If you have a less than stellar credit score and you need a business loan, you’re probably wondering “Are there small business loans for someone like me?”
If you had asked this question 10 years ago, the answer would have been a hard no. But today, thanks to the burgeoning online industry, there are many options for bad credit small business loans. This guide will break down how to approach the business financing process if you’re still building your credit.
Personal vs. Business Credit
The important thing to note first is that when we’re talking about bad credit, we are talking about bad personal credit. In case you didn’t know already, your personal credit score is actually a very important part of the business loan application. In most cases, it will only be the banks who reference your business credit (along with your personal credit). Very few online lenders will do so. And if you are looking for bad credit small business loans, the bank will not be an option.
Bank lending to small businesses is at an all-time low. Securing a loan from a bank is more difficult than ever, and only top-tier borrowers are qualifying. That means if you have bad credit, it’s not an option. It’s best to be over 700 before applying with the bank.
If you are unsure what your credit score is, every year you can pull a free credit report (which includes your score), at annualcreditreport.com. We also recommend signing up for a free credit monitoring site, like Credit Karma, so that you can keep an eye on your credit score and take early notice if it starts to drop.
If you know your credit score is under 700, let’s talk about how to get you a small business loan.
What Will My Credit Score Get Me?
The first thing you probably want to know is, based off your credit score, do you even have a chance of qualifying for a loan? That’s a tough question to answer, as lending is never black and white. Many different factors contribute to your “fundability.” The best way to know for sure is to apply. That being said, there are some general benchmarks you should be aware of:
700+: If you have a credit score over 700, you’re in a good position to qualify with most lenders.
650+: If you have a credit score over 650, you could qualify for an SBA loan.
620+: If you have a credit score over 620, you could qualify for a medium-term loan.
550+: If you have a credit score under 620 but over 550, you could qualify for a short-term loan, and potentially a medium-term loan if your business is in a good financial position.
500+: If you have a credit score under 550 but over 500, you will have trouble qualifying for some loan products, but if your business is doing very well, that might open the door to a few different loan products.
500 and below: If you have a credit score under 500, you will have a very difficult time qualifying for most loans. Again, if your business is doing extremely well, that might help open a few doors.
The most important thing to keep in mind here is that just because your credit score puts you into certain lenders and loan product’s thresholds, that doesn’t mean you are guaranteed to find funding. Other factors are just as important throughout the process. More on that below.
What are Lenders Looking for?
Understanding that the credit score isn’t the only thing lenders are looking for, let’s walk through the other things they’ll want to see. Remember, even if you have bad credit, if you’re strong in other ways, it should help open up your loan options.
1. Annual Revenue
One of the most important parts of your loan application is your business’s annual revenue. The more, the better. Not only does this indicate to lenders that business is good, but it helps set expectations for loan size. Generally speaking, you will qualify for around 8 to 12% of your annual revenue. It is possible to qualify for more, but using this number is a great way to have an idea about how much you can get going in.
2. Profitability
Along with revenue, lenders want to know whether or not your business is profitable. However, your business doesn’t have to be profitable to qualify with many online lenders, but it will help if you are.
3. Current Debt
Lenders want to know who else you have been working with. If you are currently paying back a small business loan, you might have trouble qualifying for a second product. Why? Most lenders don’t want to take what is called “second position” to another lender. It is very likely that your original lender put a UCC lien on your business, meaning that if you go bankrupt and your assets are liquidated, this lender will be compensated for your remaining debt. If a lender takes second position to someone else, it means they will not get paid until the lender in first position is completely paid back. For some lenders, taking second position isn’t an issue. For others, if you’ve almost repaid the debt entirely, then it won’t be a problem. But for some, they won’t consider taking second at all. If you currently have outstanding debt, be prepared to talk about this with lenders.
4. Cash Flow
Lenders want to know how well you manage your cash flow — and how much cash you tend to keep on hand. Almost every lender will want to see at least 3 months business bank statements to verify this. If you have a history of NSFs, you might want to wait a few months before applying so you can take some time to cautiously manage your bank account, making sure it looks lender-friendly.
5. Past History
Past history is very vague, but it’s the best way to sum up what lenders are looking for when they pull a credit report. If a lender is doing a “hard pull” and wanting to look at a physical credit report, it’s because they want to know what has happened in your financial past. Have you had a bankruptcy? If so, this isn’t a non-starter, but some lenders will want you to be a few years out from this. Have you had a foreclosure? Do you have a tax lien? Any other red flags on the report? If you have a potential red flag on your report, don’t fret. These aren’t necessarily prohibitive, especially for lenders doing bad credit small business loans. No matter what, be prepared to talk through these things if you know they can be found on your credit report.
Where to Find Bad Credit Small Business Loans
Now that you have a decent understanding of your bad credit small business loan options, where can you find these said options?
To start, know your best options are going to be online.
If you have a 640+ credit score, please note your options, such as medium-term loans or SBA loans, do not count as bad credit small business loans, as these loan products have the potential for single-digit interest rates. We tend to classify bad credit small business loans as products that borrowers with a 640 or below credit score can qualify for.
1. Collateralized Loans
One of the best ways to offset a bad credit score is by having some form of collateral to offer lenders. But, we don’t mean your house. There are some online lenders that have products that use such things as your invoices to help collateralize a loan. Here are two examples of collateralized bad credit small business loans.
Invoice Financing
Invoice financing is a product you can only qualify for if you are invoicing your customers for your products or services, and those customers are other businesses (B2B). If this sounds like your business, keep reading.
With invoice financing, these institutions can offer a cash advance equal to around 85% of the outstanding invoice amount. Then, when your customer pays back the invoice, you will receive the remaining 15%, minus any fees incurred. Usually, these companies charge a flat fee (often around 3%) to process the transaction, and then charge a fee per week the invoice remains outstanding (often around 1% a week).
Since the cash advance is backed by these invoices, these lenders are often able to do business with those that have struggling credit.
It’s also important to note that there is one invoice financing company on our marketplace, Fundbox, that doesn’t even look at your credit. This might be one of the best bad credit small business loan options since credit isn’t even a factor.
Equipment Loans
If you are needing a loan to finance an equipment purchase, keep reading. With equipment financing, you can use the equipment you are purchasing to collateralize the loan. And again, since there is collateral, it helps offset a bad credit score. However, equipment loans are the hardest loan to qualify for of the options listed in this section, as they will most likely require a 600+ credit score.
Equipment loans operate very much like a car loan. You are advanced the sum you need to purchase the equipment, and then pay back the loan, plus fees, over a set period of time. And, the best part is that you own the equipment once it’s fully paid off, which makes this a better solution than renting or leasing equipment.
2. Short-Term Loans
Short-term loans are unusual in their nature as they are usually 3 – 18 months in length and are paid back with daily ACH payments. By daily, we mean all business days, not including bank holidays. Short-term loans often have short applications and pretty fast times to funding, so if you need cash fast to act on an important business decision, a short-term loan could be a great fit.
Short-term loans are one of the most unique products that can be found online, and are a potential solution for those with a credit score over 500. Because of the short term of the loan and the daily payments, lenders are able to take on more risk.
3. Merchant Cash Advances
Merchant cash advances, or MCAs, are the definition of bad credit small business loans. With MCAs, lenders will advance you a certain amount of cash, and you pay back this amount, plus fees, from your daily credit card sales. These lenders will take a set percent of these sales, so you get to pay more when business is booming and less when business is slow. However, since they are pulling directly from your sales, an MCA will cut into your business’s cash flow.
Obviously, you will only be eligible for this type of loan if you process credit cards. And although this is good product for those with bad credit, it is also the most expensive product on the market. It is best to try the options above before turning to a merchant cash advance.
How to Graduate from Bad Credit Small Business Loans
Although bad credit small business loans are a good solution right now, especially if your business needs working capital to grow, don’t resign to accepting them in the future. Chances are your business will have working capital needs down the road, but when you find yourself in this position again, set a personal goal to have graduated to a lower cost loan product by that time. And the good news is, by taking on this loan, you are upping your chances of qualifying for a better product in the future, as you’re building credit. That being said, if you do want to graduate to a lower cost product, you need to be a very responsible borrower. Here are some things you must accomplish in order to graduate:
Pay on time. This is the most important step. Not only will this build a good relationship with that lender, but these on-time payments will have a great effect on your credit score.
Build up your total bank balance. Like we said above, your average bank balance is something almost every lender will care about. If your goal is a lower cost loan, then spend some time padding up your bank balance and making sure you don’t have overdrafts.
Sign up for a credit monitoring service. Don’t just assume your credit score is approving — ensure it. By signing up for a free credit monitoring service like Credit Karma, you can make sure your score starts crawling up. Even better, Credit Karma breaks down where your score needs help, so you’ll walk away with other tips to get your score up.
Stay in business. This one may seem obvious, but it matters. The longer you are in business, the better loan options you will have. In fact, if nothing else changed about your loan application except your time in business, that alone could unlock a few new loan options.
These are just a few ways you can prep yourself for a better option next time around. Of course, there are other things you can focus on, such as building your revenues or becoming profitable, but chances are, as a savvy business owner, those are always at the top of your list.
Now what?
As you can see, there is a whole new world of bad credit small business loans out there. If you are ready to apply for a loan, the best thing to do is make sure the rest of your loan application, outside of the credit score, is in tip top shape. Once you’ve successfully prepared, try starting with lenders who offer the loan products highlighted. If you find you are unable to qualify, try following the steps provided above on “graduating to a lower cost product.” If you are able to achieve a few of these things, that should help you qualify in the future.
If you are denied for a loan, be sure to ask the lender why. Their feedback will allow you to see what areas of your application need improvement, and help you focus your energy on improving the area that is holding you back. After all, it may not be your credit score.
On a final note, before you start your loan search, make sure you understand that more often than not, bad credit small business loans can be very expensive. Unless you have strong business revenues or are very profitable, you may only qualify for extremely expensive products. Before committing to any loan, be sure you can afford it. Don’t assume a loan will get your cash flow machine working again, and help pay for itself. You don’t want to commit to a loan you can’t afford, and end up hurting your credit score even more.
Nowadays, bad credit won’t stop you from finding working capital for your business. If you work hard enough, you can find a great bad credit small business loan, and with time, work up to a small business loan that requires great credit.
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