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Qualifying for a business loan can be tough when you have bad personal credit. Your personal credit score can play a significant role in qualifying for a business loan, especially if your business is new.
Several types of business loans can work for borrowers with bad credit, including equipment loans, merchant cash advances and microloans. Choosing collateralized loans, online lenders or special types of financing can increase your chances of being approved. Here are some examples of business loans for bad credit, along with some tips for improving your odds of getting the loan you need.
Can You Get a Business Loan With Bad Credit?
You can get a business loan with bad credit, but your choices may be limited. You'll typically pay a higher interest rate than a borrower with good credit, and you may not qualify for a large loan.
What's considered a bad credit score? The FICO® Score☉ Θ model, which is the personal credit scoring model used by 90% of top lenders, uses a score range of 300 to 850. A FICO® Score of 580 to 669 is considered fair and a FICO® Score under 580 is considered poor. Good credit scores start at 670 and go up from there.
Lenders consider multiple factors when evaluating your business loan application. They'll generally look at your years in business, annual revenue, industry, business credit score (if available) and business plan. They may also consider collateral or a cosigner, if someone is able to guarantee your loan.
Learn more: Here's What It Takes to Get a Small Business Loan
Types of Business Loans for Bad Credit
Here are a few examples of business loans that may work for borrowers with less-than-perfect credit.
Types of Business Loans for Bad Credit
| What It Is | Minimum Credit Requirements | Loan Amounts | |
|---|---|---|---|
| Equipment financing | Loan used to purchase business equipment | 500 or higher (600+ preferred) | Up to 80% or 90% of equipment cost (after down payment) |
| Invoice factoring | Sells your receivable invoices for an advance equal to a percentage of their value | Often, no credit check is required | Receive a percentage of your total invoice amount(s), typically 85% |
| Business line of credit | Revolving credit line you can use when you need it | 600+ | $100,000+ |
| Microloans | Small loans of $500 to $50,000 geared toward underserved business owners | 620+ preferred for SBA microloans; no credit check required for Kiva loans | $500 to $50,000 |
| Short-term loans | Installment loans that need to be repaid in a few months to a few years | 600+ | Up to $250,000 |
| Merchant cash advances | Borrowing against projected credit and debit card sales | Flexible; may accept credit scores below 550 | Based on your revenue |
Equipment Financing
An equipment loan allows you to purchase business equipment without paying for it upfront. Your equipment serves as its own collateral, making it easier to qualify for financing with poor credit. You won't need additional collateral but may need to make a down payment on your purchase. Also keep in mind, if you can't repay the loan, you could lose essential equipment—and your down payment.
Invoice Factoring
Instead of taking out a conventional loan, you can sell your outstanding invoices to a factoring company. They pay you a percentage of each outstanding invoice (typically 85%) and collect from your customers themselves.
Invoice factoring relieves you of having to wait for slow-paying customers and eases your administrative burden (no more follow-up calls or tracking down payments). In some cases, a credit check may not be required. On the other hand, customers may be confused by having to pay a factoring company, and factoring doesn't work if you don't have outstanding invoices to sell.
Business Line of Credit
A business line of credit gives you access to a revolving credit line with a set credit limit. It's similar to a credit card account, except that a business line of credit must be repaid within a certain timeframe, typically six to 24 months.
A line of credit allows you to carry a balance, as long as you make at least a minimum payment every month. As you repay your balance, you can borrow again without needing to get reapproved. Having access to a line of credit gives you a good source of working capital and flexible repayment terms. However, interest costs can add up if you carry a balance.
Microloans
Microloans can be as small as $500 and range up to $50,000. These loans are designed to help small business owners make key investments that grow their businesses. Microloans are available through the Small Business Administration (SBA), community development financial institutions (CDFIs) and social lending organizations like Kiva.
Some microlenders target underserved communities such as women, people of color or veterans. Although some programs don't require any credit checks, many do require a business plan. You may get access to business counseling, but your loan may also come with restrictions on how the money can be used.
Short-Term Loans
While term loans are typically repaid over three years or more, short-term business loans are for smaller amounts and are usually repaid in six to 24 months. A short-term loan is installment credit, so you get a lump sum and repay it in regular installments over a set term. Interest rates on short-term loans can be high, especially if your credit score is low.
Merchant Cash Advances
If your business accepts credit and debit card payments, you may be able to borrow against projected sales and repay your advance via daily or weekly automatic withdrawals from your bank account. A merchant cash advance gives you quick access to funds, but interest rates can be high and the costs effectively eat into your revenue. If you aren't careful, automatic payments can disrupt your cash flow.
Learn more: Why Are Payday Loans Bad?
Costs to Consider Before Getting a Business Loan
Comparing total costs is key when you're considering different loan options and trying to decide how much you can afford to repay. Here's a quick list of common loan terms to help determine what your loan's costs will be.
- Interest rate: Your interest rate is the percentage the lender charges you each year to borrow money.
- Annual percentage rate (APR): The APR is the annual rate you pay on a loan after factoring in lender fees and finance charges.
- Down payment: A down payment is money you pay upfront to help make a purchase and secure your loan. Your down payment won't be returned to you if you can't repay the loan.
- Factor rate: In some alternative financing arrangements, the factor rate is a decimal number that may be used to calculate what you'll repay. A 1.25 factor rate means you'll repay $1.25 for every dollar you borrow.
- Application or origination fee: These are fees you may pay for processing your loan application.
- Underwriting fee: An underwriting fee covers the cost of reviewing your credit, income, debts and other factors
- Closing costs: Closing costs are a blanket term for one-time fees you may pay for reviewing, underwriting and processing your loan application. Closing costs may be paid upfront in cash, deducted from your loan amount or added to your loan balance.
Where to Get a Business Loan With Bad Credit
Getting a loan from a traditional bank can be difficult with less-than-stellar credit. If you need alternatives, a variety of online lenders offer business financing. Here are some of the most popular:
- Bluevine offers lines of credit up to $250,000, available to borrowers with a FICO® Score of 625 or more, at least 12 months in business and at least $10,000 in monthly revenue.
- ForwardLine is a business financing broker that offers working capital loans with merchant cash advances for businesses that have been in business for at least six months, have a FICO® Score of 500 or better and have monthly revenues of at least $100,000.
- National Funding offers working capital loans, and equipment financing and leasing tailored to a variety of industries, and says most borrowers have credit scores of 600 or higher.
- OnDeck offers short-term loans of $5,000 to $400,000 and lines of credit from $6,000 to $200,000. You must have been in business for at least one year and have a business checking account, a FICO® Score of at least 625 and annual revenues of $100,000 or more.
- QuickBooks Capital offers short-term loans from $1,500 to $250,000 and lines of credit up to $100,000, both as a direct lender and through their online marketplace. Their minimum credit score is 580.
- Rapid Finance provides short-term loans up to $1 million, merchant cash advances up to $500,000, lines of credit from $5,001 to $250,000 and invoice factoring for $20,000 to $10 million.
- ACCION Opportunity Fund makes loans of up to $250,000 to borrowers with at least two years in business, $50,000 in annual sales and 20% ownership of their business. Over 90% of ACCION clients are women, people of color, immigrants or low- to moderate-income.
- Kiva makes loans of up to $15,000 at 0% interest with no minimum credit score requirement. You must live in the U.S.; be at least 18 years old; use the loan for business purposes; cannot be in foreclosure, bankruptcy or under any liens; and must demonstrate your social capital by having a small number of your friends and family make a loan to you.
You can also shop for a loan and apply via an online lending marketplaces such as Lendio and Biz2Credit. An online marketplace can match you with lenders based on your needs and eligibility requirements, including your credit score.
How to Get a Business Loan With Bad Credit
When credit isn't your strong suit, these six steps can help bolster your business loan application.
1. Improve Your Credit Score
Before applying for a business loan, check your personal credit report and credit score so you know where you stand. If your score is lower than you'd like, consider taking time to improve it by bringing late accounts current, paying down debt to reduce credit utilization, and making all your payments on time.
Learn more: How to Improve Your Credit Score Fast
Improving your business credit score may also help. Three business credit reporting agencies—Dun & Bradstreet, Experian and Equifax—use business credit scoring models to generate a business credit score that lenders and vendors may use to evaluate your business's creditworthiness. You can check your business credit report at any of the three major business credit bureaus for a fee. Learn more about what's in a business credit report and how it works from Experian Small Business.
2. Demonstrate Revenue
In addition to checking your credit, lenders will look at your business revenue and cash flow to determine your loan eligibility. Showing that you have steady, significant revenue demonstrates your ability to repay. Many lenders have minimum revenue requirements for business loans and lines of credit: $50,000 per year or $10,000 per month are common revenue thresholds. Use a recent profit and loss statement, balance sheet and cash flow statement to document your revenue.
3. Add Collateral
When your credit isn't optimal, offering collateral can make it easier to get approved. Lenders consider collateralized loans less risky because they can sell your assets and to help recoup their loss if you default on the loan. Equipment loans are a common example of collateral in action: The equipment you're financing serves as collateral on the loan. In some cases, lenders may require a lien on your assets as a condition of lending. Review your loan terms carefully before signing.
4. Develop a Strong Business Plan
A strong business plan helps you make a case for your loan. A business plan explains your business concept, the market for your product or service, your operational plan, and what it will take financially to grow your business. A strong business plan shows lenders you have a plan for earning enough money to repay your loan.
5. Find a Cosigner
A cosigner agrees to repay your loan if you fail to pay it yourself. When a cosigner adds their name to your loan application, they agree to let the lender review their credit file and income. Adding a cosigner to your loan application can boost your chances of approval by lowering the risk to the lender.
Tip: Make sure your cosigner understands the pros and cons of cosigning a loan. If you fail to make payments, their credit might suffer—and they could be on the hook for repaying your loan.
6. Apply Selectively
Credit checks cause hard inquiries on your credit report that may cause a minor and temporary drop in your credit score. To minimize this effect, complete any applications that require a credit check within a couple weeks: Most credit scoring models consider multiple loan applications within two weeks as one inquiry. Also, some lenders can prequalify you for a loan without checking your credit score.
Other Ways to Finance Your Business
If a business loan is not in the cards right now, consider alternative sources of financing. Though each of the following options comes with its own set of challenges, you may be able to finance your business without a traditional credit check.
- Personal savings: If you have enough resources to get your business up and running, start on a shoestring and reinvest as you go.
- Crowdfunding: Platforms like Indiegogo help you connect with investor-customers and raise money
- Small business grants: Check sites like Grants.gov for small business grants from the government. Competition for grants can be stiff, but if you receive one, you don't have to repay the money.
- Equity financing: Angel investors may provide financing in exchange for a share in your business. As part of the package, many investors also provide mentorship to help your business get off to a strong start.
- Customer presales: Collect payment in advance and use the money to produce your inventory or fund your operations. Just make sure you're able to deliver the goods or services you've sold on time and within your budget.
- Friends and family: Asking friends and family to loan you money or invest in your business is a time-honored way to raise capital—and assemble a group of stakeholders who care about you. Think through the pros and cons of borrowing from friends and family: You don't want money issues to interfere with your important relationships.
Frequently Asked Questions
What Credit Score Do I Need for a Business Loan?
Credit scoring requirements vary, but for reference, many bank business loans guaranteed by the SBA require a personal FICO® Score of at least 650. If your credit score is below 650, you may want to consider alternatives like invoice factoring, merchant cash advances, equipment loans or microloans, which may have more flexible credit requirements.
Can I Get a Business Loan Without Collateral if I Have Bad Credit?
You may be able to get a business loan without collateral; however, your choices may be narrow if you have bad credit. Offering collateral can make it easier to qualify for a loan; without it, you're asking the lender to assume more risk.
Be prepared to be flexible. You may pay a higher interest rate and may qualify for a lower loan amount. You may need to work with an alternative lender rather than a traditional bank. If you need to cast a wide net, you may want to try an online marketplace that searches multiple options based on your eligibility criteria.
Will a Business Loan Affect My Personal Credit?
A business loan can affect your personal credit, especially if your lender requires a personal guarantee and/or reports to consumer credit bureaus. Personal guarantees are common for startup loans to businesses that don't have much of a credit history and for SBA loans. You can ask your lender where they report your loan activity: to consumer credit reporting agencies (Experian, TransUnion and Equifax), business credit bureaus (Dun & Bradstreet, Experian and Equifax) or both.
Your personal credit may also be affected if you default on a business loan. Defaults appear as negative information on your credit report and stay there for seven years.
The Bottom Line
Building and maintaining good credit can open up financing options for your business. Stay on top of your personal credit by checking your personal credit report and score with Experian for free. Once you've been in business for more than a year, lenders evaluate your business credit score as well as your personal credit score. Start building your business credit score by obtaining a federal Employer Identification Number (EIN) and opening a business bank account. Ask your suppliers and business credit card issuers to report your account to business credit bureaus and always pay your bills on time.