If you own a small business, you're no stranger to facing challenges head-on. However, when you need funding for your business, having bad credit can make securing a loan seem insurmountable. You may feel discouraged and uncertain about your options, but take heart: getting a small business loan with bad credit is possible.
In this article, we'll explore information and resources to help you navigate the financing process confidently and clearly, even if your credit history is less than ideal.
Can you get a small business loan with bad credit?
The short answer: yes, but it depends on the score and the lender.
Your credit score is a number that represents your creditworthiness. It generally ranges from 300 to 850; the higher your score, the better your credit. A low or "bad" credit score is typically anything below 580. If your score is in this range, you may struggle to get a lender to approve a mainstream loan.
However, minimum credit scores vary by lender. For example, the Small Business Administration (SBA) is a government agency that makes and guarantees loans to small businesses. It doesn't have a minimum credit score requirement for its loans, but lenders that offer SBA loans may set their own credit score requirements.
|
Rating |
Range |
Outcome |
|
Poor |
300-579 |
Often rejected by lenders. |
|
Fair |
580-669 |
May pay high interest rates and not qualify for mainstream loans. |
|
Good |
670-739 |
Lenders often approve loans. |
|
Very good |
740-799 |
Qualify for better interest rates from lenders. |
|
Exceptional |
800-850 |
Easy approval, lower interest rates and fees. |
How to get a small business loan with bad credit
To overcome bad credit and secure a loan, improving your credit score is essential. It may take some time, but you can take steps to increase your score.
Start by checking your credit report for errors and dispute any inaccuracies you find. It’s more common than you might think — Consumer Reports found that over a third of people have errors on their credit reports.
Paying down high credit card balances and making all payments on time can also boost your score. You might also consider opening a secured credit card to establish a positive payment history.
What lenders look for
Apart from credit scores, lenders consider additional factors, such as business financials, collateral, personal financials and industry experience, when evaluating loan eligibility. These factors provide a better understanding of the likelihood that you’ll be able to repay the loan and may offset a subpar credit score.
To assess your creditworthiness, lenders look at the 5 Cs — capacity, capital, collateral, conditions, and character:
- Capacity: Your ability to repay the loan based on your income, cash flow, debt and credit history. Lenders want to know you have the financial means to make payments on time.
- Capital: The assets you have available to use as collateral or to invest in your business. Lenders want to see that you have a stake in your company and have something to lose if you default on the loan.
- Collateral: The assets you pledge as security for the loan. Lenders want to have something of value that they can seize if you default on the loan.
- Conditions: The external factors that could affect your ability to repay the loan, such as the state of the economy, your industry, and your competition. Lenders want to know that your business has a solid plan for success.
- Character: Your personal and professional history, including your credit score, education, experience, and reputation. Lenders want to ensure you’re trustworthy and have a proven track record of responsible financial behavior.
If you have bad credit, you must show that your business has other strengths that make you a good candidate for small business funding.
Types of loans available for business owners with bad credit
There are several types of business loans available for business owners with bad credit. By knowing your options, you can make an informed decision about the best loan for your business needs, despite having less-than-perfect credit.
Secured loan
A secured loan requires collateral, such as a piece of equipment, real estate or inventory, to qualify. If you default on the loan, the lender can seize the collateral to recoup their losses. Secured loans may be easier to get if your credit isn’t great, but they come with the risk of losing the collateral if the loan isn't repaid.
Term loan
Term loans are a common type of financing for business owners. It can be a good option if you need a lump sum for a specific purpose, such as purchasing equipment or expanding operations. With a term loan, you get a set amount of money and agree to pay it back over a specified period of time, typically with interest.
Working capital loan
Working capital loans provide cash to cover day-to-day expenses, such as payroll, rent, inventory and utilities. Unlike term loans, working capital loans are typically used to finance short-term needs and are paid back over a shorter period of time.
It can be a good option if you need to bridge a cash flow gap or take advantage of a growth opportunity, but you’ll likely pay higher interest rates and fees.
Lines of credit
For more flexibility, consider a line of credit. It gives you access to funds as needed, like a credit card. You can take what you need, repay it, and then borrow it again. You only pay interest on the amount you use, but interest rates are often higher than other types of loans.
Equipment financing
If you’re looking for a loan to buy equipment, consider equipment financing instead. The equipment itself is used as collateral for the loan, making it easier to obtain financing with bad credit.
No credit check loans
Small business loans with no credit check don’t rely on your credit rating for approval. While these loans may be attractive to borrowers with bad credit, they typically come with higher interest rates and fees. Here are some advantages and drawbacks to consider before applying.
Pros of no credit check loans:
- No credit history required
- Easier access to funding
- Quick approval and disbursement
- Flexible terms and uses
Cons of no credit check loans:
- Higher interest rates and fees
- Shorter repayment terms
- Limited borrowing power
- Potential for predatory lending and scams
Alternative financing
If you have bad credit, traditional bank loans from a bank or credit union may not be an option. However, there are other ways to get a business loan. Online lenders are a good choice. It can offer quick and easy access to funding, but you may find high interest rates and fees.
A community development financial institution (CDFI) can help. CDFIs provide loans to people who don’t qualify for traditional funding. Check the Opportunity Finance Network for CDFI financing in your area.
Invoice factoring is another type of financing that lets you sell unpaid invoices to a third-party lender in exchange for immediate cash. Alternatively, you can consider a merchant cash advance. However, getting a loan based on future credit card sales can be risky if your company’s sales decrease.
Finding the right loan for your small business
Bad credit doesn't have to be a barrier to financing your small business. If a traditional loan isn’t an option, look at secured loans, lines of credit, or equipment financing. Alternative sources like merchant cash advances and no credit check loans may also be an option, but they’re not without risk.
It's important to research and compare lenders, understand the factors that affect loan eligibility and showcase your business's strengths to demonstrate your creditworthiness. With the right loan, you can get the funding you need to start or expand your business, regardless of your credit.
How NEXT Insurance supports small business owners
At NEXT, we understand the challenges small business owners face. That's why we offer online services that make getting the coverage you need easy, including small business insurance.
Our streamlined process allows you to get a certificate of insurance and apply for coverage within minutes on your phone or computer.
