Getting a business loan with bad personal credit can be difficult, but it’s not impossible. While some lenders specialize in startups and less creditworthy borrowers, certain types of loans are also better suited to business owners with bad personal credit—though often with higher rates. Luckily, there are a number of steps you can take to find a loan that fits your business’ needs and improve your approval odds.
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1. Decide Why You Need Financing
Before you shop for a business loan, take time to evaluate why you need financing. Not only do lenders look at the stated loan purpose when considering an application, but many financial institutions also want to see how the loan will impact the business’ ability to earn—and even increase—revenue. This is especially true for borrowers with bad credit or those without an established credit profile. Consider these questions when evaluating why you need financing:
- Will the funds increase the efficiency of the business, make it more competitive or otherwise increase sales or production?
- Is there a way to purchase the item or continue operations without financing?
- Can you raise funds without incurring interest—like via crowdfunding or through a stock offering?
Small business loans can be used for a number of purposes, but borrowing may not be the best option for your business. This is especially true if your business is short on cash and may struggle to make loan payments. If you struggle to define how the loan will improve your business, lenders will be less inclined to extend funds.
2. Check Your Eligibility
Bad personal credit can negatively impact your approval odds, but it’s not the only factor lenders consider. In fact, there are a number of other things financial institutions look at when reviewing a loan application. Consider these factors when evaluating your borrowing eligibility:
- Personal credit score. Business lenders typically look at the prospective borrower’s personal credit score when evaluating their application. Applicants should have a credit score of at least 530 to qualify for a bad credit business loan, but a score of 680 or higher will yield you more favorable terms
- Business credit score. Many lenders also look at a business’ credit score when gauging the applicant’s creditworthiness. If your business is established enough to have a credit score—at least one year old—check your credit profile via Dun & Bradstreet (D&B), Experian or Equifax.
- Length of time in business. In addition to preferring creditworthy businesses, lenders are more apt to lend to established businesses that have been operating for at least one year.
- Annual revenue. A business’ annual revenue provides insight into its ability to repay a loan on time and in full. Startups that lack actual financial records may be able to demonstrate this with projections for five years into the future.
- Cash flow. Cash flow represents all of the cash—or cash equivalents—that flows in and out of a company in a set period of time. Like revenue, this number can demonstrate how much money a business has to cover its debts each month. As such, it’s often an excellent indicator of the risk a business poses to lenders.
- Current debt load. A business’ current debt load provides insight into how the company manages money, and its ability to meet obligations each month. Lenders are less likely to extend funds to a business that already has a high debt load than to one with minimal outstanding commitments.
- Loan purpose. Some lenders limit how business loan funds may be used, and some loan purposes are more attractive to lenders than others. For example, banks are more willing to lend when the funds will improve the business’ ability to make sales or offer better products and services.
Related: Business Loan Requirements: How to Qualify For A Business Loan
3. Compare Business Lending Options
In general, you can get the best small business loans from traditional banks, credit unions and online lenders. If you have bad personal credit, search for providers with less strict qualifications than competitors. For example, some online lenders have lower credit score requirements than traditional banks and credit unions. Likewise, shopping for financing may involve considering business lenders that offer secured loans with fewer requirements.
The most competitive interest rates are usually reserved for the most creditworthy applicants. However, it’s still important to compare lenders based on available loan amounts, loan terms, annual percentage rates (APRs) and fees to get the best deal available. Some financial institutions also offer an easier application process and faster funding times than competitors. This can help businesses access cash quickly—even with a low credit score.
Related: Best Bad Credit Business Loans
4. Gather the Required Documents
Lenders require applicants to provide documentation to verify their identity, business details and overall ability to repay their debts. For business loans, this often involves providing personal and business tax returns going back at least two years, as well as business financial records for the past three years or more. Similarly, businesses applying for invoice factoring may need to provide accounts receivable and accounts payable aging reports.
Many lenders also request a business plan that demonstrates the applicant’s ability to repay the loan with revenue. Among other information, a comprehensive business plan should include revenue projections—especially for startups that don’t have established financials.
5. Write a Clear Business Plan
A business plan is a formal document that outlines a business’ goals and how it plans to achieve those goals—both operational and financial. In addition to including an executive summary and an overview of the company, the business plan should demonstrate the company’s ability to repay a loan. For that reason, having a comprehensive business plan is especially important for applicants with bad credit.
A business plan should include the following sections:
- Description of products and services. Use this section to describe how your business’ products or services can benefit customers. This is also a good opportunity to explain why the product is better than alternatives offered by competitors, and whether the business is engaged in ongoing research and development to remain competitive.
- Market analysis. The market analysis should include a summary of the business’ target customers, including demographics. Also provide historic, current and projected market data as well as a statistics-based industry outlook. Finally, describe the business’ competitors and where each excels and underperforms.
- Marketing strategy. Based on the business’ product and market analysis, include a marketing strategy aimed at promoting the business to its target audience. Provide details about the marketing budget and how you’ll increase sales and revenue.
- Organization and management. An organizational chart can help lenders better understand how the business operates. Likewise, details about the management team can build confidence in the future success of the business. Where appropriate, also list advisors like accountants and attorneys who may lend credibility to the business from a lender’s perspective.
- Financials. Use the business plan to describe how the company makes money—and how it plans to do so in the future. If the business is established, include income statements, cash flow statements and other documentation going back three years or more. Newer businesses should include projections like forecasted income statements and capital expenditure budgets for the next several years.
The format of a business plan varies by industry, and most plans include more sections than are detailed above. If you’re unsure of how to create a business plan for your company, the U.S. Small Business Administration (SBA) offers online resources to help.
6. Submit Your Application
After gathering all of the documentation necessary to apply for a loan, complete the lender’s formal application process. Applications vary by lender, but many financial institutions let prospective borrowers apply online, via telephone or in person. Contact your preferred lender or visit its website to learn more about the application process.
Types of Small Business Loans for Bad Credit
Getting a business loan with bad credit can be challenging, but there still are several financing options to consider. These are the most common types of loans for business owners with bad personal credit:
- Term loans. A term loan is a traditional type of financing that businesses receive as a lump sum payment and repay over a set period of time. Terms usually extend anywhere from three months to 10 years, available loan amounts top out around $50,000 and APRs typically start near 9%.
- Business credit cards. Business credit cards let business owners access a revolving credit limit that can be used to cover business expenses. APRs on the best business credit cards can extend up to about 25%, but interest only accrues on balances that carry over from month to month. The application process is also less rigorous than traditional loans, which may be beneficial for applicants with poor credit.
- Business lines of credit. A business line of credit lets businesses access up to a set borrowing limit. During the draw period—often up to five years—the business can access cash on an as-needed basis. Interest only accrues on the portion of the credit line in use, and the business can access the line of credit again as it is repaid during the draw period. After the draw period ends, repayment begins.
- Invoice factoring. Invoice factoring is when a business sells its outstanding invoices to a factoring company in exchange for a lump sum of cash—usually around 85% of the total invoice amount. The factoring company becomes responsible for collections, and then pays the business a portion of the remaining invoice amount, minus a factoring fee. As a type of secured loan, invoice factoring does not require the rigorous qualification requirements of other business loans.
- Invoice financing. Invoice financing lets business owners borrow money that is collateralized by the value of outstanding invoices. In contrast to invoice factoring, the business is responsible for collections, and the loan is repaid after the invoices are paid. Invoice financing is more accessible to less creditworthy borrowers than traditional loans because it is collateralized by the underlying invoices.
- Equipment financing. Equipment financing involves borrowing money to purchase equipment or machinery for a business. Because the financing is secured by the underlying collateral, it is more accessible to borrowers with bad credit. The best equipment financing offers long terms—sometimes up to 25 years—and loan amounts of $1 million or more.
- Microloans. Microloans are small loans that can help businesses access the cash they need. Some microloans start at just $500, but the SBA’s microloan program backs loans up to $50,000 for businesses that need cash to start and expand operations. Microloans are also available through nonprofit organizations and online platforms like Kiva.
- Merchant cash advances. Merchant cash advances (MCAs) let business owners access a lump sum of cash by giving the lender—often a merchant services company—a portion of future sales receipts. This type of financing is typically offered through merchant services companies and is best for businesses with a high volume of sales that need quick access to cash without a strong credit profile.
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Tips to Get a Business Loan With Bad Credit
Having a low credit score can make it difficult to qualify for a business loan—but it isn’t impossible. Follow these tips to get a business loan with bad credit:
- Write a business plan that clearly demonstrates the business’ ability to earn revenue and make loan payments.
- Find a co-signer who has a higher personal credit score than the business owner or other applicant.
- Provide valuable collateral to secure the loan and reduce the risk assumed by the lender.
- Take steps to improve your credit score before applying for a loan.
Bottom Line
The prospect of getting a business loan with bad credit can seem daunting, especially for new business owners. However, it is possible to qualify for business financing with a low personal credit score—or no business score at all. To do so, identify your borrowing needs and shop around for lenders with less rigorous lending standards. Just keep in mind that the interest rate you qualify for may be higher than the rates available to more creditworthy applicants.
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