Business Line of Credit: For businesses with revolving working capital needs, some business lines of credit may be available to those with poor credit
How Your Credit Score Impacts Loan Options
Although many other factors contribute to your business’s fundability, your business credit score has one of the largest impacts on what you qualify for. While it can be possible — however unlikely — to find lenders offering high-principal, long-term business loans for bad credit, a low score will usually restrict the options.
If you apply for a small business loan with bad credit and no collateral, you may find that your poor score keeps you from being approved for any funding at all. Indeed, insufficient collateral was another reason why 41% of discouraged business owners did not apply for financing, according to the Federal Reserve Banks’ report.
What’s Considered a ‘Bad’ Credit Score?
Lenders usually consider a score below 580 a “bad” credit score for business loan applicants. How do they determine this?
Credit reporting agencies calculate and interpret your score based on your financial data and borrower behavior. Your credit score then falls under a tier ranging from poor to excellent.
Lenders will judge how much risk they could assume if they extend a loan agreement. Based on that risk, lenders determine the maximum funding amount they’ll offer you as well as your interest rate and repayment terms.
Credit scoring company Fair Isaac Corporation, more commonly referred to as FICO, categorizes applicants into 5 tiers based on credit score:
While lenders may deny an applicant for other reasons, those with “excellent” credit are rarely turned down.
740 – 799
With a credit score falling in this range, you’re more likely to be approved for a loan and may even have multiple options to compare.
670 – 739
“Good” credit gives you a solid chance of being approved, but you probably won’t have the luxury of weighing different options.
580 – 669
Consumers with “fair” credit may experience difficulty getting approved and incur higher interest rates and other costs.
Anyone applying for small business loans with a “poor” credit score is often rejected for various financing options, including unsecured business loans.
5 Best 'Bad Credit' Business Loans
If your score isn’t where you’d like it to be, that’s OK. There are still bad credit business loans and other financing options available for you, and we’ll explain how to apply for a business loan with bad credit.
You can obtain one of the best bad credit business loans available through alternative lenders.
Alternative lenders aren’t as risk-averse as banks. They extend capital to a broader selection of business owners, including those seeking business financing for bad credit.
Interestingly, instead of banks and credit unions, 20% of firms in 2020 applied for loans, lines of credit and cash advances via online lenders, according to those surveyed in the Federal Reserve Banks’ report. Another 15% applied with finance companies.
Because alternative lenders generally focus more on your business’s overall financial health, your credit score isn’t the end-all-be-all for their approval criteria.
Bad credit applicants with lower credit scores might find these financing options suitable.
You’ll receive a lump sum of money to finance the project. You’ll pay off the principal, plus interest, according to a predetermined payment schedule over a repayment term.
The scheduled length is the difference: You’ll pay off short-term loans much more quickly than a conventional term loan, which can mature up to 30 years from signing. Generally, short-term loans reach maturity in 18 months or fewer, depending on the principal amount and your fundability.
The Case for Short-Term Loans
You can use these loans for nearly any business purpose, making them a flexible option without a long-term commitment, bad credit aside.
Alternative lenders offer short-term loans for businesses with bad credit because they have a lower risk profile. Simply put, there is less time for something to go wrong that causes you to default on the loan — and less money to lose even if you do.
Because of the higher risk, there are some caveats with short-term loans. Rather than monthly payments, you might have to pay weekly or even daily.
Also, as with all business loans for poor credit borrowers, approval is not guaranteed. If you’re denied a short-term business loan because of your poor score, there are other business funding with bad credit options available.
2. Accounts Receivable Financing
Accounts receivable financing, which includes invoice financing and invoice discounting, is an alternative funding product that converts outstanding invoices into immediate cash for your small business. It’s a great option for receiving the working capital you need when waiting for customer payments.
Accounts receivable financing companies typically pay as follows:
You receive a business cash advance, which may be up to 90% of the total invoices you’d like to finance.
You’ll be responsible for fees that accrue each week a balance remains. However, when the invoices are fully paid off, the remaining amount withheld from you will be paid out.
Trying to secure invoice financing with bad credit or no assets to serve as collateral isn’t as much of a hassle. If you work with clients with excellent credit scores, accounts receivable financing lenders can look past your credit challenges and get you the funding you need. The invoices secure the advance, making this form of financing self-collateralizing. So if you’re wondering how to get a business loan with bad credit and no collateral other than your invoices, this may be the right option for you.
3. Equipment Financing
If your business needs to replace or add new equipment, financing for bad credit is available. These loans are typically secured through the equipment you’re purchasing. If you default, lenders can recoup their losses by seizing and selling the equipment.
In some cases, you could secure up to 100% of the equipment’s value, though lenders often require a 10%-20% down payment.
Even with bad credit, equipment leasing and buying opportunities are still available because of the built-in collateral.
4. Merchant Cash Advance
A merchant cash advance (MCA) is a go-to financing option for business owners with bad credit. An MCA isn’t a loan but an advance on your future sales. Depending on the specifics of your MCA agreement, a lender will draw a percentage of your daily credit card sales as payment or withdraw funds directly from your business bank account.
With this short-term bad credit business finance option, the creditworthiness of your business, while considered, is less of an approval factor. Instead, lending providers are more interested in seeing solid sales.
A merchant cash advance is a bad credit business finance option for borrowers turned down elsewhere.
5. Business Line of Credit
A business line of credit is the most flexible funding solution. Like a credit card, borrowers are approved for a maximum amount, from which they can draw funds as they need. Interest accrues only against the capital you’ve taken out.
You repay the money weekly or monthly until your line of credit reaches maturity. When you’ve repaid the initial amount, you’re often free to take out more. Although some options require collateral to secure them, it’s possible to obtain an unsecured line of credit with a bad credit score. Fast Capital 360’s lending partners, for example, will accept as low as a 560 credit score.
Business lines of credit can be used for daily working capital needs as well as larger projects.
Small Business Tip:
While business lines of credit are a great way to secure business funding with bad credit, they don’t always help you build your score. That’s because some alternative lenders don’t report to credit bureaus. If you want to build your credit to open up more funding options, you may consider applying for a business credit card.
Getting Business Funding with Bad Credit Through Fast Capital 360
If working with an alternative lender is the best path for you, here’s how to quickly apply online for business loans with bad credit or no collateral with Fast Capital 360.
When alternative lenders review your application, they consider many factors to determine your fundability. Credit scores are indeed weighted heavily in the business loan application process, but other parts of your business profile show your company’s financial health.
Here are a few things that help lenders look past your score:
One of the most important parts of your loan application is your business’s annual revenue. High revenue proves to lenders that you bring in enough money to repay their loans.
When a business owner applies for a loan with bad credit, high revenues can help offset the risks.
Annual revenue also factors into the amount of money your lender will offer. In general, the higher the revenue, the higher the loan amount.
Even with high revenues, lenders want to know if your business is profitable.
While your business doesn’t have to be highly profitable to qualify for a loan, seeing that you have liquid assets to repay a loan will help your chances — especially if you’re looking for business funding with bad credit.
If you have less than excellent credit and outstanding loans on the books, it might be more difficult to qualify for a second or third loan.
That’s because many lenders are hesitant to enter into a “second position” loan agreement. If you already have a business loan, your lender likely put a Uniform Commercial Code lien on your business.
This means that the first-position lender has the right to seize assets in the event of default, leaving less collateral (if any) for other lenders to recoup losses.
A lender’s primary concern when offering bad credit business loans is if the borrower will make payments. Demonstrating that you keep enough money on hand to afford regular expenses goes a long way in helping you qualify for business financing, bad credit or not.
This is why lenders will commonly ask to see at least 6 months of business bank statements (or more), depending on the kind of financing you’re seeking.
How to Improve Your Credit Score
While you can obtain small business loans, even with bad credit, a low credit score still limits your overall funding options and raises interest rates. Take the following steps to improve your credit score:
Consistently meeting your minimum monthly payments on time is the most significant factor in your credit score. Even one missed payment can be a red flag when you apply to get small business loans with a poor credit score.
Commonly called your “utilization ratio,” amounts owed reflects what percentage of the total credit available to you is used. Lenders want to see that you can take on debt without being underwater.
This is determined using the average age of your accounts and the last time they were used. Creditors like to see a long, positive history where you’ve been able to maintain several active accounts.
New Credit and Credit Mix
Opening multiple new and similar types of accounts at once can hurt your credit score because it’s viewed as risky behavior. However, successfully managing different types of credit — e.g., mortgage, auto loan and credit card — is a sign of financial responsibility.
Final Word: Getting a Business Loan With Bad Credit
Fast business loans with bad credit? They’re available — and you have options.
Whether you choose a short-term loan, business line of credit, invoice financing, equipment financing or a merchant cash advance, some lenders can help you get the capital your business requires.
If you’re still wondering how to get a small business loan or other financing with bad credit, we’ve got you covered. One of our expert Business Advisors can guide you through the funding process.