How To Get A Business Loan With Bad Credit?

In the realm of personal finance, a FICO Score below 580 is often labeled as poor. But when it comes to business financing, lenders normally consider anything under 670 as less-than-ideal. Unfortunately, if your credit score falls in the “fair” or “poor” range, it could reduce your odds of getting approved for a small business loan.

According to the 2023 Small Business Credit Survey conducted by the Federal Reserve Banks, securing funding is noticeably harder for higher-risk applicants. The data shows that 43% of businesses with high credit risk and 31% with medium credit risk faced loan rejections. Furthermore, only 13% of high-risk and 33% of medium-risk applicants received full approval. In contrast, businesses with low credit risk fared much better, with just 16% denied and 62% fully approved.

As approval rates are lower, a business loan with bad credit is still available. It all comes down to finding a lender that caters to your financial profile and selecting a loan product designed for low-credit entrepreneurs.

That said, you shouldn’t expect premium rates or long repayment periods. Since lenders take on more risk, they often charge interest rates as high as 99% and may limit terms to 24 months or less.

Still, with the right approach and plan, it’s possible to get the capital your business needs. Let’s find smart ways to secure a business loan when your credit score isn’t perfect.

A credit score, often referred to as a credit rating, is a key financial metric used by banks and lenders to assess an individual’s ability to repay borrowed money. It reflects your creditworthiness, essentially, how reliable you are in handling debt and meeting financial obligations. This score is calculated based on your historical credit activity, such as timely bill payments and overall debt management.

Credit scores usually fall within a range of 300 to 900, with higher scores indicating stronger credit health. A higher score increases your chances of getting approved for loans, credit cards, and other forms of credit.

Businesses can have credit scores too, determined by their financial history and repayment patterns. When applying for a business loan, lenders may evaluate both your personal and business credit scores to make a lending decision.

A credit score begins at 300, which is considered the lowest possible rating. If your score falls between 300 and 559, it is generally categorized as a poor credit score. This range indicates higher financial risk to lenders and may affect your ability to qualify for loans or secure favorable interest rates.

Credit Score Rating Chart

Credit scores are calculated by credit bureaus such as Equifax and TransUnion, based on many factors related to your financial behavior. These elements provide lenders with insight into your creditworthiness and help them assess risk before approving a loan or line of credit.

Here are the major factors that influence your credit score:

• Credit History – How long you’ve been using credit accounts.
• Payment History – Record of on-time payments, late payments, bankruptcies, or debt collections.
• Credit Utilization – The percentage of your available credit that you’re currently using.
• Credit Inquiries – How often you’ve applied for new credit or loans.

Financial institutions turn to reports from credit agencies when you apply for a personal or business loan. These reports include your credit score and help lenders decide whether or not to approve your request.

“A lot of individuals don’t realize that their spending behavior directly impacts their credit score,” explains Valérie Bornais, Operations Support Specialist at BDC. “This can also affect their ability to secure financing for their business. In many cases, loan approvals are based on personal credit history,” she adds.

Lenders generally check both your personal and business credit scores, when applying for a small business loan, to decide your eligibility. A personal FICO® Score below 670 is generally seen as bad credit, especially for newer businesses without an established credit history. In such cases, lenders often rely more heavily on your personal credit profile.

To qualify for most f, you’ll usually need a minimum personal credit score of 500. However, these loans often come with higher interest rates. Comparing offers from multiple lenders can help you find more favorable terms.

It’s important to note that no-credit-check business loans are not available. While some personal loans don’t require a credit check, using them for business funding can be risky and may affect your personal financial stability.

There are several bad credit business loan types available. Many of these options have relaxed credit requirements or require collateral to minimize risk for the lender.

Below are some of the most common business loans designed for bad credit borrowers:

Term Loans
A term loan gives your business a lump sum of money to cover a wide range of expenses. Short-term loans generally range from 3 to 24 months, while long-term loans can extend up to 10 or even 25 years. These are ideal for planned investments or major purchases.

Secured Loans
You’ll need to pledge collateral—such as equipment, inventory, or savings accounts with a secured business loan. Offering collateral can improve your chances of approval and may even help you lock in lower interest rates and better terms.

Business Lines of Credit
A business line of credit gives you flexible access to funds up to a certain limit. You only pay interest on the amount you use. Some function like credit cards, while others operate more like installment loans with fixed repayment terms per draw.

Working Capital Loans
These loans help manage daily operations such as payroll, inventory purchases, or covering seasonal slowdowns. Working capital loans are a solid option for businesses with lower credit scores, thanks to more lenient eligibility criteria.

Equipment Financing
Equipment financing can help if you need to purchase or replace machinery, tools, or vehicles. The equipment itself usually serves as collateral, reducing the lender’s risk and making it easier to qualify, even for startups or businesses with poor credit.

Invoice Factoring
You sell unpaid customer invoices to a factoring company in exchange for quick cash with invoice factoring. This type of financing is often easier to obtain because the invoices serve as security, reducing the need for high credit scores.

Merchant Cash Advances (MCA)
A merchant cash advance provides a lump sum upfront, repaid through a percentage of your daily credit or debit card sales. Lenders place more weight on your business revenue than your credit score, making MCAs a potential option for those with limited credit access.

Your credit score is a main factor in deciding your creditworthiness, but it’s not the only element banks examine when reviewing a business loan application. Financial institutions normally assess applications using the Five Cs of Credit, which provide a complete picture of your business’s financial health and risk.

The 5 Cs of Credit

1. Character
   Character refers to your credibility with lenders and is often evaluated based on your credit history (reflected by your credit score). However, your personal background, such as education, professional expertise, and entrepreneurial experience, also plays a significant role, especially for larger loan applications.
2. Capital
   Capital represents the amount of money you are willing to invest in your business venture. The higher your contribution, the less risk for the lender. When you invest more in your business, lenders feel more confident in your commitment to its success.
3. Capacity
   Capacity is a measure of your ability to repay the loan, based on your income, expenses, and existing debt obligations. Lenders often look at your debt-to-income (DTI) ratio, which compares your monthly debt payments to your monthly income. A higher DTI ratio signals more debt relative to income, raising the risk for the lender.
4. Collateral
   Collateral includes any assets or property you pledge to secure the loan. If you default on payments, the bank can seize the collateral as repayment. The higher the value of the collateral you provide, the lower the risk for the lender.
5. Conditions
   Conditions are the terms of the loan, such as the loan amount, interest rate, and repayment period. In addition, the current economic conditions and the state of your industry can influence the loan’s conditions, as they affect the lender’s perception of risk.

Businesses with bad credit may find it hard to secure financing, but there are options available:

1. Online Lenders

Online lenders offer an easy application process and may overlook poor credit. However, quick loans usually come with higher fees and stricter terms.

2. Microlenders

For small loans (under $50,000), microlenders provide competitive rates and fewer fees, even for businesses with bad credit.

3. CDFIs

CDFIs support businesses in low-income areas and offer funding options for those with poor credit. Find them through the Opportunity Finance Network or a local SBDC.

4. Your Current Bank

Your current bank might consider your relationship, cash flow, and reserves to approve a loan, even with bad credit.

Here are some ways to help secure a business loan with bad credit:

• Explore alternative lenders: Online lenders, peer-to-peer platforms, and community development financial institutions (CDFIs) are more flexible than traditional banks. They focus on cash flow and business potential rather than just credit scores, though interest rates may be higher.
• Offer collateral: Pledge assets such as property, equipment, or inventory to secure a loan. This reduces the lender’s risk and can increase the chances of approval despite bad credit.
• Apply for smaller loan amounts: Lenders are more likely to approve smaller loans, especially if they see a solid business plan and cash flow projections. This approach can increase your chances of success.
• Provide strong financial documentation: Ensure that your business’s financial records, such as profit-and-loss statements and tax returns, are accurate and up-to-date. This demonstrates your ability to manage finances responsibly.
• Consider a personal guarantee: Offering a personal guarantee can increase lender confidence in your commitment to repaying the loan, even with bad credit.

Having bad credit may initially seem like a barrier to securing business financing, but there are still plenty of options available once you start checking lenders. By shopping around and comparing different loan offerings, you may find more opportunities than you expect.

Here are four essential factors to consider when looking for a bad credit business loan:

• Loan Options: Choose a loan that aligns with your business needs. For example, if you plan to purchase commercial real estate, you’ll need a specific commercial real estate loan. It’s important to tailor your loan application to meet your precise requirements and business budget, ensuring the loan amount is sufficient for your goals.

• Overall Costs: Always check the fine print and be aware of all costs involved, such as the interest rate, origination fees, document fees, and potential prepayment penalties. If anything is unclear, don’t hesitate to contact the lender directly for clarification.

• Funding Time: Depending on your urgency, the time it takes to receive the loan funds is critical. If you need quick access to cash, make sure the lender can provide fast approval and funding, as some loans may take several days to process, which could be too slow for your needs.

• Lender Reputation: Before committing to any lender, research their reputation by reading customer reviews and feedback on trusted platforms like Trust pilot and the Better Business Bureau (BBB). This will help you gauge the lender’s reliability and customer service standards.

Yes, it’s possible to get a small business loan with a FICO score under 670. However, you may face higher interest rates or be limited to loans designed for those with bad credit, even if your credit score falls into the “fair” range.

Your credit score serves as an indicator of how well you’ve managed debt in the past, and lenders often use it to predict how you might handle repaying a business loan. With a fair or poor credit score, you’ll likely have fewer loan options and may encounter lenders who are hesitant to take on the risk associated with lending to you.

For businesses with a FICO score in the 500s, alternative financing options such as merchant cash advances may be more suitable. These non-traditional loans are often more accessible, though they can come with higher costs.

Pros 

• Access to extra funds : Helps cover expenses such as new equipment, payroll, or financial gaps.
• Possibility of raising your credit score: Successfully repaying the loan can improve your credit score, opening doors to cheaper financing in the future.

Cons

• Higher overall costs: Lenders charge higher interest rates due to the perceived risk.
• Closer scrutiny: Expect lenders to examine your finances in detail, including bank statements, tax returns, and cash flow.
• May qualify for smaller amounts: Bad credit loans often come with lower borrowing limits.

There are other financing alternatives worth checking if you’re having trouble in getting approved for a bad credit business loan. These options can provide the capital you need, often with fewer restrictions or different requirements:

Business Grants

Grants offer free funding that doesn’t need to be repaid or accrue interest. These are typically awarded by federal or state governments, nonprofit organizations, or private corporations. However, they are highly competitive, and eligibility criteria can vary.

Business Credit Cards

Even with poor credit, you may still qualify for select business credit cards — such as the Capital One Spark 1% Classic. While these cards may carry higher interest rates and lower credit limits, they allow you to manage everyday expenses. To avoid paying interest, aim to pay off your balance in full each month.

Crowdfunding Platforms

Crowdfunding is a creative way to raise funds from the public without taking on debt. In exchange, you might offer backers rewards, products, or even a small equity stake in your company. Platforms like Kickstarter or Indiegogo are popular among startups and small business owners.

Peer-to-Peer (P2P) Lending

Peer-to-peer lending connects you with individual investors instead of traditional banks. You’ll repay the loan over a set term, often with interest. For instance, Kiva offers up to $15,000 in zero-interest loans, combining elements of crowdfunding and peer lending for more accessible financing.

Special Purpose Credit Programs

Some financial institutions, such as Chase, offer special credit programs designed to support underserved or disadvantaged business owners. These programs typically feature more flexible approval criteria, such as lower credit score requirements, minimal time in business, or smaller down payments.