You could be starting your small business or working on growing into a larger operation, but either way, asking for needed capital isn't easy.
It doesn't get any easier when you have bad credit.
But we're here to tell you — there are lenders out there approving business loans, despite bad credit business loans.
We'll review what's considered bad credit, which factors may impact your small business's chances of getting approved, and which lenders are known for giving bad credit business loans.
When it comes to credit scores, a generalized score range named by FICO is how many credit reporting agencies, banks, and lenders define the state of your small business's credit.
Keep in mind that each bank and lender will interpret your score a bit differently, and these ratings are just guidelines.
579 or below
The reality is that one of the top reasons small businesses are denied a loan is because they have bad credit. It's nothing to be ashamed of, and you aren't alone — over half of Americans have poor credit scores.
If your credit score is on the lower side, banks and lenders could look at investing in your small business as riskier than investing in a business with a higher credit score.
This doesn't mean that it's impossible to get a small business loan if you have bad credit, because other factors will be considered before a decision is made.
How long you've been in business typically matters to lenders. If you can prove that you've had success as a business for a longer amount of time, a lender may feel there is less assumed risk with lending you money.
According to Experian, traditional lenders will expect 3 years of tax returns in order to get approved. If you have less than three years, don't worry. Remember that you still have other options when it comes to financing (and we'll get to those!).
We'll also point out alternative lenders that are more open-minded to the age of your business.
Traditional lenders (banks and some credit unions) have stricter requirements when it comes to your application. And those stricter requirements can sometimes mean that it takes longer to get approved for a loan.
If you're in a time crunch, you may not have the luxury of waiting on a traditional lender. Thankfully, there are other options: online and alternative lenders.
If you decide to look outside a bank for funding, then you can consider alternative lending options such as marketplaces that put you in touch with investors or even crowdfunding.
These alternative lending options essentially mean that instead of getting a loan directly from a bank, you're searching elsewhere.
Take a look at some of the more common lending options.
Invoice factoring is a faster way to get the money you're looking for. Here's how it works: Say you know you have projects coming up but you haven't invoiced your customers yet. You need to buy materials to start the project, but that costs money you don't have.
This is where you'd bring in a third party for invoice factoring. You could sell your estimated invoice to the company and they'd typically pay you the majority of the invoice, while taking a fee.
While you get less money than you'd get if you got paid by the customer, invoice factoring will allow you to get the money faster.
The best part? When it comes time for your customer to pay, it's now the third party's responsibility to collect that payment. It's out of your hands, meaning that they'll likely assume the risk if your customer is overdue with a payment.
Sometimes, you'll hear "invoice factoring" used interchangeably with "invoice financing," but they're two different things. Invoice financing is typically utilized by larger, more established companies, so if you're a small business, we suggest considering invoice factoring.
If you don't already have one, it may be a good time to look into getting a business credit card. It would be associated with your small business's bank account and allow you to work on building credit, while quickly getting the funds you need.
When choosing a card, check to make sure that the card reports to a major credit reporting agency so you know your payments will go toward building credit.
Business credit cards can have higher interest rates, so if you do decide to get one, it's likely a smart idea to do it for smaller amounts of money that you know you'll be able to pay back quickly.
Microloans are, as the name suggests, loans of lesser amounts — think less than $50,000. The Small Business Association (SBA) reports the average microloan to be about $13,000.
You'd apply for a microloan via a nonprofit organization. Microloans are typically sought after by small business owners; if you have less-than-good credit, a microloan can help you build back your business credit. Similar to invoice factoring, these loans don't take long to get your money (some in less than two weeks, but it varies).
This option is utilized by small business owners who have specific equipment they use to do their jobs. It would come in handy if the money you need is to get that equipment, and the lender considers the equipment collateral. It works similarly to leasing a car, and there are options to let you buy it out, or at the end of financing, buy the equipment at market value.
Obviously before accepting a loan, you'll want to do your homework to make sure you understand what you're getting yourself and your business into. There are a couple of factors you'll want to consider
If you have bad credit, then a lender may assume you're more of a risk. Because of this, interest rates can be higher, as well as your annual percentage rate (APR). The loan may seem like a good deal at first, but do the math to figure out if you think it's worth it for your business.
Loan fees can be like a trip to the movie theater. You go in thinking you're paying just the price of the ticket, but by the time you purchase drinks, snacks, and popcorn, you're paying nearly 3 to 4 times the ticket cost.
Similarly, loans also can come with fees, such as late fees, closing costs, underwriting fees, and more.
Imagine if you borrowed money from a friend to buy the movie ticket, and you had to keep going back for more money each time you bought something at the concession stand. This is why you want to pay attention to loan limits and make sure you know how much your loan is covering over time.
If, for some reason, you still need money after the pay-off time is up on the loan, you may have to refinance it, and that could be an inconvenient process.
Doing your own research is important, but it's never a bad idea to consult an expert when it comes to preparing to accept a loan.
If you're able to consult a financial advisor, accountant, or even a lawyer, they could help to review your finances and cash flow and determine which option may be the best for your business.
Talking to a professional like one of those mentioned above may also allow you to explore your options in a way that doesn't jeopardize your credit score.
Each business is unique and so are their financial needs, based on goals. But even though differences exist, it's still important to pay attention to their experience.
If you're able to find reviews of the process with lenders you're considering, we suggest you read them carefully. Keep an eye out for lenders or agencies that, based on reviews, may seem predatory or whose customers had a less-than-desirable experience.
OK, is your head spinning? Hang in there.
Now that we've gone through the nitty-gritty of what's what, we'll show you some bad credit business loan options that seem to be popular amongst small business owners.
As a note, the above lender options are not officially endorsed by Simply Business, but we wanted to show you examples of options that are available if you decide to move forward with your research.
When it comes to applying for a small business loan, each lender will have different requirements regarding the types of documentation and info they'll need in order to approve or deny you.
Here are some things we recommend having on-hand before applying for your business loan:
You may have bad credit, but that doesn't mean you're a bad businessperson, and most lenders realize that. But they still want proof that you have a plan.
Coming to the table with a detailed business plan ready to share will serve you well in the application process.
It should go without saying, but we'll say it: If you're applying for a loan, most lenders will be interested to see your past financial statements and how your business is currently doing, including proof of your business’s cash flow.
If you've taken out a loan before or have any outstanding debts, personal or tied to your business, have info on hand to share with lenders if they ask. Some may be curious to see how you're handling those payments, as an indication of how you may or may not honor a potential agreement with them.
Some lenders may require collateral if they approve you for a loan. So it's a good idea to have business insurance to prove that whatever collateral you provide: items from your inventory, equipment, etc., are protected.
Providing proof of business insurance can help you show your lender that you and your business are protected, giving them even more incentive to give you a bad credit business loan.
You may not be required by lenders to submit proof that you've consulted a professional (e.g. financial consultant, accountant, etc.), but taking actions to explore your options here is smart.
Before selecting an alternative lending option for your small business, it could serve you well to seek the advice of a trusted advisor. These experts can be helpful in guiding you throughout the application process and answer any questions you may have.
It's hard not to feel a little self-conscious if your business has bad credit. After all, no one aims to create bad credit — sometimes, circumstances beyond our control can happen.
But it doesn't have to hold you back! There are plenty of lenders that would consider your small business's loan application. Small business owners are resilient, and having bad credit is just one hurdle that many lenders are open to helping you overcome.
I’ve told stories since I learned to talk and written since I could hold a pen. As a small business owner myself - I'm a freelance writer and yoga teacher - I love contributing to the entrepreneurship community in different ways (including writing for Simply Business!). When I’m not drafting articles for SB, I can be found on my yoga mat, perusing an indie bookstore, and writing (with my cat nearby of course).
Allison writes on a number of topics such as small business leadership, business structures, and employee training.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
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