When your business has a bad credit score, securing a traditional business loan can feel nearly impossible. Many lenders, especially banks, rely on strong credit scores to determine whether they’ll approve a loan application. However, bad credit doesn’t necessarily mean the end of your financing options. There are still several ways to access the capital your business needs.
In this guide, we’ll walk you through different bad credit business loan options, including alternative lenders, SBA loans, and other creative funding solutions that can help you get the financing you need to grow your business.
Before diving into loan options, it’s important to understand what constitutes bad credit for businesses. In general, a business credit score below 650 is considered subprime or bad credit. Personal credit scores can also impact business financing, with scores below 600 typically falling into the “poor” range.
Lenders use your credit history to assess how risky lending to your business might be. A lower score can mean higher interest rates, fewer loan options, or outright rejection. However, bad credit doesn’t mean you’re completely locked out of borrowing.
If you have a bad credit score, alternative lenders may be your best option. These lenders are typically more flexible and less reliant on credit scores than traditional banks. Instead, they look at factors such as cash flow, revenue, and business history when determining loan eligibility.
Online Lenders: Many online lending platforms, such as Kabbage, OnDeck, and Fundbox, specialize in offering loans to businesses with bad credit. These lenders often provide quick approvals and flexible repayment terms.
Peer-to-Peer (P2P) Lending: Platforms like LendingClub connect small businesses with individual investors who are willing to lend funds, even to businesses with less-than-perfect credit.
Invoice Financing: If your business has outstanding invoices, invoice factoring or invoice financing allows you to borrow against unpaid invoices. This type of financing is not typically dependent on your credit score but rather your accounts receivable.
Alternative lenders can offer faster access to capital and more flexible terms than traditional banks, making them an ideal solution for businesses struggling with bad credit.
The Small Business Administration (SBA) offers a variety of loan programs that can be more accessible for businesses with bad credit. While SBA loans still require a solid credit score, they are generally more forgiving than traditional loans from banks, especially when it comes to interest rates and repayment terms.
SBA 7(a) Loans: The most popular SBA loan program, providing financing for a range of business needs. These loans are available through SBA-approved lenders and may be easier to qualify for than traditional bank loans.
SBA Microloans: Ideal for smaller loan amounts (up to $50,000), these loans are a good option for startups or small businesses with bad credit. They are offered through non-profit organizations and community-based lenders.
SBA 504 Loans: These loans are specifically designed for purchasing equipment or real estate. The credit requirements may be a bit more flexible than traditional loans.
SBA loans may have more lenient requirements compared to traditional financing, and they often come with lower interest rates and longer repayment periods, making them a great option for businesses with bad credit.
If your business has assets like real estate, equipment, or inventory, you may qualify for a secured loan or secured line of credit even with bad credit. These loans are backed by collateral, which reduces the lender’s risk and increases your chances of approval.
Secured Term Loans: Similar to traditional loans but backed by collateral, making them easier to obtain even with bad credit.
Secured Business Lines of Credit: A revolving line of credit where you can draw funds as needed, with your business assets used as collateral. This option provides flexibility and can help manage cash flow issues.
By offering collateral, you lower the lender’s risk, which may make it easier to secure funding. However, be mindful that if you default on the loan, the lender can seize your assets.
Microloans are small loans, typically ranging from $500 to $50,000, that are designed for businesses with poor credit or limited financial history. These loans are often offered by non-profit organizations and community-based lenders, making them more accessible for entrepreneurs who may not qualify for larger loans.
Shorter Loan Terms: Microloans typically have shorter repayment periods, ranging from 6 months to 5 years.
Flexible Requirements: Microloans often have lower credit score requirements than traditional loans, making them a great option for small businesses or startups.
Purpose-Specific: Microloans are often intended for specific business needs such as purchasing equipment, inventory, or covering working capital.
If you’re a small business owner with bad credit, microloans provide an opportunity to secure funding without the stringent requirements of larger lenders. They also offer relatively fast approval times.
Crowdfunding is a modern way of raising funds for your business through online platforms such as Kickstarter, Indiegogo, or GoFundMe. Crowdfunding allows you to raise money directly from a large group of people in exchange for rewards or equity in your business.
Reward-Based Crowdfunding: Supporters contribute money in exchange for a product or service once it’s created. This is ideal for businesses with a compelling product or service to offer.
Equity Crowdfunding: You give away ownership in your business in exchange for investments. This type of crowdfunding is often used by startups looking to scale quickly.
Crowdfunding offers an alternative way to secure capital without relying on traditional loans or having to worry about your credit score. If you have a unique product or service, this could be a great way to raise funds.
If traditional financing options are unavailable, you might consider borrowing money from friends or family. These informal loans can be a way to get capital without the stringent requirements of formal lenders.
Clear Terms: When borrowing from friends or family, it’s important to establish clear repayment terms and interest rates to avoid misunderstandings or strained relationships.
Formalize the Loan: Treat it like a formal loan by putting the terms in writing, including repayment schedules and any collateral if applicable.
Loans from friends or family can be more flexible and accessible than traditional loans. However, it’s important to manage these relationships carefully to prevent any negative personal or financial consequences.
If your business needs short-term financing or access to revolving credit, a business credit card may be an option even with bad credit. While the interest rates may be higher, business credit cards can provide quick access to funds and offer rewards for purchases.
Higher Interest Rates: Credit cards typically come with higher interest rates than traditional loans.
Credit Limit: Your credit limit will likely be lower if you have bad credit, but it can be used for ongoing expenses or as an emergency backup.
Business credit cards can be useful for managing smaller expenses or cash flow gaps. They’re easy to access and flexible, but be mindful of interest rates and monthly payments.
While having bad credit can make it more challenging to secure business financing, it doesn’t have to be a roadblock. By exploring alternative funding options such as online lenders, SBA loans, microloans, and crowdfunding, you can still find the capital needed to grow your business.
If you’re struggling with bad credit, don’t let it stop you from pursuing growth opportunities. Start by researching alternative lenders and other financing options to find the best fit for your business needs.