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Opening a business takes a lot of hard work and typically a significant amount of capital, but once you open the doors, you may find that the financial needs don’t stop. Equipment can break, business can slow, and expansion opportunities arise. However, if you don’t have the cash in the bank, then you may need to turn to one of the many finance options available to small business owners.
If you have good business credit — something that you start building the minute you open for business — accessing the required funds can be both easy and affordable, but if you have bad business credit, are you out of luck? Can you still get a loan or engage in another type of financing?
The good news is that there are financing options available for those who have bad business credit – you just have to put in a little extra legwork.
What is business credit?
Business credit, like personal credit, plays a significant role in your ability to access financing and to do so at affordable rates. Both are based on the same fundamental principle – if you regularly pay your bills, keep your credit utilization ratio low, and steer clear of major infractions, like bankruptcies, you will typically have good credit.
Obviously, business owners that fail to make timely payments, have a significant amount of debt when compared to their available credit, or exhibit otherwise risky financial habits will receive a poor credit score. The same can also be true of businesses who have a very short credit history or that operate in “risky” industries.
While personal credit is built off a standardized scale between 300 and 850, business credit scores differ, often from agency to agency. However, though there are several business credit reporting agencies, like Dun & Bradstreet, Equifax, and Experian, most agencies use scoring systems between 1 and 100, with 100 representing the best score. Typically, businesses that have scores at or above 80 are considered to have good credit.
Securing Financing with Bad Business Credit
If you find that you have bad business credit, you may not be eligible for some of the more traditional lending options, such as low-interest rate loans from banks. However, there are a few other options you can consider.
Line of Credit by OnDeck
Secured Credit Cards
Secured business credit cards are designed specifically to meet the needs of business owners with bad credit. These cards typically are available to applicants with a poor or non-existent credit score and require account holders to put up a secured payment that acts as collateral should they not be able to make payments.
These may not be ideal for those looking for access to significant funds, but they can help business owners with bad credit improve their credit score over time, unlocking financing options for the future.
Invoice Financing
If your business operates off invoices or accounts receivable, then you may be able to turn those unpaid invoices into cash by working with an invoice financing company like BlueVine or Payability.
This type of financing, which is often available to those with poor credit, allows business owners to access a specific amount of their invoices — typically about 80% — up front. Once the invoices are paid, the invoicing financing company will return the remaining funds minus a fee, typically a percentage of the invoice.
Alternative Lenders
It may not be possible to secure a loan or line of credit from a traditional bank, but today’s subprime lending market is thriving due to an increase in alternative lenders. These lenders, which are typically online financial entities, offer lines of credits or loans to eligible borrowers, though “eligibility” is often based on far more than your business credit score.
Lenders like OnDeck and BlueVine use a combination of information, like the age of a business, recent revenue, and often personal credit scores to determine eligibility. As such, borrowers with a solid personal credit score or otherwise healthy revenue may be able to secure the financing that need, often within as little as a few days.
Personal Loans & Credit Cards
Though it’s not wise to mix business and personal finances, some business owners, particularly those with bad credit, may find that a personal loan is the only way to move forward. While this option can certainly provide access to funds, it may not always be the best option, particularly if you’re not confident that you can live up to your payment obligations.
Because this option relies on your personal credit score and therefore your personal creditworthiness, it can increase your debt-to-income ratio, potentially having a significant and negative impact on your score. And, as you likely know, a poor personal credit score can quickly make it difficult, costly, or impossible for you to purchase a house, buy a car, or take out additional loans if needed.
Turn to personal loans and credit cards as a last resort.
Borrowing from Friends & Family
Though we certainly don’t consider this option ideal, some business owners, particularly those with poor personal and business credit may not have other options. If that’s the case, and you have a willing friend or family member, be sure to enter into this type of engagement with caution.
Though the loan may be from someone near and dear, it should be treated as a typical business agreement, including repayment terms. In this case, it helps to maintain a regular repayment schedule, including interest, if necessary, and to get everything in writing, which will protect both you and the kind lender.
If you have bad business credit, you may think your financing options are non-existent. Fortunately, thanks to options like secured credit cards, alternative lenders, and even personal loans, small business owners can still access the funds they need, even if their score business core leaves more to be desired. Additionally, many of these options, particularly secured credit cards and alternative lenders, can actually help you build credit, making it easier and more affordable to borrow the next time you have the need.
This article was originally written on December 21, 2018 and updated on December 7, 2021.
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