Personal Finance

Best Bad Credit Business Loans Ultimate Guide 2021

Financing a new business or helping an existing business grow can be especially difficult for business owners with bad credit. Luckily, bad credit business loans can make financing more accessible—even for less creditworthy borrowers and businesses without an established credit history.

Before you search for business loans for bad credit, we’ll walk you through what’s considered bad credit, how to get a business loan with bad credit and what you should consider when choosing a loan.

What Is a Bad Credit Score?

Lenders typically look at a business owner’s personal credit score and business score when evaluating a business loan application. However, for startups and other businesses without a credit history, the applicant’s personal score is even more important.

A business owner should have a personal FICO Score of at least 530 to qualify for a bad credit business loan. That said, even a FICO Score under 670 is considered fair or poor, and likely won’t qualify a business owner for the most competitive interest rates available.

Can You Get a Small Business Loan With Bad Credit?

It’s possible to get a small business loan with bad credit, but applicants with low credit scores may have a harder time getting approved for traditional loans. What’s more, small business owners with bad credit—scores as low as 580—typically can only access high interest rates.

Business owners with low credit scores must also demonstrate strong, stable cash flow to qualify for a business loan, and lenders may require collateral. For these reasons, an alternative form of financing like a merchant cash advance may be a better option for business owners with bad credit.

How to Get a Business Loan With Bad Credit

The process of applying for a business loan varies by financial institution, but most banks and online lenders impose similar requirements. That said, it’s more difficult to get a business loan with bad credit, so there are some additional steps to take before submitting a formal application. Follow these steps to get a business loan with bad credit:

  1. Check your personal and business credit scores. Before you start shopping for lenders, check your personal credit score. Knowing your exact score and the content of your credit report can help you better understand how lenders will evaluate your loan application. If your business is established, also check its business credit score through Experian, Equifax or Dun & Bradstreet (D&B).
  2. Improve your credit scores. If possible, take time to improve your credit score before applying for a loan for your business. Start by reviewing your credit reports and disputing inaccuracies that are negatively impacting your score. Then, pay down debts to reduce your credit utilization and continue making on-time payments. If you lack a credit history, open a credit account and start making regular payments.
  3. Prepare your business for due diligence. Lenders conduct extensive due diligence before extending small business loans. This typically involves reviewing the applicant’s business plan, personal and business bank statements and other financial documents. You may also be asked to provide copies of applicable business licenses and legal documents, a description of how you will use the funds and details about available collateral. If you have bad credit, you can improve your approval odds by creating a robust business plan and identifying collateral before you apply.
  4. Identify possible co-signers. A co-signer is someone who agrees to repay a loan if the primary borrower defaults. Not all lenders accept co-signers, but finding a co-signer with a high credit score can improve your chances of approval or available loan terms. Before applying for business financing, talk to your other business partners or someone else who might co-sign the loan.
  5. Compare lenders to find the best deal. To reduce the risk posed by lending to less qualified borrowers, financial institutions impose higher interest rates than those available to more creditworthy applicants. While you may not qualify for the lowest rate, you may still save money by comparing loan amounts, repayment terms and rates offered by multiple lenders.
  6. Submit an application. Loan application and underwriting processes vary, so contact your preferred lender before you apply. Once you’re ready, submit the necessary information online, over the phone or in person. You may be contacted by a lender representative if they have questions about your application or you need to provide additional documentation. This is especially likely for borrowers with bad credit whose approval depends more heavily on the health of the business than their credit score.

How to Choose a Bad Credit Small Business Loan

When you have bad credit, choosing a small business loan requires more than deciding how much to borrow and shopping for the most competitive rates. Instead, business owners with poor credit must find lenders with less demanding eligibility requirements and then identify the option that best meets their needs. Consider these factors when choosing a bad credit small business loan:

  • Qualification requirements. Most small business loans are granted based on the applicant’s personal credit score. For that reason, the most important factor to consider when searching for a bad credit business loan is a lender’s qualification requirements. Check your personal credit score and then compare minimum credit score requirements at various lenders to see where you might qualify.
  • Loan offerings. Small business loan offerings vary by lender. Not only do lenders offer a range of loan amounts and repayment terms, but some also offer secured loans that are easier to qualify for than unsecured options.
  • Annual percentage rates. Business loan annual percentage rates—or APRs—vary by loan type and lender, and generally range anywhere from 9% to 99%. That said, the lowest rates are only available to the most qualified borrowers, and business owners with bad credit are typically offered rates near the top of the APR range. If you’re likely to qualify through multiple lenders, compare APRs to determine which option offers the most affordable rates.
  • Additional costs and fees. Many traditional and online lenders charge origination fees to offset the costs of processing applications and underwriting loans. However, lenders that specialize in borrowers with bad credit often charge more fees than other competitors. For example, you may have to pay higher origination fees, late payment fees or prepayment penalties to help offset the institution’s risk of lending.
  • Lender reputation. Having bad credit means you may not get to choose from your pick of top lenders. However, it’s still important to evaluate a lender’s reputation before committing to a loan. To do so, read online reviews and check with other local business owners to see which lenders have the best reputation—and which to avoid.
  • Underwriting and funding speed. Many lenders that cater to borrowers with bad credit offer slower underwriting and funding speeds than competitors. However, it can still be helpful to compare lenders and determine which offers a turnaround time that best meets your borrowing needs.

Where to Get a Bad Credit Business Loan

Getting a bad credit business loan is more difficult than qualifying for a loan with a good credit score. For that reason, it may be necessary to look at several lenders—and types of lenders—to find one willing to extend funds to your business. These are some of the best places to get a bad credit business loan:

  • Traditional banks and credit unions. It’s typically more difficult to get approved for a small business loan through a traditional bank or credit union; these institutions also may offer a smaller selection of financing options. However, if you have stable cash flow and are already working with a local bank or credit union, you may be able to qualify with a local lender that already has knowledge of your business and revenue.
  • Online lenders. Online lenders generally offer more flexible and less competitive borrower qualifications than larger, traditional institutions. Some online lenders even specialize in serving borrowers with bad credit. What’s more, online lenders may provide faster funding speeds than brick-and-mortar banks.
  • CDFIs. A community development financial institution is a private financial institution with the primary mission of helping communities that traditionally lack access to banking and investing. These community-centered lenders offer certain business owners funds as a way to strengthen the local community and economy. Search for a local CDFI using the CDFI Fund’s searchable awards database.
  • Invoice factoring companies. Invoice factoring is an alternative to traditional business loans that involves selling a business’s outstanding invoices to a third-party company for a cash payment. While the business only receives a portion of the invoice balance—usually between 80% and 90%—the strategy provides access to fast cash without having to qualify for a traditional loan. Search for invoice factoring companies online to find an option that meets your business’s needs.
  • Merchant service providers. Similar to invoice factoring companies, many merchant service providers offer financing in exchange for a portion of future credit card sales. If your business experiences a high volume of sales, merchant cash advances (MCAs) may be a good way to access cash quickly. Contact your merchant services provider to determine whether it offers MCAs and, if so, the company’s qualification requirements and terms.

What About Startups With Bad Credit?

Regardless of the business owner’s personal credit, businesses under a year old—and those with limited demonstrable revenue—may find it difficult to qualify for a business loan. As with small business loans for bad credit, there are some lenders that specialize in startups with bad credit. Still, these loans often come with high interest rates and other fees. If you have a startup with bad credit, consider a financing alternative like a business credit card or, where appropriate, a merchant cash advance or invoice factoring.

Related: Best Business Credit Cards For Startups and New Businesses

Frequently Asked Questions

What other types of business financing can you get with bad credit?

Qualifying for a traditional business loan can be difficult if you have bad credit. However, there are other types of business financing that are more accessible to less creditworthy applicants. These alternatives—including merchant cash advances and invoice factoring—may be better suited to business owners with bad credit because they are secured and repaid by the business’s outstanding invoices and future sales.

Likewise, equipment financing may be available to business owners who need to purchase machinery and other equipment for operations. Because this type of financing is secured by the underlying equipment, it poses less risk to lenders and may be more accessible to borrowers with bad credit.

What can you do if you’re denied a bad credit business loan?

Whether you’re denied a bad credit business loan entirely or aren’t approved for a large enough loan, there are a few things you can do to secure financing:

  • Take steps to reduce your operating expenses and apply for a lower loan amount.
  • Identify a business partner with good credit who can serve as a co-signer and improve your approval odds.
  • Opt for a nontraditional source of funding, such as private investors or a crowdfunding campaign.

What documents are needed to apply for a bad credit business loan?

Applying for a bad credit business loan typically involves providing business bank statements and personal and/or business tax returns. You’ll also need to provide copies of business licenses and permits, proof of business registration and your business’s Employer Identification Number (EIN) or Federal Tax Identification Number (TIN).

Before approving a loan application, most lenders also require a business plan and copies of financial statements—including a profit and loss statement, balance sheet and cash flow statement. This is especially important when applying for a bad credit business loan because it demonstrates the business owner’s ability to repay the loan in spite of their poor credit. Business owners with low credit scores may also be required to provide proof of collateral.

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