Guide to Business Loans for People with Bad Credit
Mon | August 2024
Our CEO, John-Lie Nielsen, always tells us that his job as a CEO and business owner is three-fold:
Strategy: Every business needs a strategy from inception to growth.
People: That strategy needs the right people to make it happen.
Capital: You need dollars to invest in those great people to execute your strategy.
We are going to focus on #3 for today. As entrepreneurs, we know that accessing business financing is a crucial component of growing any business. However, this process can be overwhelming for entrepreneurs with poor personal credit. The big banks have rejected you, or you may even be afraid to apply for any.
The bottom line is that you don't let having a low credit score stop you from seeking the capital your business needs to grow. Without capital, even the best strategy and the most talented team will struggle to achieve their goals. This guide is for you and other small business owners who need business financing but don't have a stellar FICO score.
What are business loans for people with bad credit?
A credit score of 600 or less on the FICO® credit scoring model is generally considered a bad or poor credit score. For most banks, FICOs below 720 are considered subprime. If you have low credit, you have probably faced difficulties accessing a business loan or any capital for your business. We understand that this can be frustrating, but it's important that you don't let it stop you.
Business financing for people with bad credit can be a lifesaver if you've been turned down by banks or if the application process is taking too long while you are trying to grow your business.
The good news is that there are business financing options out there for folks with bad credit. The fact, however, is that because these products are priced to risk, the cost of capital will be higher than a traditional business loan. With that said, small business owners can access the financing they need to invest in growth projects or expand their businesses. With access to working capital, you can invest in people, machinery, renovations, or any growth opportunity that comes your way.
The first step is to educate yourself on your options and understand that a credit score doesn't have to define your business potential. Plus, it's never too late to improve your credit score. Today can be the day you start turning your life around.
Best business financing for people with bad credit
Now , let's explore the types of financing available. We'll cover their features and tips to help you choose the best option for your business.
Short-term business loans
Short-term business loans provide quick access to capital for immediate needs, such as emergencies, purchasing inventory, or seizing investment opportunities. These loans typically require repayment within 12 months, though terms may extend up to 24 months, depending on the loan type.
Key features include:
Quick Financing: Funds are usually provided within days, making this ideal for urgent financial needs.
Financing Amount: Loan amounts range from $2,000 to $600,000, depending on your income and credit score (500+). A score of 570 or higher may qualify you for up to $1,500,000.
Flexible Use: Funds can be used for various purposes, including emergencies or managing seasonal cash flow gaps.
Interest Rate: Fixed interest rates are applied, though they tend to be higher due to the increased risk for lenders.
Lenders like Credibly require that your business has been open for at least six months and that you have a credit score of 500. A higher credit score (625+) may qualify you for better terms with lenders like BlueVine.
Business lines of credit
A business line of credit works like a credit card, giving you a predetermined limit you can access as needed as long as you don’t exceed it.
With a line of credit, you only pay interest on the amount you borrow, not the total limit. For example, if your credit limit is $50,000 and you borrow $10,000, you’ll only be charged interest on the $10,000. Funds are generally accessible through a business checking account or mobile app.
Key features include:
On-Demand Access: You can borrow, repay, and borrow again up to your approved credit limit.
Financing Amount: You can access up to $150,000 depending on your credit and collateral.
Interest: Interest is only charged on the amount borrowed, not the total credit limit. Lines of credit secured by collateral (e.g., real estate or inventory) offer higher limits and lower interest rates.
Lines of credit can be used to cover expenses during slow periods, purchase inventory, and cover marketing costs. Regular use and responsible repayment can help build or improve your business’s credit history, leading to better financing terms in the future.
Fundbox offers lines of credit up to $150,000 with a credit score of 600, while Bluevine provides access to up to $250,000 with a credit score of 625+. Be sure to review the specific requirements of different lenders to find the best option for your business.
Revenue-based financing
Revenue-based financing (RBF) gives your business easy access to capital without traditional debt. It doesn’t require a high credit score, instead focusing on your business’s revenue and growth potential. A funder reviews your income and assesses your growth before making a tailored offer.
Key features include:
Flexible Repayment Structure: Unlike traditional loans with fixed payments, RBF adjusts repayments based on your company’s cash flow, making it easier to manage payments during slower sales periods.
Retain Ownership: RBF doesn’t require you to give up part of your business, allowing you to retain full control.
Capital Amount: With RBF, you could receive $5,000 to $500,000 upfront based on your projected future sales, without the need for collateral or personal credit.
Total Repayment Amount: The total repayment amount is determined by a factor, usually between 1.2 and 1.49 times the financed amount, which is agreed upon in advance, so you know exactly how much you’ll repay.
Funders like One Park Financial favor businesses with a steady revenue and growth potential. Although your credit score isn’t the primary factor, strong performance, and consistent income can increase your chances of approval and improve your financing terms. If you have a credit score of 500 or higher, you may pre-qualify for up to $500,000.
Invoice financing
Invoice financing, or accounts receivable factoring, isn't a business loan. Instead, it lets companies turn unpaid invoices into cash quickly. Essentially, you sell these invoices to a company that buys them. Here's an example of how it works:
You provide goods or services to your customers and issue invoices as usual.
Instead of waiting for your customers to pay, you send those unpaid invoices to an invoice financing company.
They advance you a percentage of the invoice amount, usually between 80% and 95%.
Once your customer pays, the financing company gives you the rest minus their fees.
One of the biggest advantages of invoice financing is that your credit score matters less. Instead of looking at your credit history, lenders focus on the reliability of your customers. So, suppose you have well-known, reliable clients who always pay their invoices. In that case, you can qualify for this type of financing—even if your credit score isn't perfect.
Invoice financing works best for businesses that sell to other businesses and offer payment terms. This could include industries like:
Manufacturing
Wholesale
Professional services
Agriculture
Invoice financing can provide quick access to the capital you've already earned if you have invoices for clients you trust. However, suppose your business sells directly to consumers or operates on a cash payment system. In that case, there may be better options than invoice financing, as it relies on invoices with payment terms.
Companies like Clarify Capital require your business to generate at least $10,000 per month in a business bank account. You can get approval with good or bad credit, but keep in mind that the better your credit score, the better the factoring rate you'll get on your invoices. Additionally, invoice financing fees can vary depending on the company and your specific situation, but they typically range from 1% to 5% of the invoice amount.
Equipment financing
Equipment financing is a loan specifically designed for purchasing business equipment. Instead of using your cash or depleting your operating capital, you can finance the necessary assets for your business’s growth.
Qualifying for equipment financing is often easier than other small business loans since the equipment itself serves as collateral. Some alternative lenders offer equipment loans to borrowers with credit scores as low as 500. The process is generally straightforward:
You apply for a loan based on the equipment you want to purchase.
The equipment serves as collateral for the loan.
You repay the loan over a specific period, typically ranging from one to ten years.
Loan amounts vary depending on the lender and their requirements. For example, Creditfy allows you to apply for up to $5,000,000 in equipment financing with a credit score of 500 or higher through an online application.
Taycor Financial offers up to $2,000,000 in equipment financing for borrowers with credit scores as low as 550, with terms ranging from 12 to 84 months. However, interest rates for equipment financing can be as high as 28%.
How to find and apply for bad credit business loans
The first step was to learn about your bad credit financing options. Now let's look at what factors you can take into account when evaluating and comparing lenders:
Interest rate: The loan interest rate is the cost of borrowing the loan amount and principal. Some lenders may communicate the interest rate as a daily percentage rate or simply as an 'interest rate'. You can request that the interest rate be presented to you in the form of an annual percentage rate (APR) so you can easily compare your options.
Additional costs: To get a business loan, you may need to pay various fees, like origination fees, prepayment penalties, and late fees. These can vary by lender and type of loan.
Loan term: This refers to the period over which you are expected to repay the loan.
Payment terms: Lenders will specify how frequently you must make payments. These payments vary by type of financing and can be monthly, weekly, biweekly, or daily.
Loan amount: Check to see if the lender offers loan amounts that meet your specific business needs.
Customer reviews: Look for online reviews to assess the lender's reputation. Websites like Trustpilot, Google Reviews, and the Better Business Bureau are good places to check.
Application process: Understand the lender's general requirements and the expected time frame for financing approval.
Remember to be honest about your financial situation. Transparency is essential because it builds trust with lenders, increases your chances of approval, and helps avoid complications during the loan process. Don't settle for the first offer you receive. Comparing the terms each financing offers is vital to your success.
Compare business financing options
We designed this table to help you evaluate and compare potential financing companies based on key factors like interest rates, loan terms, and customer reviews. Use it to make informed decisions and choose the best financing option for your business.
Funder Name | Interest Rate (APR) | Additional Fees | Loan Term | Payment Terms | Loan Amount | Customer Reviews | Application Process |
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Column Descriptions:
Interest Rate (APR): Compare the annual interest rates lenders offer to understand the cost of borrowing.
Additional Fees: List any extra costs, such as origination fees, application fees, or late fees.
Loan Term: Note the duration for which you are expected to repay the loan.
Payment Terms: Specify whether the payments are monthly, weekly, biweekly, or daily.
Loan Amount: Check whether the offered loan amounts meet your business needs.
Customer Reviews: Check reviews on Trustpilot, Google, or the BBB to assess the lender's reputation.
Application Process: Understand the time it takes to apply and receive funding, as well as the lender's general requirements.
Documents required for your financing application
Requirements differ by funder, but here’s a general list for business financing with bad credit:
Income and Expense Statements: Shows your business’s financial health.
Tax Returns: Recent returns verify income and expenses.
Business Bank Statements: Demonstrates cash flow and stability.
Personal Financial Information: Some lenders may request your credit report and financial statements.
Proof of Identity: A government-issued ID is required.
Business Licenses and Permits: Confirms your business’s legal status.
Note that companies that offer business financing to those with bad credit may have more flexible requirements. However, providing as much information as possible improves your chances of approval and can help secure better terms.
Find business financing options for bad credit
Ready to get started? Now that you understand the financing options available, it's time to take action if you have what banks consider bad credit. Start by comparing lenders and reviewing their requirements. Remember that the right financing can help you grow your business and achieve your goals.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.