If you have a checkered credit history, traditional banks or credit unions may be unwilling to approve a business loan. Luckily, alternative lenders, which provide options outside of conventional banks, offer small-business loans if you have a bad credit score.
Some of these lenders set no minimum credit score requirements and consider factors such as revenue or time in business for approval.
U.S. News conducted an in-depth review of the leading bad credit small-business loan companies, researching key factors including customer service ratings, qualification requirements and loan options.
Established in 2013, BlueVine has delivered more than $9 billion in financing to more than 200,000 customers. The entrepreneurial lender focuses on small businesses, offering business lines of credit up to $250,000 and invoice factoring with credit lines up to $5 million. BlueVine also offers an online vendor and bill payments program and business checking accounts. The lender serves borrowers across the country and has three brick-and-mortar locations in Redwood City, California; Gretna, Louisiana; and Jersey City, New Jersey.
Best for loan options
Biz2Credit was founded in 2007 as a platform to match small businesses with funding based on their needs by connecting borrowers with lenders that offer a range of loan and credit options. The platform has arranged more than $3 billion in small business funding for thousands of U.S. companies.
Best for short loan terms
OnDeck is an online lender providing small businesses with term loans and lines of credit. The company has extended $13 billion in loans using data analytics and digital technology to assess the creditworthiness of borrowers.
Best for product availability
Rapid Finance offers lines of credit, merchant cash advances and Small Business Administration bridge loans from $5,000 to $1 million. Approval in 24 hours is available, with one-day disbursement.
Bad credit is a FICO score that falls below 670, which is a fair or poor credit score. You typically need a FICO score of at least 530 to qualify for a bad credit business loan, but you could get better terms with a good credit score of 670 or higher.
Bad credit business loans are generally aimed at business owners with low credit scores. Not only your personal credit score but also your business credit score may be a factor in whether you get a loan, particularly from traditional lenders.
As with personal credit scores, business credit scores have distinct scoring ranges and interpretations. Your business credit score reflects your payment history on accounts associated with your business.
However, your personal credit will be used exclusively to measure the risk of a loan if your business has no credit history, as with a startup.
Some lenders will issue loans to small-business owners with low credit scores. There are a few things working against you, however.
Approval for a small-business loan can be tricky because it factors in not only credit history but also cash flow and collateral, says Jay DesMarteau, head of equipment finance at LendingClub, formerly head of commercial distribution at TD Bank. The bottom line is that approval is always easier when applicants have strong credit and steady revenue.
“When a business owner has poor or unsteady cash flow, banks and lenders often focus more on the company’s documented financial history and assets,” DesMarteau says. “Those with poor credit scores may struggle with their loan approval.”
Still, some online lenders specialize in working with small-business owners who have low credit scores.
Small-business loans come in many forms, and some are easier to qualify for than others. Alternative lenders, including online lenders, may offer bad credit small-business loans that are more accessible than loans from traditional lenders.
Alternative lenders and traditional lenders specializing in bad credit provide these types of loans for small businesses:
- Term loans. Term loans are lump sums of cash you borrow from banks and pay back, with fees, over a certain period of time. You can choose from secured or unsecured business loans, but secured business loans require collateral, such as equipment. Unsecured business loans primarily rely on your credit but may need a personal guarantee.
- Lines of credit. Business lines of credit are similar to business credit cards and can help when you’re in a cash flow crunch. With a business line of credit, a lender approves you for a pool of funds, also known as a revolving line of credit. You will pay interest only on the portion of money that you borrow from your business line of credit.
- Equipment loans. With equipment loans, lenders typically finance 80% to 100% of the cost of your equipment. The equipment acts as collateral for the loan. Alternative lenders may be more likely than traditional lenders to offer equipment loans to small businesses with poor credit.
- Invoice financing or factoring. If your small business struggles with cash flow issues because customers do not pay their balances in full, invoice financing – or invoice factoring, which is closely related – is an option. With invoice financing, you sell your invoices to a lender at a discount and receive an advance on them. With invoice factoring, you hand control of the invoices and collections to a factoring company.
- Merchant cash advances. A merchant cash advance is an advance on your firm’s future sales and can deliver quick access to capital. You’ll often repay the advance as a percentage of your daily credit card and debit card receipts, plus fees.
- Get the money you need. If you’re in need of equipment, marketing funds, inventory or cash to manage seasonal sales fluctuations, a bad credit business loan can provide you with the money you need to help your business.
- Potentially raise your credit score. Making on-time payments each month may raise your credit score and potentially qualify you for additional funds in the future.
- Expect to pay more. Lenders charge more in interest when you have a lower credit score, which will make the overall cost of your business loan more expensive.
- Face more scrutiny. A lower credit score means a closer examination of your business, its cash flow, financial history and other factors.
- You’ll qualify for less. Borrowers with lower credit scores will not be eligible for business loan amounts as large as those with better credit.
Getting a business loan means preparing a solid application, especially when you have bad credit. Before you apply, take these steps to help qualify for a small business loan with bad credit:
- Improve your personal credit. Present your personal finances as attractively as possible, recommends S. Michael Sury, lecturer in finance in the McCombs School of Business at the University of Texas at Austin. If you have a bad personal credit score, you can get a higher credit score by making on-time payments, dealing with delinquencies and paying down balances when possible. Dispute and fix errors, such as incorrect balances.
- Build your business credit score. If you want to establish a business credit history, consider opening small-business credit products, such as a business credit card or line of credit. If you need to improve your business credit score instead, the steps are similar to how you would rebuild your personal credit score, says Rod Griffin, senior director of public education and advocacy for Experian, one of the three major consumer credit bureaus. Catch up on any late loan payments and make sure your vendors are paid on time to give your business a higher credit score.
- Write a solid business plan. Sury recommends a well-thought-out business plan with a mission and strategy to boost your odds of securing financing. Your business plan should include projected financial statements. If you have a strong management team, you can highlight its background, experience and creditworthiness, Sury says.
- Find other ways to boost your creditworthiness. If you have a bad credit score, you can improve it by asking for reference letters indicating timely payments from personal and business creditors as well as vendors.
When you’re ready to start a business loan application, make sure you can answer these questions:
- Why do you need this loan?
- How do you plan to use the loan proceeds?
- What collateral, such as business equipment or other assets, will you pledge?
- Has your business applied for other loans?
You will likely need to provide personal information, such as your Social Security number, home address and phone number, along with your resume. Any sound loan program will also require your business and personal financials and legal documents, such as articles of incorporation.
For in-depth information on the business loan application process, read the U.S. News Small-Business Loans guide.
When choosing a lender for your small business, pay close attention to the lender’s:
- Loan options.
- Eligibility requirements.
- Customer service.
Keeping these factors in mind will help you find a lender with a better chance of approving your loan and offering you the best possible terms and costs.
Look for a lender that provides the type of loan you need, such as a business line of credit, invoice financing or term loan.
Also, check that loan limits and terms are in line with your needs. If you require a $250,000 loan with a seven-year repayment term, you won’t want to apply with a lender that makes only small, short-term business loans.
Applying for a loan that you don’t qualify for doesn’t make sense. Find out what a lender expects as a baseline for approval before you apply.
Ask about these and other factors:
- Minimum personal credit score.
- Minimum years in business.
- Minimum annual revenue.
Seek a lender with the lowest costs, including:
- Annual percentage rate.
- Down payment.
- Factor rate.
- Origination fee.
- Underwriting fees.
- Closing costs.
- Additional fees.
Read lender reviews to find out how businesses rate the products and the customer service each lender offers.
If you aren’t approved for a small-business loan or can’t secure enough financing because of poor credit, you have a few options:
- Lower the loan amount. You may need to work with less financing than you had anticipated, says P. Simon Mahler, a business mentor with SCORE, a nonprofit that offers free mentorship and education to small businesses. Reassess your business plan and look for areas where you can reduce expenses.
- Add business partners. This move can strengthen the creditworthiness of your business, as lenders may consider the total personal income and collateral of all owners.
- Seek creative funding. Think about asking friends, family members, private investors and potential customers to invest in your business. You can seek funding through a crowdfunding campaign using Indiegogo, Kickstarter or GoFundMe.
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