Low credit scores can make it more difficult to get small business loans, but fortunately there are financing options that may still be available. Here we discuss how to find the best business loans for bad credit.
Can You Get a Business Loan with Bad Credit?
Many small business lenders check the owner’s personal credit, business credit or both. Not all lenders have high minimum credit score requirements, however. And there are a few financing options that don’t check credit at all.
There’s a caveat to keep in mind here, however: if you have bad credit, many (though not all) financing options will be more expensive. Good credit can help your business qualify for better loans at a lower cost.
If you need financing, though, you’ll want to know what bad credit business loans are available.
What is Considered a Bad Credit Score?
What is considered bad credit to one lender might be OK to another. Following are some typical score ranges, but keep in mind that each lender decides for itself what credit scores will be considered acceptable.
720-850 (Excellent): If your credit score falls within this range, you will almost always be considered a low-risk borrower. A borrower with credit scores in this range will often be able to pick and choose the loan that makes the most sense for their business, provided they meet other requirements such as time in business or revenues.
670-719 (Good): Scores in this range will often be considered good credit. A borrower with this type of score can expect to have a good choice of lending options though not as many as if scores were higher.
620-669 (Fair): These scores are higher risk, especially those on the low end of this range. It may be possible to get a small business loan, but financing will not likely come with the lowest interest rates. Traditional bank loans are often not available to borrowers in this score range.
500-619 (Poor): There is some financing available for borrowers with those with poor credit scores, but they will be considered high risk. Funding options are limited and annual percentage rates will likely be high.
Below 500 (Very Poor): With this credit score it is unlikely a business owner will qualify for a business loan that involves a credit check.
What About Bankruptcy?
It’s worth noting that if you have a bankruptcy on your credit reports, it’s important to check the lender’s policy with regard to bankruptcies. Many will require the bankruptcy be completed (discharged or dismissed) and some may require it to be at least 1-2 years prior.
Types of Financing Available for Bad Credit
There are several types of loans and financing that either don’t check personal credit, or that don’t have high minimum credit score requirements. If your personal credit scores are low, consider these loan options:
Microlenders are often non-profit organizations that help underserved entrepreneurs get access to capital. Loan amounts are usually fairly small— ranging from a few hundred dollars to several thousand dollars. The U.S. Small Business Administration (SBS) Microloan Program caps out at $50,000.
There are many microlenders across the US, and each has its own standards. Some may offer financing to business owners with personal FICO scores as low as 575—650+, though an acceptable explanation for lower credit scores may be required. Learn how to find microlenders in your local area here.
Line of Credit
A line of credit allows the borrower to access financing up to a specific credit limit. Pay it back and those funds become available again. A line of credit is one of the most popular types of short-term small business financing and is frequently used for working capital and cash flow purposes.
Lines of credit through banks or credit unions will typically have fairly stringent eligibility requirements, but lines of credit through online lenders may be available to borrowers with lower credit scores, provided the business meets other qualifying criteria.
Business Cash Advances
A business cash advance or merchant cash advance is a financing product that analyzes past revenues (sales) to determine how much money to advance the business. Payments are then taken out of future sales, usually on a daily or weekly basis.
Because this type of financing is based primarily on sales volume, credit scores are not typically an important approval factor. Personal credit may be checked, but minimum credit score requirements are usually quite lenient.
Crowdfunding platforms allow businesses to get funding from individuals interested in supporting the business. Rewards-based crowdfunding platforms like Kickstarter allow businesses to offer tangible rewards (usually in the form of the product) to backers. Equity-based crowdfunding permits businesses to offer equity (an investment) in exchange for funding, and debt-based crowdfunding provides loans to businesses.
A credit check is rarely required, and neither are minimum credit scores. (If credit is checked, it will usually be for debt-based crowdfunding and in some cases will be used to rule out an open bankruptcy or other serious credit problems.) In addition, crowdfunding can be an excellent option for startups.
Term loans offer a loan in a lump sum (rather than a line of credit) and are often used for specific projects. Many lenders require good credit to qualify for a term loan but some online lenders offer short-term loans that may be available to businesses with fair credit scores, provided revenues and other requirements (such as time in business) are solid.
If your business invoices other businesses, invoice factoring or invoice financing can help you get funds more quickly. Your credit is not as important as the credit of your client; that’s who the factoring company will collect from.
Don’t overlook equipment leasing as an option to get the equipment you need to run your business. Some leases require good credit, but others may accept borrowers with fair or even poor credit. Equipment manufacturers may offer leases, or you may work with third-party equipment leasing firms.
Vendors or suppliers may allow customers to purchase goods or services without paying up front. The business will then be able to pay for the items later, hopefully out of future cash flow. Terms vary, but net-30 terms are common and given the business thirty days from the invoice date to make the payment. Find easy net-30 vendors here.
Business Credit Cards
A business credit card offers a line of credit accessed with the card. Most small business card issuers check the applicant’s personal credit scores, and good or excellent credit is typically required. Those with fair or bad credit may need to get a secured business credit card, which requires a security deposit.
Best Business Loans for Bad Credit
Here are loan options that may be available to business owners with fair or even poor credit. Keep in mind lenders have other requirements, in addition to credit. You can use a loan marketplace such as Nav to get matched to financing based on your qualifications.
Line Of Credit
Business Cash Advance
Kiva is a popular microlender that deserves its own callout because of its unique model. It offers entrepreneurs in the U.S. 0% interest loans up to $15,000. Entrepreneurs must crowdfund their loans from the philanthropic individuals who lend on Kiva’s platform. Kiva has over one million donors and boasts a 94% success rate. To qualify, you will need to invite friends and other contacts for initial funding. Kiva reports 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 credit score.
How to Get a Business Loan With Bad Credit
Credit is just one of the main factors lenders consider when making small business loans. The other two are revenues and time in business. If your credit is not great, the other two should be strong.
To document revenues, you will likely need to provide copies of business bank statements. Make sure you are using a business bank account, and not a personal one. Lenders may look at average monthly revenues or total annual revenue.
As far as time in business goes, lenders will often prefer to lend to businesses that have been in business at least two years. Even if you must start your new business as a small side hustle, officially establishing your business as soon as it’s feasible by getting a business license or forming a legal structure can help you meet this requirement.
How to Choose the Right Business Loan With Bad Credit
A less-than-perfect credit profile makes it more difficult to qualify for financing, so you may need to adjust your expectations and accept that while you may not qualify for a bank or SBA loan, you may have to consider other options.
- Check your credit, including your personal credit scores and your business credit profile. As we’ve discussed, creditworthiness is a key factor for many types of financing. You need to know where you stand.
- Search for lenders more likely to offer you a loan based on your credit profile. For example, most traditional banks will want to see a personal credit score above 680 (preferably in the 700s), some online lenders will offer a term loan or business line of credit to a borrower with a personal credit score of 600-650. Merchant cash advances may be available to small business owners with personal credit scores as low as 500, but will be more expensive than a term loan or line of credit from the bank or an SBA loan. Spend your time where the odds of success will be the greatest. And don’t be surprised if your options are more expensive if you have a bad credit history.
- Consider creative solutions. You may need to save up for a down payment on the loan. You may have to seek financing from alternative lenders. You may be able to qualify if you agree to pledge personal collateral and offer a personal guarantee. There are risks with these strategies so think them through carefully and talk to your trusted business advisors.
- Borrow less. You may not be able to get all the business funding you need now, so set priorities and look for financing to achieve your most important goals. You may also need to piece together several different options; for example, if you can’t get a line of credit, perhaps you can get a micro loan, vendor or supplier financing, and an equipment lease.
- Make sure you have sufficient cash flow to support the frequent payments and high interest rates on these loans. Many times, these lenders will take daily or weekly direct debits from your business banking account to repay the financing. That means you’ll need to ensure that you not only have the cash flow to service the debt, but that you have consistent cash flow going through your business to support that payment schedule.
Poor credit can be a symptom of underlying financial stress on a business. Before you borrow, take a hard look at your business finances. If you aren’t sure what changes to make, consider working with a business mentor (see below).
What to Do if You Can’t Get Approved for a Business Loan
Even if you do your homework and try to pick loans that you’re likely to qualify for, your loan application may still be rejected. It’s frustrating and disheartening.
Still, if it happens to you, there are a few steps to consider:
First, ask the lender for an explanation. Small business lenders sometimes supply vague reasons for rejecting business loan applications. Be persistent and ask for details. It may be that you are just a few points from an acceptable credit score. Or it may be that with increased revenues your application would be approved.
Next, work on your credit. There is no one-size-fits-all guide to strong personal scores, but there are some overall strategies that will help many people boost their scores:
- Monitor your credit. It’s human nature to impact the things we pay the most attention to—and that includes your personal credit scores. You can monitor your credit scores for free with Nav other websites. (There are over 138 places to get your credit scores for free.) Alternatively you can pay for services available from the major credit bureaus to monitor your credit. Checking your credit is also important to make sure it’s accurate. Mistakes on your credit reports can lead to inaccurate credit scores.
- Reduce your debt. A big part of how your score is calculated is the ratio between the amount of credit you have available and the amount of credit you use on your revolving accounts, mainly credit cards. Getting your debt usage down to 25% or less is a great goal. If you have several credit cards and currently pay only the minimum amount due, target the one with the highest balance and start paying more than the minimum until that balance reaches 25%. Then start on the next card. It may be beneficial to get your balances even lower, but that debt usage ratio is a great place to start.
- Make each and every loan or credit card payment on time. The single most impactful thing you can do to improve your score going forward is to make your payments on time. It won’t change your score overnight, but creating a track record of on-time payments can contribute to great credit scores.
- Work on your business credit. You can build business credit, even as you work on your personal credit. Strong business credit may offer additional financing options.
Finally, get help with your business. Accessing financing can be important, but if it’s not an option right now, continue to do what you can to grow sales. Several organizations provide free consulting to small business owners, helping with everything from business plans to marketing strategies. Get help from your local Small Business Development Center (SBDC) or SCORE chapter. Find your local SBA resource partner here.
This article was originally written on May 4, 2016 and updated on February 4, 2022.