Can You Get A Business Loan With Bad Credit?

If you’re an entrepreneur or a business owner, there will come a time when you’ll need more funding. Whether it’s for launching a startup or expanding an existing one, business loans can give you access to the funding you need. But what if you have a poor credit history? Can you get a business loan with bad credit?

Yes, you can. You’ll find various sources of a business loan with bad credit, such as business credit cards, short-term loans, microloans, invoice financing, and merchant cash advance. Let’s dive in.

What is the Credit Score Needed for a Business Loan?

When applying for a business loan, traditional lenders, such as national and community banks, will focus more on your business credit score. Meanwhile, alternative lenders, such as Kiva and Fundbox, give more weight to your personal credit score and your company’s financial standing when determining if you’re eligible for a business loan or not.

You don’t have a business credit score yet if you’re still launching your startup or if it’s up and running for less than a year because credit bureaus don’t have enough information to determine your credit score. Even so, you can still apply for a business loan and creditors will check your personal credit score. You need a credit score of at least 500 to qualify for a business loan from alternative lenders and a minimum of 650 for traditional lenders.

These are the two credit score systems used by the three major credit reporting agencies: Experian, Equifax, and TransUnion. You’re entitled to get a free copy of your credit report from each credit bureau every year.

Personal Credit Scoring System for FICO and VantageScores

Meanwhile, if your business is at least a year old, lenders will evaluate both your business credit score and your personal credit score to determine your eligibility.

A business credit score is a representation of a company’s financial history. Unlike a personal credit score, which is associated with a Social Security number to identify an individual, a business credit score is linked to an Employer Identification Number (EIN).

There are three major business credit reporting agencies—Dun & Bradstreet, Equifax, and Experian.

Credit bureaus, such as Experian’s Intelliscore Plus and D&B’s PAYDEX Score, use methods that score businesses from 1 to 100. Meanwhile, Equifax’s Small Business Credit risk scores range from 101 to 992.

Unlike personal credit reports, you don’t get a free annual business credit report. You need to pay for one and the price varies between credit reporting agencies.

Business Credit Scoring System for FICO and VantageScores

What are the Types of Business Loans for Bad Credit?

Traditional banks are reluctant to offer loans to people and businesses with bad credit because of the risks that they won’t get paid. If you have a bad credit history, whether on your personal credit or business credit report, securing a loan application could be a struggle. Fortunately, you have options other than traditional lenders, which usually require at least a good credit score.

1. Business Credit Cards

You can turn to credit cards to finance your business operations. If your startup business needs a significant cash injection while building up its credit history, a business credit card for bad credit may just be what you need. Secure a credit card under your company name and make sure to get one that reports your payments to the major credit reporting bureaus. Business credit cards have an average annual interest rate of 17.81%.

2. Short-term Loans

You can take out short-term loans from traditional and alternative lenders. Lenders may automatically withdraw payments from your business bank account daily, weekly, or monthly for 6 to 24 months. The annual interest rates of short-term loans differ among lenders but they generally range from 10% to 80%.

3. Microloans

Non-profit organizations or microlenders offer small loans or small loans ranging between $500 and $10,000 to businesses in need of financial assistance. You must have a personal credit score of at least 575 to be eligible for a microloan. The Small Business Administration (SBA) is the most popular provider of microloans of up to $50,000. Other microlenders offering small loans for businesses are Kiva and Accion. Their annual percentage rates range from 6% to 31.9%.

4. Invoice Financing

You can use your unpaid invoices and turn them to cash through invoice financing. Financing companies, such as Fundbox, will give you a loan according to the value of your unpaid invoices. You’ll collect the payment from your clients and use it to pay back your loan. Its average annual percentage rate ranges from 10% to 60%.

5. Merchant Cash Advance

If you need fast cash for your business, you should check out a merchant cash advance. Applications are processed and approved within one business day. Lenders will offer you a loan in a lump sum according to anticipated sales. You can pay back the loan by making money transfers from your bank account or by giving back a percentage of your future sales generated through credit and debit card transactions. The total annual borrowing cost of merchant cash advances ranges from 40% to 350%.

Are There Business Loans With No Credit Check?

Having poor credit makes it difficult to secure a loan. You’re probably wondering where you can find a business loan with no credit check. Online lenders that specialize in offering loans to bad credit borrowers will look into your business revenue, type of business, and age of business rather than focus on your business and personal credit score. They offer easier applications and more lenient requirements compared to traditional banks.

Examples of business loans with no credit check are merchant cash advance, inventory financing, equipment financing, and purchase order financing.

Are There Business Loans With No Credit Check?

You’ll have several options when looking for a business loan for bad credit. You need to do your research and compare certain factors to determine which one is most suitable for your needs.

  • Interest Rate – Compare the interest rate and annual interest rate that you pay for your loan.
  • Loan Term – How long do you want to pay for the loan?
  • Loan Limit – What is the maximum amount you can borrow?
  • Loan Fees – What are the other fees (eg. Origination fees and closing fees) you need to cover?

Where Can You Find Government Small Business Loans for Bad Credit?

Many businesses with bad credit turn to private lenders and banks offering small business loans that are backed by the government. The SBA loan is a popular government small business loan for bad credit. The Small Business Administration guarantees a percentage of the loan to reduce the risks for lenders.

There are SBA loan requirements that you need to meet if you want to be eligible, including personal and business financial statements and a detailed business plan. Additionally, you’ll get better chances of securing a loan if your personal credit score is at least 680.

Are There Unsecured Business Loans for Bad Credit?

Many businesses with bad credit turn to private lenders and banks offering small business loans that are backed by the government. The SBA loan is a popular government small business loan for bad credit. The Small Business Administration guarantees a percentage of the loan to reduce the risks for lenders.

There are SBA loan requirements that you need to meet if you want to be eligible, including personal and business financial statements and a detailed business plan. Additionally, you’ll get better chances of securing a loan if your personal credit score is at least 680.

How to Get Approved for a Business Loan with Bad Credit?

  • Just like other types of loans, you need to check your business and personal credit score first. Check your credit reports and look for any errors that could bring down your credit score. If you find any inaccuracies, file a dispute with the credit reporting agency right away.
  • Know your options. Don’t choose the first loan you find on the internet. Do your research well and look for a business loan that can provide you with the amount you need with loan terms that you’re comfortable with. Keep in mind that loan applications trigger a hard inquiry, which will negatively affect your credit score. So, apply only when you’re absolutely sure about your chosen option.
  • Decide if you’re willing to provide collateral. Securing your loan with an asset will reduce your borrowing risks and make you look more appealing to lenders despite your bad credit history.  However, creditors will have the right to seize the collateral or pursue your assets if you fail to pay back your loan.
  • Look for a co-signer. Looking for a business loan for bad credit is difficult. But you can make things a bit easier if you can present someone with a good credit history who’s willing to co-sign the business loan for you. Make sure that your co-signer understands that they will take on the responsibility of paying back the business loan if you can’t.

Conclusion

Credit scores play a crucial role in the finance sector. Bad credit will make it harder to secure a business loan from traditional lenders. Fortunately, you have other options if you’re an entrepreneur looking for a business loan with bad credit. Your options include business credit cards, short-term loans, microloans, invoice financing, and merchant cash advance. Although these loans have higher interest rates compared to loans offered to those with good credit scores, they can provide you with the cash you need for your business.

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