How To Get Small Business Loan With Bad Credit

Opportunity often comes when you least expect it. You have dreamed of expanding your car wash shop for years; all of a sudden, the space next to it becomes available. You are getting your retail inventory ready for the holidays, and a vendor gives you a discount on the season’s best-selling toy. Taking advantage of opportunities like these could mean applying for a small business loan. But if you have bad credit, should you close the door when the opportunity arises? No, you can’t: Today there are several ways to get small business loan for setups with bad credit.

Do I Need Business Credit Score For Small Business Loan?


If you have been in business for less than one year, then you won’t have a business credit score because credit reporting agencies still don’t have enough information on how your business handles debt. Instead, lenders will look at your personal credit score to check if you qualify for financing.

Generally, traditional lenders such as banks and credit unions want to see a minimum personal credit score of 650 before they approve you for a loan. However, many may require a score of 680 or even higher.

If you’ve been in business for more than a year, lenders will put into consideration, both your business credit score and your personal credit score.

Traditional lenders will weigh more on your business credit score, while that alternative funding sources (such as online lenders) will concentrate on your personal credit score and financial metrics like the income or credit of your business).

How Can You Get Small Business Loan With Poor Credit Score?

Getting a small business loan with poor credit score is very difficult but not impossible. Hence, to get a small business loan with low credit rating, follow these steps:

  • Check your credit score

Examine your personal and business credit score by obtaining copies of your credit reports. Check the reports to see if there are errors and contact the credit bureaus to dispute any errors you find. Knowing what your credit rating is can help you determine the types of small business loans you are most likely to qualify for.

  • Conduct a Research on your options

Seek a small business loan that gives you the required amount of money at the lowest cost with a repayment term that is suitable for whatever situation you are in. (Read on for more details on the different types of business loans for people with bad credit).

  • Write A Business Plan

Some lenders require a business plan as part of the loan application. Even if your lender doesn’t need it, writing a business plan is a good move. If your bad credit is the result of financial management issues, a well-thought-out business plan will go a long way towards helping you avoid the same mistakes with your business finances. You can get free advice on your business plan from expert consultants near you. If you prefer the do-it-yourself approach, then search for business plan templates online.

  • Provide collateral

Placing collateral can increase your chances of getting a business loan with low credit. If you don’t repay the loan at the stipulated time frame, the lender will take your collateral as payment for the loan. Avoid using personal assets, like your home, as collateral for a business loan. If your business goes bankrupt, you could end up losing both your business and your home. Rather, choose a loan that allows you to use business assets such as equipment or account receivables as collateral.

  • Look For A Cosigner

If you want a business loan but have bad credit, look for someone with good credit score who is willing to co-sign the loan for you. Since this person guarantees that they will take care of the loan repayments if you cannot, it is important to make sure that they can afford it and that you both are really comfortable with it.

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Types of Small Business Loans With Bad Credit

It is difficult to get a small business loan from a commercial bank with poor credit score. Fortunately, there are other sources of funding that you can use.

  • Business credit cards

Besides giving you access to capital, using a business credit card can also help you improve your business credit score if you make your payments on time. Therefore, a business credit card can be a good financing option for a start-up business that needs to establish a credit history. (Make sure you choose a business credit card that reports your payments to the major credit reporting agencies; not all of them do. You may need to reach out to your card issuer for more information on this.) Since business credit cards have higher interest rates than many other types of financing, they are ideal for financing small amounts. that you are very sure you can fully pay on time.

  • Short-term loans

Both traditional banks and alternative lenders offer short-term loans to customers, which typically have repayment terms of 6 to 24 months. Instead of a fixed monthly payment, some lenders automatically withdraw payments from your business’ bank balance on a daily, weekly, or monthly basis.

  • Short-term lines of credit

These give terms similar to short-term loans, aside from that they are revolving credits (like credit cards) rather than installment loans (requiring fixed monthly payments). Entrepreneurs often require short-term loans or short-term lines of credit when they are short of working capital to run the day-to-day operations of the company. For example, payment for expenses like payroll or inventory.

  • Invoice factoring

Small businesses with unpaid receivables can transform them into cash through factoring. Factoring companies buy unpaid invoices from you for a percentage of their value (usually 80-85%). The factor collects the payment of invoices from your customers and settles the balance of the invoice minus the factoring costs. The value of the bills, not the credit score, is the main consideration for the factors.

  • Invoice financing

Although similar to invoice factoring, however, this method of short-term financing has a few key differences. Instead of buying invoices, the finance company gives the value of the invoices to you. You are responsible for collecting payment from your customers and repaying the loan and any commission.

  • Equipment financing

Do you need to buy equipment for your business? This type of loan makes it possible to finance the purchase of equipment by using the equipment itself as collateral (much like a car does for a car loan). This helps keep interest rates quite low, even though those with poor credit will pay more interest. Equipment manufacturers are the best place to apply for equipment loans and get approved quickly without hassle.

  • Microloans

If you need a small amount, let’s say ($500 to $100,000), a micro-credit from a non-profit organization might be the solution. These loans are mainly intended for entrepreneurs living in disadvantaged communities or managing socially responsible businesses. The goals of your business should also align with those of nonprofit organizations, such as creating new jobs for people living in poverty.

Poor credit is not a problem for microloans; however, the lender may demand that you get frequent business advice or enroll for business courses as a condition of getting the loan approved.

  • Merchant cash advance

Businesses such as retailers or restaurants that accept a high volume of credit card payments are eligible for these short term loans for people with poor credit ratings. The lender gives you a lump sum on your business’s future credit card sales and then takes a percentage of those sales from you each day.

Since the payments are on the basis of sales, you won’t have to make a large payment in one day with slow sales. However, merchant cash loans have high interest rates and fees, so most businesses should use them as the last option.

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How to get small business loan with bad credit score
Small business loan with poor credit

Factors to Consider Before Applying for a Business Loan

To increase your chances of getting a business loan, understand these key factors before you apply. Here are important factors that impact your approval odds;

  • The type of lender

Traditional lenders have strict requirements for getting loan approval. Most of them require the completion of a multi-page loan application for, both online and offline, and the provision of three years of financial statements and a business plan. They will also look at your personal and business credit scores, so you will have a solid credit history for your loan application to be successful.

It can take months for a traditional bank loan to be approved. Conversely, alternative or online lenders usually have much more soft requirements. For example, they can ask you to log into your accounting software or check company’s bank statements. Some alternative lenders will approve your loan application within minutes if you meet their requirements.

  • Personal credit score

As mentioned above, 650 is the minimum personal credit score you will need to get approval for a traditional business loan. Nevertheless, alternative lenders also have minimum credit score requirements. Typically, you will need a score of at least 500 to qualify for a business loan from another lender; if your score is 600 and above, you will have more options.

  • Age of business

Traditional lenders typically require three years of tax returns and financial statements as part of the loan application. If your business has been in operation for less than three years, you are likely to have difficulty getting loan approval from them. Alternative lenders have less strict requirements for the age of your business; as a matter of fact, many are turning to newbie businesses.

Factors To Compare When Choosing A Loan Option

Theoretically, you will find oneself with several loan options to choose from. To determine the best loan option for your business, it is very important to compare the following factors:

  • Loan term

Short term loans are typically 24 months or less. Medium term loans are generally two to five years. Long-term loans range from five years and more.

  • Interest rate and APR

Know both the interest rate and annual percentage rate (APR), which includes the interest rate plus loan fees or any other loan charges. Also consider the total interest payable over the life of the loan.

  • Loan limits

It is more difficult to get a second business loan when you already have an unpaid loan. Try to get a loan that covers the full amount of money you need so that you don’t have to go to multiple sources for funding.

  • Loan fees

Ensure you understand the full details of fees associated with your loan. These can include origination fees, entry fees, closing costs, late fees, and factor fees.

Factors That Lenders Consider When Approving A Loan

What factors do lenders consider when reviewing a business loan application? Here’s what they want to know:

  • Annual revenue

Traditional lenders will look at financial statements from previous years to see if your business has stable income. Online lenders are more likely to approve low income businesses. Always remember that an impressive annual income can help make up for a bad credit score and make it easier to get a loan for your business.

  • Cash flow
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Even high-income businesses will have a hard time getting approved for a loan if their cash flow is poor. Lenders want to make sure they have enough cash to repay the loan while covering other business obligations.

  • Current debt load

Lenders will check the amount of debt you currently have to make sure you can handle the extra debt.

  • Business plan

Traditional lenders will carefully review your business plan, looking for a solid business model, a strong management team, and realistic financial and business projections. Alternative lenders generally do not require a business plan before they can approve your loan request.

  • Purpose of the loan

Traditional lenders want to know the exact thing you are going to use the loan for and the financial impact that it will have on your business, such as increased sales or increased production.

How To Get Business Loan With Better Terms

What if none of these loan alternatives provide a loan that fits your needs? If you cannot get approval for a business loan that’s right for you right now, hang in there. Follow these simple steps to help you get a better business loan in the future.

  • Improve your personal credit score

Start by making the overdue payments as soon as possible and dispute any errors on your credit reports. Pay your bills promptly, not just credit card and loan payments, but rent, utilities, and phone bills as well.

Do not apply for new credit accounts or close unused credit accounts; each of these actions can affect your credit score negatively. Finally, strive to repay credit card debts and other revolving credits; aim to use less than 30% of your total available credit. Get the details on how to improve your personal credit score.

  • Build your business credit

After making sure your business credit report is accurate and updating any late payments, work on strengthening your business credit by obtaining credit and using it judiciously. Make sure that any business credit cards you use report payment history to at least one of the three major business credit reporting agencies (Experian, TransUnion, and Equifax).

Look for ways to get trade credit from the vendors and have them report to the credit reporting agencies. Even a very low business credit limit can help – paying your bills promptly will help improve your credit rating and encourage suppliers to give you more credit.

  • Reassess your business plan

Examine your business plan to see if there are ways to cut costs or increase income. Both tactics can help reduce the amount of business loan you need. You can also ask lenders who have refused to give you loan about their opinion on your business plan. Review the plan with what you have learned and make it more attractive to lenders in the future.

Conclusion

To find out if getting a business loan is a right choice for you, request a free copy of your credit report. If your personal credit score is 500 or more, you have more business financing options than you might think. It is difficult to get business loan for setups with poor credit rating, but it is achievable if you do your personal research to find the right loan product.

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