Although it may seem like you need to have stellar credit and multiple years in business to secure financing, in today’s lending environment that statement is far from true. In fact, there are over 44 different financing options available to business owners, and not all of them require an A+ personal or business credit grade.
Very poor credit will likely put you out of the running for the lowest cost loans such as bank loans and SBA loans, however you will find that some of those 44 financing options are still wide open to you and your business.
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Bad Credit Business Loans: The Trade-Off
There is a trade off. Business owners with bad personal credit can often secure financing, but the more risk the lender assumes because of your poor credit scores, the more likely you are to pay a higher annual percentage rate (APR) to cover the extra risk.
This can seem counterintuitive—why would lenders charge more to the business owners who historically have the most trouble paying back debts? Doesn’t it make sense for the lender to charge less so the bad credit borrowers will have a better chance of paying it back?
That may sound better from the borrower’s perspective, but unfortunately it’s the lender’s money, and thus the lender’s ball game. Lenders charge a higher interest rate to individuals with low credit scores to offset a higher expected default rate. (Keep in mind that, although lenders are giving you a capital infusion to help you grow your business, they are trying to grow their business as well, which means maximizing their return on investment.)
Let’s take a look at some of the better options when it comes to business loans for bad credit.
Business Loan Options for Bad Credit
Microlenders are institutions, often operating not for profit, that help low-income or underserved small business owners secure loans.. These loans are “micro” in the sense that they are usually only available in smaller amounts. Up to $35,000 is typical.
There are many microlenders, and each has their own set of rules and requirements. For example, Accion is a microlender that serves small businesses that need assistance with startup costs. A personal credit score of 575 or higher is required, so if you meet their other requirements this can be an option if your scores are lower than average.
The Association for Enterprise Opportunity (AEO) helps business owners find microlenders by state and business focus. Try a quick search and check out the microlenders’ individual websites to find out what their specific credit requirements are.
Kiva is a microlender that deserves its own callout because of its unique model. It offers entrepreneurs 0% interest loans up to $10,000. The only catch is that entrepreneurs must crowdfund their own loans from the philanthropic individuals who use Kiva’s platform. Kiva has over one million donors and boasts a 94% success rate. To qualify, you must have a business plan and invite friends and contacts for initial funding.
Kiva also reports your payment history to Experian Business. This is great news for the future of your business—if you make on-time payments, you start to build a higher business Intelliscore credit score.
BlueVine is an option for B2B businesses who have long invoice cycles and often find themselves waiting to get paid for services or products they’ve already delivered. If this sounds familiar to you, or you experience irregular cash flow and would like to free up some of your cash, BlueVine advances up to 85% of your outstanding invoices up to $100,000. To qualify, you’ll need a 530 personal credit score, and your business must be a U.S.-based business-to-business (B2B) business.
Credibly offers two different financing options, a small business loan and merchant cash advance product. Their small business loans range from $5k to $250k. Credibly uses their own algorithm to qualify business owners, thus they have no credit score minimum, and you could be approved for a loan within 48 hours of your online application.
To qualify you must be in business a minimum of 6 months with $15k average monthly bank deposits, and stable monthly revenue. Their rates can be high based the risk level they assign to your business, so be sure to calculate the APR of your loan first.
Business Credit Cards
A business credit card, although not a loan, can help you obtain the financing you need without the heft process of loan approval. The required credit score will vary, so you may be able to find a business credit card that will work with your current credit situation.
If you are not in a position to qualify for a business credit card, you can look into getting a secured credit card. A secured credit card is one that requires a deposit or collateral up front. In most cases, this deposit must be made in cash. A secured credit card or secured business credit card can be a valuable tool to help you build your credit.
Whether or not you take on a bad credit business loan, consider focusing on improving your personal credit and building your business credit now. Building credit is important for a number of reasons, including the fact that it will help you next time you need to cover cash flow gaps or you are presented with a growth opportunity, and will keep costs down next time you want to borrow money for your business.
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