A business loan is a great way to help your business grow. But what if you have bad credit? Fortunately, there are steps you can take to increase the odds of getting approved for small business loans, which we’ll discuss here.
What do lenders consider bad credit?
Many of us have had credit problems at some point in our lives. Maybe you missed a payment on a bill, maybe you had an unexpected expense and can’t afford your regular monthly payments. Or maybe you’ve just made bad financial decisions in the past. Whatever the reason, if your credit rating is low, it will likely affect your ability to get a business loan.
Bad credit can range from having no debt at all (a good thing!) To late payments on utility bills or rent. It could also include bankruptcy, which can limit your small business financing options. So what do lenders consider bad credit? Basically anything that would make you a high risk borrower, like a low credit score or no credit history.
To get a loan from these places, you will need to do everything in your power to increase your chances of getting approved.
What is the minimum credit score for a small business loan?
There is no one-size-fits-all approach to an ideal business credit score for a business loan that opens the door for lenders to approve your application. The minimum credit score (FICO) required depends on several factors including the amount and purpose of the loan, the amount of the collateral and whether or not it is an unsecured loan. Typically, you will need a minimum personal credit score of at least 600 to be approved for a small business loan from banks or credit unions.
Is It Possible To Get A Loan Without A Credit Check?
Certainly! Traditional lenders look at your credit history to see how well you’ve managed your debt in the past. If there are red flags, you will not get the business loan. However, there are loan options if you are determined to own a business and cannot meet minimum credit score requirements.
One of these loan options is a lending institution that does not check your credit. Unfortunately, there is usually a big trade-off in terms of high interest rates when you go this route. Additionally, these bad credit commercial lenders do not normally accept applicants with a score below 500, and many require borrowers to have a minimum FICO score between 580 and 600.
Types of business loans for bad credit
There are different types of bad credit business loans that you can apply for if you have bad credit (629 or lower FICO). They include:
1. SBA loan
The Small Business Administration offers a variety of bad credit business loan programs, including the Microcredit Program and the CDC / 504 Loan Program.
2. Cash advances from the merchant
A merchant cash advance (MCA) is a short term loan based on your future credit card sales. These loans are often unsecured, have high interest rates and have no set repayment terms.
3. Business lines of credit
A business line of credit is like a personal line of credit, but it’s for your business. These loans are unsecured and usually have variable rates tied to an index like prime rate or LIBOR.
4. Equipment loan
If you need to purchase equipment for your business, you can get a loan specifically for it. These loans are generally unsecured and have a shorter repayment term than traditional loans.
These loans come from micro-lenders who offer small loans to business owners that traditional banks have turned down. However, the average loan amount is $ 35,000 and the interest rates are incredibly high. Hence, it is important to seek out the best deal.
6. Peer-to-peer loan
Peer-to-peer lending is a relatively new concept that connects borrowers and investors willing to lend money. Instead of going through a bank, you can use your bad credit business loan application to match one or more lenders based on the amount you need and their rates.
7. Guarantee loans
These are unsecured loans where someone else co-signs the loan with you and guarantees to pay it back if you can’t. Your guarantor should have good credit (a score of 700 or more) and be prepared to put their assets on the line.
8. Invoice financing or factoring
This option is another type of high risk loan that allows businesses with strong incomes but low credit scores to secure money for unpaid bills. The company sells its unpaid accounts receivable (A / R) at a discount.
9. Business credit cards
A business credit card will charge a high APR, but it’s an option if you have bad credit and need cash quickly. Compared to other loans for business owners with little or no credit, the rates of these cards are generally lower.
Crowdfunding is a way to raise funds from a large number of people, usually via the Internet. Some crowdfunding platforms specialize in lending to business owners with bad credit.
How to get a small business loan with bad credit
As you can see, if your credit rating is bad, there are options for getting a small business loan. Here are some tips and ideas to use when you’re ready to do it:
- Make sure you understand the loan terms before signing anything. This includes the interest rate, monthly payments, and the repayment schedule.
- Shop around for the best deal. Rates and terms can vary widely from lender to lender, so it’s important to compare offers.
- Be prepared to put in place guarantees. Many lenders require collateral in case you cannot repay the loan. It could be your house, car, or business assets.
- Prepare a solid business plan and financial statements. Lenders will want to see that you have a good understanding of your business and that you are able to repay the loan.
Loans for start-up businesses with bad credit
Start-ups with bad credit will most likely have to turn to online lenders to make their entrepreneurial dreams come true. These alternative lenders offer different types of business loans that you can use to finance your start-up, including:
1. A business line of credit
Online lenders like Lendio offer flexible lines of credit to start-up businesses with bad credit. With Lendio, you only need a minimum credit score of 560. Plus, you only pay interest on the funds you use. One of the downsides of using Lendio is that you need $ 50,000 or more in annual income.
2. Short term loans
You can borrow up to $ 250,000 with any of these loans as long as you have a credit score of 600. They can come with high interest rates, but they are a good option for a specific, one-time purchase. . One of the alternative lenders who offer short term loan with bad credit is OnDeck.
3. Equipment loans
Currency Finance is a good alternative lender if you need equipment and your credit is below average. They often provide equipment financing in as little as 24 hours. To be eligible for Equipment Finance from Currency Finance, you will need at least $ 120,000 in annual income and a credit score of at least 620.
Microcredit companies offer bad credit loans, often lending amounts as low as $ 500 to help entrepreneurs start or grow a business. Accion, a nonprofit, provides microfinance of up to $ 50,000 for small business owners with a minimum credit score of 550. The organization has more than 50 lending partners in the United States, Canada, Mexico and Latin America.
5. Financing of invoices
Invoice factoring companies like FactorTrust and BlueVine offer quick cash in return for your unpaid customer invoices. This is a great option if you have a solid business but need some help covering your expenses until you get paid.
6. Cash advance from the merchant
With an MCA, small businesses with bad credit can get up to $ 100,000 in financing fast. If you need cash fast and have good sales volume and stable income, this might be an option for your business. Companies that offer them include Payability and Kabbage.
7. Business loans
If you have a less than stellar business credit score, business finance from Rapid Financing might be the answer. RF examines the overall health of your business credit, not just your credit score, to determine if you are eligible for financing. It is one of the best companies to use for long term financing, and the funds may be available within hours of loan approval.
8. Business credit cards
A business credit card is a good option for small businesses with bad credit, as long as you use it responsibly. Some good options to consider are the American Express Plum Card, which has no annual fee and 0% APR for the first nine months, or the Chase Ink Business Preferred Credit Card, which offers 80,000 bonus points if you spend $ 5,000 in the first three months.
9. Personal loans
A personal loan can be a good option for a small business with a bad credit rating, but it’s important to remember that you will likely have a higher interest rate. You can use a personal loan to cover any business expense, such as inventory or marketing costs.
10. Working capital loans
If you need quick cash to cover daily expenses like payroll or rent, consider a working capital loan. These are easy to qualify and usually come with low interest rates. Credibility may be the best if you have a really bad credit rating as their working capital loans and MCAs have a minimum required credit rating of only 500.
Don’t let bad credit stop you
As you can see, if your credit isn’t perfect, there are options to help your business get the money it needs. Looking into how to repair your credit is also a great option for your long-term financial health. Whether you need long-term financing for equipment or are looking for short-term cash flow until debts catch up, these lenders can be a great source of funds for small businesses with a bad credit. Keep in mind that loan repayments can be a significant burden on businesses with tight cash flow. It is therefore important to find a loan with manageable payments that does not charge exorbitant interest rates.