Getting a small business loan with bad credit can be challenging, but it is not impossible. Business loans can help fund new equipment, launch a marketing campaign, or cover business expansion costs. For business owners with bad credit, though, getting a business loan may feel impossible. You can get a bad credit business loan, though. To do so, you’ll want to research your different loan options as well as which lenders are willing to work with borrowers who have less-than-perfect credit. There are even options for business loans that require no credit check, especially if you pursue alternate funding options specialized in helping small business owners.
Why Your Credit Score Matters
The vast majority of lenders will look at your personal credit score when deciding whether they should approve your small business loan. Your credit score is the best way to judge your trustworthiness as a borrower. This number will tell them how responsible you’ve been with credit in the past, with information on:
- How much debt you currently have
- How often you make your payments on time
- How much credit you currently have access to
If your credit score is high, then lenders will have greater confidence that you are a low-risk borrower who will pay your loan back on time. If you have a low credit score, you may still get approved but could end up paying higher interest rates. You may not be able to borrow as much as you would with a perfect credit score, either.
Eligibility for Small Business Loans
These three areas will weigh heavily in the decision-making process for lenders. Improving them could improve your small business loan eligibility.
1. Personal credit score
As discussed above, lenders will take your personal credit score into account on your business loan application. That’s because, ultimately, the responsibility of paying back the loan lies with you. They want to make sure you are a credit-worthy borrower who will pay them back on time. If your credit score is low, you can still qualify for a small business loan. Most lenders like to see a personal credit score of 700 and above, but some lenders will approve loans with a minimum credit score of 500.
2. Years in business
The longer your business has been around, the better that looks to lenders. That’s because a successful business that’s stayed in operation for many years is more likely to have a healthy revenue to pay back the loan.
If you haven’t been in business very long, you can still qualify for a loan. You may have a better chance for approval, though, if you look at alternate forms of small business funding such as merchant cash advances or invoice financing.
3. Annual revenue
If you have a healthy bottom line, then lenders can feel confident that you’ll be able to pay back the loan amount on time. If your business is consistently in the red, though, then you may have a hard time meeting the small business loan guidelines.
Some alternative financing options will allow you to present a business plan about how you’ll put the loan to use and approve you based on your plan, not your annual revenue. These loans take longer to get and are generally for much smaller amounts, though.
Improve Your Chances of Obtaining Business Loans with Bad Credit
If you have a low credit score, you can increase the chance that a lender will approve you by offering collateral or having a co-signer on the loan.
1. Collateral
Collateralized loans can help lenders recover their costs if you aren’t able to pay back your loan. It reduces their risk when lending to you. Collateral could be anything from a house to stock you own in another business.
2. Co-Signer
A co-signer with a good credit score can also help reduce the risk to a lender. If you don’t make the payments, the lender can get them from the co-signer. There are risks, though, as bad payment history on the loan will harm both credit scores.
Types of small business loans available
There are many types of business loans. You’ll want to understand them, so you know which one is going to be right for you.
- Term Loans: This is a standard loan type, where you get a lump sum of money upfront and pay it back with interest over a set period of time.
- Microloans: Microloans are like term loans, except for much smaller amounts. Small loan requirements will vary from lender to lender.
- Invoice Financing: This type of lending allows you to borrow against your outstanding invoices. You sell the invoice to a lender for a discounted amount, getting a cash advance while collecting the total amount on the invoice for themselves.
- Lines of Credit: This option works more like a credit card. You’ll have a maximum amount that you can borrow, but you only pay interest on the amount you use. Once you pay it back, you can use the line of credit over and over.
- Merchant Cash Advances: These allow you to take an advance on your future sales which is then paid back through a fee on each transaction you make. Merchant services such as PayPal and Square offer this option.
Things to Consider When Applying for a Small Business Loan
Before you apply for a small business loan, you’ll want to ask yourself a few questions:
- How much money do I really need to borrow? Borrow the least amount necessary to help you meet your goals without stretching yourself financially.
- What am I using the money for? Make sure you have a clear plan on how you’ll be putting the money to use. Not only will the lender want to know, but it can help you think through the amount of money you need to borrow.
- How am I going to pay the loan back? Work the numbers and make sure the estimated repayment amount fits into your monthly budget.
- What’s my personal credit score? Doing a check on your credit score before you apply for loans can help you correct any mistakes in the report. It also gives you a chance to boost your less-than-perfect credit score before you apply.
- What is the small business loan type best for my situation? Once you know the answers to the questions above, it’s much easier to decide which type of small business funding will be best in your situation. Then, you can start the application process and get the small business loan that you need.
