Last Updated: February 2, 2023
Acquiring business loans can be tricky, with innumerable qualifications to meet. And getting a business loan with bad credit can be even more complex. This article addresses essential information on how to get a business loan with bad credit, including eligibility requirements, types of loans, and costs associated with business loans. (If you’re unsure of what bad credit is, consider reading our article on what is a bad credit and find out if you have a good or bad credit score.)
If you’re planning to start a business and are looking for financial assistance, there’s a lot of help available on the internet. And if you have some not-so-good credit reports, you might’ve also wondered, ‘can I get a business loan with bad credit?’
There are many business loan options available on the market. But before you apply for a business loan, make sure you meet specific eligibility criteria.
Lenders tend to be specific about revenues. Before providing a loan, they check financial statements of the past years to ensure that your business generates a constant and stable income. In case of lower revenues, look for online business lenders. If your annual revenue record is consistent, you can still get a good business loan, despite problematic credit scores.
When applying for a business loan with bad credit, lenders check the applicant’s credit score, especially with small business loans. If you have a good record and personal credit score—with 80 considered a good score—acquiring business loans is not a problem. With too much debt in the debt-to-income ratio, borrowers will likely face difficulty getting small business loans for bad credit.
Years in Business
Lenders only consider the application process for businesses that have an active record of a minimum of two years.
If you’re planning to apply for a business loan, go for a collateral-based loan because lenders tend to give these loans quicker. In addition, debts with a backing of value are less likely to result in risky situations and have a comparatively lower interest rate.
You are more likely to get a business loan if you have a high cash flow and a lower debt record, directly impacting the debt-to-income ratio. Lending parties assess this to understand the potential risk percentage of lending financial help to you.
Getting a small business loan with bad credit is possible. And if you replace your bad credit score with a good one, you can make use of some of the most popular business loans.
|NOTE: A U.S. Bank study revealed that about 82% of businesses in the US failed due to problems related to cash flow.|
Where to Get a Business Loan With Bad Credit
Where can I get a business loan with bad credit? There are many avenues to take when trying to obtain a business loan with bad credit. But the most common ways in which you can get a loan amount are given below.
Community Development Financial Institutions (CDFIs) provide financial assistance to many, especially beneficial if you’re looking for small business loans for bad credit. CDFIs are primarily concerned with lending money to business owners whose companies are not considered under the traditional umbrella. There is also an opportunity for obtaining a CDFI approval if you’re a female, ethnic minority, live in a rural area, and are not connected with a mainstream bank.
Traditional lenders tend to be strict with their lending standards and look into personal and business credit scores, as well as credit history. Most lenders demand a three-year financial record from the borrowers before making lending decisions. But online lenders are more flexible.
If you plan to contact traditional lenders to obtain bad credit small business loans, we recommend fixing your credit score along the way for better options in the future.
Another way you can get business loans is to run a non-profit business. Traditional lenders are less likely to give loans because they’re risky and not so profitable. Mainstream banks and online lenders can help you get a loan for your non-profit if you meet their specifically defined requirements.
How to Get a Business Loan With Bad Credit
If you’ve been thinking about how to get a loan to start a business with bad credit, consider the six steps below to strengthen your chances of getting one.
Personal and Business Credit Scores
Check your personal and business credit scores by accessing your credit reports. If you find any errors, get them rectified with the help of credit bureaus—which will also give you an idea about the type of loan you’re eligible for.
If you’re looking forward to getting business loans for bad credit, you need to do plenty of research. Check out various companies and get an idea about their lending policies and requirements. Look for companies whose requirements match your records and who are willing to lend you a loan for the lowest repayment terms.
Solid Business Plan
Before you start applying for a business loan, make sure you have a solid business plan, which can help you understand the faulty areas of your business and ensure that you don’t repeat them in the future. Some lending parties ask you for a business plan and make decisions depending on that plan. You can even obtain help from the top-rated software for business plans on the market.
Credit Score Fix
Once you have your credit reports, you can get an idea about your credit score and if you need to fix it. Some simple ways to fix your score and improve your creditworthiness include timely payment of bills, aiming for short-term loans and smaller equated monthly installment (EMI) payments, as well as setting goals for lower credit balances, reducing debts, and not canceling old business credit cards. (You can explore more about the great credit cards suitable for small businesses.)
Add a Co-signer
If you cannot get loans with your bad credit, seek out co-signers (a business partner) to co-sign the loan with you. But these co-signers should have a good credit score. Do you need good credit to get a business loan? You can get loans even if you have bad credit, but having a co-signer with a good credit score is seen as assurance for repayments.
Check Online Reviews
Before you apply for business loans, it’s best to check online reviews to know if the lending party is suitable. Reviews provide in-depth information that can help you understand everything about a bank or lender. They also carry first-hand experience in feedback and comments that can help you get a clear understanding of the lender.
|NOTE: According to the National Small Business Association (NSBA), about 27% of businesses cannot acquire business loans or financial assistance. Consider the steps given above to improve your chances of getting a business loan.|
|When applying for a business loan, the essential considerations include annual revenue, credit history, years in business, collateral, and cash flow.|
|The best way to get a business loan with bad credit is through CDFIs, lenders, and non-profits.|
|If you have bad credit, adding a co-signer with good credit can help increase your chances of acquiring a business loan, as a co-signer is seen as a safe backup.|
|You can rectify errors in your credit record with the help of credit bureaus.|
Types of Business Loans for Bad Credit
How to get a small business loan with bad credit includes understanding eight types of business loans that you can apply for.
Short-Term Business Loans
Short-term business loans are the most common type of loans for business owners with bad credit. They’re given when the business owners wish to invest in particular business areas or ongoing working capital.
Secured Business Loans
Secured business loans (collateralized loans) are common types of small business loans for poor credit and assurance of valuable things and personal assets. These are generally available as business term loans. Lenders can legally claim the collateralized assets for repayment.
Short-Term Business Line of Credit
These loans allow you to secure finances up to a certain amount. After which, the interest is calculated on the amount that has been spent, which is paid to you in the form of loans.
Merchant Cash Advance
Merchant Cash Advance refers to loans in which the lender grants the applicant a capital advance and then buys some part of the daily credit of the loan receiver, including debit card sales. The receiver repays the loan amount in the form of an advance through a calculated percentage of card sales.
Business Credit Cards
Business Credit Cards are a unique form of business loan that can be utilized anytime and anyplace. Business credit cards are like mediators between personal and corporate cards and are specially designed for business owners looking for small business loans with bad credit.
These types of loans are also referred to as accounts receivable financing, where the lender pays you the amount equivalent to your company’s outstanding invoices in the form of loans. The lender charges a fee for this but helps you retrieve the invoice amount and collect the same amount from the clients later.
Invoice financing loans are distributed to B2B businesses suffering from problems related to cash flow, which may result from unpaid invoices. These loans are commonly referred to as start-up business loans with bad credit. The lenders charge the clients a fee. Once they receive their payments, they return the amount (10 to 15%) after deducting expenses.
These loans are suitable for business owners who wish to purchase equipment for their business, such as machinery, vehicles, etc. These loans are also offered for lease purposes. The interest rates are affordable, generally ranging from 8 to 30%.
Additional Costs of Business Loans
When you apply for a business loan, it’s essential to understand that you have to take on certain additional costs to get full access to the finances, which include:
The lender charges an origination fee, which may include the loan application processing fee given to the lender as compensation. The origination fee amounts to about 0.5 to 1% of the loan amount.
A factor rate is an additional cost usually charged with merchant cash advances. The factor rate is not fixed and varies from creditor to creditor and according to the loan amount and repayment schedule. The factor rate is most commonly applied to SBA loans with bad credit.
The annual percentage rate (APR) is an additional cost charged in a combined manner on extra loan charges. Most lenders prefer to charge an APR instead of a factor rate. The additional fees of an APR are included in the total sum.
A down payment is given in cash and is usually charged in the initial stages of purchase or acquiring the loan. If you provide a higher down payment, your interest rates and costs will be low on the remainder of the loan amount.
Underwriting fees are costs that you bear for the lender willing to take the risk, and the company is paid for performing the underwriting services. This is a form of compensation for making an issue public on the market and the risks of granting loans for such matters.
Closing fees refer to all the costs taken collectively for acquiring the loan, including application, processing, origination, and other fees.
Can you get a business loan with bad credit? Whenever you decide to apply for a business loan and have bad credit, you should first try to fix your credit score and ensure that all requirements are met. Then, follow all the essential steps mentioned above and get financial aid for your business plans and processes.
To get approved for a business loan, you need to check your personal and business credit scores, research various companies, prepare a business plan, fix your credit score, add a co-signer, and check online reviews.
The minimum credit score for a business loan is 650. If you plan to apply for a business loan, make sure to improve your credit score, as scores below 650 make it difficult to secure loans from mainstream banks and traditional lenders.
When thinking about getting a business loan with bad credit, your credit score is significant. Credit scores for businesses range from 300 to 900. You could obtain a loan with a credit score of 500, but it would not be easy to procure such a loan from traditional lenders and mainstream bankers.