. Like credit cards, interest rates are higher than with traditional term loans, but limits tend to be lower.

Some banks prefer to offer lines of credit to business owners with poor credit because they’re less risky for the lender due to the smaller financing amounts, and easier for the borrower to manage. A business owner can use what they need on business expenses and pay it back as revenue comes in. They’re not on the hook for monthly payments for several years.

Equipment Financing

An equipment financing loan is simply one used to purchase a piece of equipment, like heavy machinery or a commercial oven. Bad credit doesn’t preclude you from getting the equipment needed to run your business effectively. Rather, you’ll likely have a higher interest rate and pay more in the long run for the equipment than somebody with good credit would.

Secured Loans

A secured loan is a term loan that has a form of collateral attached that a borrower will lose if they default on the loan. Some banks may require secured loans for borrowers with bad credit, usually in the form of property, equipment, or some other significant asset.

Working Capital Loans

Working capital loans are small, short-term loans designed to cover the day-to-day operational expenses of a business. Less common than other types of loans, working capital loans are best utilized when cash flow is tight but you’re expecting a revenue spike in the near future.

How to get a business loan with bad credit

You can get business loans with bad credit, and the process is quite similar to how it would be if you had good credit. There are just a few extra things to keep in mind.

Step 1: Evaluate your credit score

First up, just how bad is your credit? There are a number of ways to check your credit score, but the simplest is to visit AnnualCreditReport.com for a free weekly check. If you have a business credit score, you can request a report from Experian online.

Remember, a “bad” score is considered in the 300 to 579 range, but many lenders will not accept a score under 650 for term loans.

Step 2: Update your business plan

Your business plan outlines the long-term vision and strategy for your business. When you have bad credit, a strong business plan is absolutely essential because it demonstrates that you understand your market, your business’s opportunity, and a realistic path to profitability. This communicates to lenders and investors alike that you know how you’ll use their money and how you’ll pay it back.

Step 3: Choose the best loan type and lender

You should always shop for the best bad credit business loan available to you. Different lenders will deem you eligible for different loan products, some better than others. Figure out how much capital your business needs, your ability to repay a loan in a timely manner, and communicate your needs and expectations to multiple lenders.

Some may not have a product for you, some may only offer exorbitant interest rates. Take the time to speak to many lenders to find the best option for your business. Take note of:

• Interest rates and fees
• Minimum criteria to apply
• Loan types available from different types of lenders

Step 4: Consider a cosigner

Many bad credit business loans will carry a high interest rate if you’re the sole borrower. A cosigner with better credit, like a business partner or trusted friend or family member, could help lower your interest rate. Just make sure you have a strong relationship with a cosigner and honor the terms of the loan. Paying the loan back on time will be good for both of your credit scores. Since it’s higher, defaulting will likely hurt their credit score more than yours.

Step 5: Prepare your application

The process of applying for a bad credit business loan is just like applying for any other type of loan. However, since a credit score is such an important factor in loan processing, you’ll want to show strong numbers in other areas. Your business finances will play an important role, so if you’re a new business owner with poor credit, it’s smart to post a few strong months of revenue before applying.

To prepare your application, you should make sure you have the following information ready:

• Time in business: Stability is important to lenders, and most banks want to see that you’ve been in business for at least two years for a term loan. Online lenders may require just six months for a term loan, while you may not need any time in business to qualify for a business line of credit.
• Revenue: Businesses that have been around for a couple of years should show annual revenues, but new businesses can show monthly revenues. Typically, online lenders want to see at least $100,000 in annual revenue, while traditional lenders may want $150,000 or more.
• Cash flow: A positive flow of cash through your business demonstrates that you’re doing something right and you’re more likely to be able to pay back a loan.
• Current debts: If your business is debt-free for now, that’s great. Otherwise, lenders will calculate your debt-to-income ratio and debt service coverage ratio (DSCR), which measure your ability to cover your debts with current profits. Most lenders require a DSCR in the range of 1.25x to 2x.

Step 6: Apply

Different lenders let you apply for different loan types in different ways. With Biz2Credit, you can apply for bad credit business loan online in a matter of minutes.

With some lenders, you can receive approval in as little as 24 to 72 hours.

Step 7: Understand loan agreement

Every loan agreement is different, but with bad credit and no cosigner, you can likely expect to have less-than-ideal terms. Before signing anything, make sure you look through your agreement with a lawyer and financial advisor who can help you determine if the repayment terms are acceptable and realistic for your business.

Some factors to consider:

• Interest rate
• Repayment term
• Monthly payment
• Any collateral necessary

Step 8: Focus on improving your credit score

A nice bonus of securing any type of bad credit business loan is that by satisfying the loan terms, you’ll work towards building your credit score. Pay off one loan on time, and you may be in better shape to get a better interest rate on your next loan.

A few other strategies you can use to improve your personal and business credit scores include:

• Make payments on time: Setting up automatic payments can help you stay on time with your loan payments and monthly debts.
• Don’t use too much credit: Your credit utilization makes up about one-third of your FICO score. It’s a good idea to limit your credit usage to about 30% of your available credit to avoid negatively impacting your score.
• Get a business credit card: Using a credit card for everyday business needs and other small purchases is a good way to build a positive credit history. Never spend more credit than you can afford to pay back in a single statement period.

Pros and cons of business loans with bad credit

Alternative financing options with bad credit

If you don’t want to jump through the hoops of getting approved for a loan or deal with high interest rates and restrictions, there are alternative financing options for business owners with bad credit.

Business Credit Cards

As we briefly touched on in the last section, business credit cards are a good way to build credit while covering some of your business’s smaller operational costs. The best business credit cards require good credit to qualify, but there are a number of cards accessible to those with bad credit. You may have to get a secured card, which requires a cash security deposit, but even that is a path to building credit and helping you make the purchases you need to make now and pay them back later.

Crowdfunding

Sites like Kickstarter and Indiegogo first launched as innovative ways for small businesses to receive funding for their business ideas from their biggest fans. In the past decade, however, crowdfunding has taken off and evolved. The crowdfunding industry in 2023 raised more than $17 billion across 6.5 million campaigns. The Crowdfunding Center has found that successful campaigns raise an average of $28,656.

Of course, crowdfunding isn’t for every business. You need a business model or product that’s going to entice hundreds or even thousands of people to give you funding in exchange for perks.

Another option? Equity crowdfunding, a relatively newer model that allows small private investors to purchase equity ownership shares in your business in exchange for an upfront investment.

Invoice Factoring

Invoice factoring is a short-term funding solution that allows businesses to turn unpaid invoices into cash. Essentially, a business sells 70% to 90% of an invoice’s value to an invoice factoring company, which then assumes the responsibility of collecting the invoice from a client.

If your business gets paid by sending invoices to clients, invoice factoring can be a good way to increase immediate cash flow rather than wait for clients to pay.

Small Business Grants

Small businesses make up the backbone of the American economy. As such, there are many grants and programs aimed at supporting small businesses. The United States Small Business Administration (SBA) offers several grants for existing businesses, while many states and municipalities offer grant programs for entrepreneurs — especially in science and technology.

Check out Grants.gov for a centralized database of grant opportunities available in a variety of industries, as well as the Economic Development Administration’s (EDA) directory for state programs.

How to choose the best business financing for bad credit

Even with bad credit, you have many avenues to find funding for your business. The right choice for you depends on your actual credit score, your appetite for debt, and the particulars of your business.

Funding solutions like revenue-based financing and crowdfunding are always better for business owners with bad credit since they don’t involve an application process or taking on high-interest debt. However, you’ll need a truly compelling product and business plan to convince investors. Attracting investment isn’t a walk in the park.

If you can’t attract investors, you can still get a bad credit business loan or explore alternative financing options, both to cover short-term day-to-day costs and fund long-term goals.

If you’re a new business owner with good personal credit, your best bet is applying for a business credit card or a business line of credit. If you don’t have a great credit score, it may still be a good idea to open a line of credit to help you improve your credit score while getting your business off the ground.

More established business owners that still have poor credit may explore bad credit business loans using financial statements and revenue reports to illustrate their business’s viability. Although you may have to accept a higher interest rate or secure the loan with collateral, it may be worth it if your loan jumpstarts your business to new heights.