Business Loans for Bad Credit
Financing information for small businesses with poor credit
Ready To Move Your Business Forward?
Small business owners with no credit or poor credit history may find themselves having a hard time getting the capital they need to grow their businesses. At National Funding, we want to give you the resources you need to improve your credit score and find the right funding solution for your business.
On This Page:
- Getting a Business Loan with Bad Credit
- Why Your Credit Score Matters
- How to Get a Business Loan with Bad Credit
- Improve Your Chances of Obtaining a Business Loan
- Types of Bad Credit Business Loans
- Things to Consider When Applying
- How to Choose a Loan Based on Your Business Needs and Credit Score
- What Lenders Look at on a SMB Loan Application
- How to Get a Better Business Loan in the Future
- FAQs on Business Loans with Bad Credit
Getting a Business Loan with Bad Credit
Today’s economic atmosphere is stricter than ever. That’s why the focus on credit scores has become integral in analyzing potential risks associated with a borrower. While obtaining a small business loan has always come with its own unique challenges, the recent economic environment has put some traditional lenders even more on guard.
Why Your Credit Score Matters
Even though you're seeking funding to support a business, most lenders will consider your personal credit score when evaluating a small business loan application. Your FICO credit score is determined by a variety of factors, known as the 5 C’s of credit: character, capacity, capital, conditions, and collateral. These characteristics examine how reliable you are at repaying your debts, how many payments you’ve made on time, and your debt-to-income ratio, among other considerations. While there are several credit scoring models that may be used to determine your creditworthiness, the most common model is the FICO score.
Here are the different FICO credit score ranges:
- Exceptional (800 - 850)
- Very good (740 - 799)
- Good (670 - 739)
- Fair (580 - 669)
- Poor (300 - 579)
The term “bad credit” usually refers to a FICO score of 300 - 629. A low FICO score is a common reason why traditional lenders often reject small business loan financing. However, even if your score falls within a lower range, you may be able to secure a bad credit business loan from an alternative lender that focuses more on where your business is going in the future than on what’s influenced your credit score in the past.
How to Get a Business Loan with Bad Credit
You can obtain the capital you need to develop and grow a successful business, even if you have bad credit. In fact, there are essentially only three steps to securing a small business loan with bad credit:
1. Know Your Personal Credit Score
Personal and business credit scores help lenders determine how risky it may be to lend money. Since these scores can influence your ability to acquire funding for your business, knowing your credit score and improving your credit score before applying for a loan can help you determine the best financing options to explore.
2. Research Your Options Based on Eligibility Requirements
For each type of financing, there are specific requirements you'll have to meet to get approved. Traditional business loans are often based on the following factors:
- Personal credit score
- Years in business
- Annual revenue
Research the requirements for each type of small business financing you're considering to determine which bad credit small business loans give you the best odds for approval.
Talk to a Funding Specialist at National Funding for personalized advice on your financing options.
3. Choose the Best Option for Your Business
There are a broad range of financing options for business owners with bad credit outside of traditional loans. When exploring alternative financing options, consider not only the eligibility requirements and repayment terms, but also the lender’s reputation. Read borrower reviews and speak with service representatives. Make sure that your lender is committed to supporting you in your journey to greater success and has a proven track record of satisfied customers.
Improve Your Chances of Obtaining Business Loans for Bad Credit
Applying for a small business loan requires preparation, especially if your credit isn't ideal. Before applying, consider taking a few steps to improve your chances of approval and secure the best terms possible for your small business loan. There are two ways you may be able to improve your chances of getting a small business loan with bad credit.
1. Provide Collateral
Lending money to a small business is inherently risky. Even for an extremely qualified borrower, an unexpected downturn in business can leave the owner unable to repay a loan. One way to increase your chances of getting the funding you need to grow your business is to provide collateral. There are two options:
- Invoice financing. If you have unpaid customer invoices, some lenders may be willing to approve your loan based mainly on the value of your invoices. With invoice financing, unpaid invoices serve as collateral for your loan. The financing company advances a certain percentage of each invoice and charges a fee for service.
- Equipment financing. If your goal for taking out a loan is to secure funding for new equipment, you may consider applying for equipment financing. With this type of collateral, the equipment you finance serves as collateral for your loan. If you default on your loan, the lending company will seize the equipment to recover their losses, but your personal assets will remain protected.
Ask a Funding Specialist which type of financing is right for you.
2. Use a Co-Signer
In this scenario, another person agrees to take on partial responsibility for a small business loan by “co-signing” the agreement. A co-signer is typically an individual with a favorable credit score or steady source of income who can handle making loan payments if the primary borrower becomes unable to.
Types of Bad Credit Business Loans
Types of business loans for poor credit offered by alternative lenders include:
Short-Term Small Business Loans
A short-term small business loan provides a lump sum of capital that the borrower agrees to pay back over a fixed amount of time on a specific payment schedule. Each payment the borrower sends to the lender includes the principal amount plus any interest owed for the period.
Short-Term Business Line of Credit
When a lender issues a short-term business line of credit, the borrower may access funds on a continual basis up to a specified approved amount. Like a credit card, the borrower is only charged interest on the open balance.
If you secure your bad credit business loan with collateral, you’re giving the lender the right to seize collateral to recover their losses if you’re unable to pay your loan back. The loans are also commonly referred to as secured business loans. They are usually secured with invoice or equipment financing.
Working Capital LoansWorking capital loans are used to finance everyday business operations like wages, inventory, taxes and a range of other costs that keep your business going day-to-day. Unlike some other types of loans, they are not used to pay for investing or other long-term assets. Working capital loans from National Funding can provide your business up to $500,000 to support your needs right now, quickly and with minimal paperwork.
Things to Consider When Applying for a Small Business Loan
If you’re looking for a business loan and have bad credit, there are several factors that may influence your approval odds as well as the terms of your loan. Before applying for a bad credit business loan, here are a few things to consider.
1. The Relationship of Personal Credit to Business Loan Approval
If your business has no credit history, traditional lenders will use your personal credit score as a numerical representation of your overall creditworthiness. Your personal FICO score will be used exclusively to determine your eligibility for a small business loan. For that reason, it’s a good idea to work on improving your personal credit score so you’ll have plenty of options when applying for a small business loan.
2. The Relationship Between Credit Scores and Interest Rates
Business owners with great credit generally receive the best interest rates on their loans. If your personal or business credit score is low, there’s a greater chance your loan will include a higher annual percentage rate (APR), which describes the interest you pay for a year.
The good news is that securing a small loan with a manageable APR can help improve your credit score over time. If you are approved for small business loans for bad credit, each on-time payment can help raise your credit score while providing the financing you need to run and grow your business.
3. Online Lenders Vs. Traditional Banks
Traditional lenders like banks and credit unions tend to have strict policies and eligibility requirements for loan approval. They also tend to be slower and require more documentation. Whether you have above-average or less-than-perfect credit, here are just a few benefits of alternative and online lenders compared to traditional lenders:
- Faster turnaround times
- Less documentation required for approval
- Faster access to funds, if approved
- Flexible terms that meet your specific needs as a borrower
- Higher approval rates
4. Age of Business and Startup Businesses
Traditional banks tend to lend to well-established businesses to reduce their risk. As a result, younger or startup businesses may have a harder time meeting a bank’s strict lending standards. Alternative and online lenders, on the other hand, actively cater to underserved business owners. National Funding offers financing for businesses that have been in operation for just one year.
Other types of lending solutions young or startup businesses may consider include:
- Business credit cards. These cards can be a practical solution for building your business credit score while having access to extra capital. To obtain one, you'll need a federal tax ID number and business bank account.
- A secured personal credit card. Secured cards can help you build better personal credit before applying for a loan.
5. Business Loan Costs
Beyond the principal amount of a loan, small business financing terms often include additional costs you must consider. By keeping loan costs to a minimum, you’ll have more capital to reinvest in your business.
Small business loan costs often include:
- Annual percentage rate. Your APR is the interest rate you pay on your loan annually.
- Down payment. While down payment requirements vary between lenders, the average amount a borrower will need to invest when taking out a loan is 25%. Some loans allow you to use collateral as your down payment.
- Origination fee. An origination fee is a charge for processing a new small business loan. Some lenders waive the origination fee, while others incorporate the fee into the overall loan balance.
- Underwriting fees. These fees are collected by the underwriters who review, verify and approve the information provided in a small business loan application and recommend terms for financing if approved.
- Closing costs. These fees include costs associated with finalizing a loan, such as loan-packaging fees, business appraisals, or recording fees.
- Other fees. Additional fees associated with a small business loan may include check processing fees, prepayment fees, and late payment penalties.
How to Choose a Loan Based on Business Needs and Credit Score
A variety of factors contribute to your eligibility for a loan. Here are some general benchmarks that may contribute to your loan approval:*
- New businesses or Startups. If you are a startup or have been in business for less than a year, it may be hard to find a loan, even if you have good credit. Potential financing options include startup financing, secured personal credit cards, and business credit cards.
- Owners with a credit score under 550. With a credit score between 500 and 550, you might have difficulty applying for certain types of loans. However, if your business is doing well, alternative lenders may use factors other than your credit score to determine your eligibility.
- Owners with a credit score over 500. With a credit score between 550 and 620, you could qualify for a short-term loan or even a medium-term loan if your business is doing well.
- Owners with a credit score over 600. If your credit score is 620 or above, you may qualify for a medium-term loan. With a score over 650, you might be able to qualify for a Small Business Administration loan, too.
- Owners with a credit score over 700. If your credit score is over 700, you're likely in a good position to qualify with most lenders, including direct and alternative lenders as well as the Small Business Administration.
- Businesses with large unpaid invoices. Some alternative lenders allow you to turn unpaid customer invoices into instant capital. Invoice financing lenders weigh the strength of your business over your credit score.
- Businesses with new equipment needs. If your business would benefit from a new piece of specialized equipment, equipment leasing or financing may be a good fit.
- Very small businesses. While you’re building a business, consider financing options like business credit cards, secured personal credit cards, and startup financing.
*These benchmarks do not represent actual approval odds for financing. National Funding does not consider credit score in our bad credit loan decisions, but instead base approval on time in business and annual gross sales.
Compare Options to Determine the Best Loan for Your Needs
Your decision to obtain financing for your business is important. There are many factors to consider when evaluating your different loan options, including:
Short-Term vs. Mid-Term Repayment
A short-term loan typically needs to be repaid within one to three years, while a mid-term loan usually has a two to five-year repayment period. The eligibility requirements, interest rates, and loan amounts of each type can vary. Carefully think about what repayment time frame works best for your needs as a business owner, and the repayment terms' impact on the overall cost of any loan you accept. For example, the repayment terms for short-term working capital loans from National Funding will not exceed 12 months for your first loan, with renewals extending up to 15 months.
Interest and Fees on Open Balance
Assess how much interest and fees you’ll be charged on open balances. If you take out a longer-term loan, the amount you have to pay each month may be lower. However, you might wind up paying more in the long run. If you take out a short-term loan, you’ll probably have higher payments but less total interest on the loan.
If a lender doesn’t extend financing in the amount your business needs, consider turning to creative funding sources. Or, look for ways to cut costs and reduce the total amount you need. Even if you obtain a loan for less than you originally wanted, securing an initial loan can help you build better credit and potentially secure more funding with a second loan or renewal later on.
What Lenders Look for on a Small Business Loan Application
What additional factors matter to a lender besides credit scores? Banks tend to request more information, while online and alternative lenders require less. At National Funding, for example, we ask for limited information in order to provide better speed and service. We generally look at a business's annual revenue, cash flow trends and credit history of both the business and the owner.
Your business’s annual revenue is one of the most important eligibility factors for bad credit small business loans. If you’re approved for a loan, the amount you’ll qualify for will usually be around 8% -12% of your business’s annual revenue.
Even if your annual revenue is high, some lenders will also want to know if your business is profitable. Your business doesn’t necessarily have to be profitable in order to qualify for a loan, but your chances of approval could be increased if it is. If your business has demonstrated significant growth in the last 3 months or more, it could improve your chances of securing a loan even more.
Current Debt Obligation
If you already have a business loan, you may have difficulty obtaining another one, especially if your original lender placed a UCC lien on your business. For some lenders, approving you for a loan even if you already have one with another lender won’t be an issue. However, there are risks to your business and credit if you take on more debt than you can realistically and responsibly pay back.
Your ability to manage the cash flow of your business may be an important factor to lenders. After all, every lender’s primary concern is your ability to make loan payments. By demonstrating that your business makes and has enough money to afford payments may improve your chances of qualifying.
Most lenders will examine your credit report to determine if you’ve ever had a bankruptcy, foreclosure or another red flag. But remember, poor credit doesn’t automatically disqualify you from getting the money your business needs, especially with lenders like National Funding who offer small business loans for bad credit.
National Funding does not require it, but some lenders may want to review your business plan to better understand your business. Business plans may show lenders a variety of things that set your business apart, including:
- unique value propositions
- marketing strategies
- leadership team
- revenue and profit models
Your business plan should be presented in concise yet detailed terms that clearly explain the amount of funding you need and why it’s required.
How to Get a Better Business Loan in the Future
To qualify for a loan with better terms, you need to demonstrate that you’re a responsible borrower. If you’re denied a small business loan or think you’ll need to borrow again in the future, use these ideas to improve your chances of obtaining a loan with better terms the next time you apply.
Improve Personal Credit
Your personal credit matters, even if you’re applying for a business loan. If you have less-than-perfect credit, get proactive about improving your credit score by following these best practices:
- Always make payments on time
- Keep balances below 30% of your total credit limit
- Don't open too many new lines of credit at once
- Actively monitor your credit score and dispute suspicious or false activity
In the United States, three major credit reporting bureaus Experian, Equifax, and TransUnion offer a range of free services to help you monitor, manage, and improve your credit score. Visit each of their websites to check your current credit report and ways to improve it.
Establish and Build Business Credit
Building your business’s credit is one of the best ways to improve your eligibility for a business loan. Establishing business credit can take some resources and time, but when done properly, it pays off big time.
Establishing business credit usually involves incorporating your business, getting a federal tax ID number, opening a business bank account, and securing various lines of credit for your business. Even if you don’t qualify for a small business loan, you may still qualify for a business line of credit or a bad credit business loan, which could improve your chances for a loan over time.
Like all credit, you want your business's credit to remain in good standing. Follow the best practices for improving personal credit above to maintain a strong business credit score, too.
Assess Your Business Plan
While you’re building better credit and working to secure funding, you may find you need to lower the amount of capital you request to improve your chances of approval. If so, reassess your current business plan to look for areas you can cut costs, such as using social media to market your business or building your own website.
Prove Your Creditworthiness
Consider building a team of experienced business partners to boost your creditworthiness. Lenders may take the total personal income and collateral of each business owner into account when determining your eligibility for a loan. You can also collect reference letters from current creditors and vendors to demonstrate your trustworthiness and ability to repay financial obligations.
Get Creative with Funding Options
Even if you’re approved for business loans with bad credit, you may not secure the full amount you need to grow your business as quickly you'd imagined.The good news is that after you secure and pay off your first business loan, your improved credit score may help you qualify for business loans with higher amounts or better terms in the future.
If you need additional funding to realize your vision for the future even sooner, you may consider asking family, friends, or private investors to invest in your business. You can also seek funding through a crowdfunding platform like Kickstarter or GoFundMe. As with all financing options, you must convince others that your business is a good investment and make sure you understand the full terms and costs associated with any creative funding sources you consider.
If you’re looking for a small business loan, compare your options with National Funding. See how much funding you qualify for by filling out our brief online form today – our quick application pulls a soft credit inquiry so your current credit score will not be impacted. A Funding Specialist will reach out to discuss your options and help you find the right small business financing options in as little as 24 hours.
FAQ: Business Loans for Bad Credit
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