How to Get a Small Business Loan With Bad Credit

Susan GuilloryUpdated April 21, 2023

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Having bad credit can make it difficult to qualify for a traditional small business loan. But it doesn't necessarily mean financing is off the table. Alternative online lenders tend to have more flexible criteria than banks, and some will work with business owners who have personal scores as low as 500. As you explore business loans for bad credit, keep in mind that lenders who provide loans to small business owners with fair or poor credit generally charge higher interest rates and/or extra fees to help offset the risk of loaning money to risky borrowers. Here are key things to know if you’re looking for a bad credit business loan.

Is a Business Credit Score Required for a Small Business Loan?

Not necessarily. If you own a small business, you may have two different credit scores — a personal credit score and a business credit score. Here’s a look at the difference.

Your personal credit score: This looks at your personal payment history. How much debt do you have and how much credit is still available to you? Are you paying your bills on time each month? How many inquiries do you have on your credit report? All of these factors help determine your personal credit score. The three primary personal credit bureaus that maintain personal credit reports are Equifax, Experian, and TransUnion. The companies with which you have credit cards, as well as any lenders of personal loans or auto loans you have, will report your activity and debts to these bureaus, which will use that information to determine your personal credit score.
Your business’s credit score. This is a credit score specifically for your business. These scores look at how you’re managing your business finances and how much debt your business takes on. Your business’s financial activity is typically reported to the business credit bureaus Dun & Bradstreet, Equifax, and Experian.

It’s important to note that many businesses don’t have a business credit profile. This could be because they have never taken out a business loan or opened a business credit card, and therefore have no credit history to be recorded. Or, maybe the business is new and hasn’t had time to establish its credit history. If your business doesn’t have a fairly substantial credit history, lenders may look at your personal credit when you apply for a business loan to determine whether you would be able to repay the loan. In this case, you will likely need to sign a personal guarantee for the loan, which means you as an individual will be responsible for the business debt if your company can’t repay it.

What's Considered Bad Credit?

While each credit bureau may have slightly different ranges for each credit rating, here’s the FICO® score range, which comes from the credit bureau Experian.

Exceptional: 800-850
Very Good: 740-799
Good: 670-739
Fair: 580-669
Poor: 300-579

There are a few factors that may cause your scores to drop. One is paying bills late or missing payments entirely. Another is using more than 30% of your available credit. Other things that may chip away at your score include: having too many inquiries on your account (these come when you apply for credit cards or loans) or going through a negative event like bankruptcy or foreclosure.What’s considered a bad business credit score? Business credit scores work on a different scoring system. They typically use a scale of one to 100 based on how much risk you present to a lender.

High risk: 1–10
Medium-to-high risk: 11–25
Medium risk: 26–50
Low to medium risk: 51–75
Low risk: 76–100

Since businesses don’t have Social Security numbers, they’re instead tracked by their name, address, and employer identification number, or EIN.

How to Get Approved for a Small Business Loan With Bad Credit

Even with bad personal or business credit, you may find small business loans that you’re eligible for. These may, however, charge higher interest rates than loans aimed toward people with good credit. Here’s a look at how to find and apply for a small business loan with bad credit.

1: Know Your Credit Scores

It’s a good idea to arm yourself with knowledge before you apply for any small business loans. You might start by looking at your credit scores, both personal and business (if you have one). Knowing your scores can help you determine which small business loan may be available to you.

2: Explore Your Options

Many lenders post their credit score requirements on their websites, so you can quickly filter out the ones you may be eligible for, based on your scores.

3: Review Requirements

In addition to your credit score, small business lenders are likely to consider the following:

How long you’ve been in business
What your annual revenue is
How strong your cash flow is
What kind of collateral you can provide

4: Have a Plan for the Money

It’s a good idea to build a budget for how you will spend the proceeds of a business loan. Because you may pay a high interest rate, you don’t want to borrow more than you’ll need. At the same time, you don’t want to borrow less than you’ll need, or you could end up in a pinch. If you’re starting a new business, you may want to research how much money it takes to start a business. Many lenders will also ask for you to submit a plan for how you will use the financing, so the more effort you put in before applying for your loan, the greater the likelihood you will be approved for it.

Types of Small Business Loans for Bad Credit

There are a variety of financing solutions aimed at businesses with poor credit. Here are some you may want to consider.

Short-Term Loans

Unlike traditional loans from banks or the Small Business Administration (SBA), which typically have loan terms of five to 25 years, short-term loans generally have a repayment period of six to 24 months. The interest rate may be higher on these loans, but lenders often have lower requirements for qualifying credit scores.

Lines of Credit

A business line of credit is a flexible form of funding that allows you to draw funds up to a certain credit limit and only pay interest on what you actually borrow. Once your repay the funds, they are available to use again. You may be able to find an unsecured business line of credit for startups.

Invoice Financing and Factoring

If you invoice clients, those invoices might serve as collateral to help you get cash quickly. With invoice financing, you receive a cash advance based on the value of your invoices. You then collect the invoice payments and pay back that advance, plus fees. With invoice factoring, the finance company buys your unpaid invoices at a percentage of their value. That finance company is then responsible for getting those invoices paid.

Equipment Financing

If you don’t have collateral for a loan but need to buy equipment like computers or company vehicles, equipment financing may be a useful option. The equipment you’re purchasing typically acts as collateral for the loan, which may help you get a lower interest rate. Your lender, however, can seize the equipment if you default on your loan.

What Can You Do if You Can't Get Approved?

It’s true that there are lenders who cater to businesses with bad credit. But even if you go to one of these lenders, you’re not guaranteed to be approved. If you get turned down for financing, here are some steps you can take.

See if you can lower your operating expenses and apply for a lower business loan amount.
Look for a business partner with good credit who might be willing to cosign the loan. This may improve your chances of getting approved.
Explore a different type of funding, such as bringing in an investor or crowdfunding for businesses.
Do what you can to build your personal and business credit to improve your chances of getting approved in the future.

Recommended: Guide to Regulation Crowdfunding

The Takeaway

Qualifying for a traditional business loan can be difficult if you have bad credit. However, there are other types of business financing — such as short-term online loans, invoice financing, and equipment financing — that are available to less creditworthy applicants. These options can help you grow your business and make it easier to qualify for financing with more attractive rates and terms in the future.If you’re curious about what type of small business financing you might qualify for, Lantern by SoFi can help. With one short application, you’ll be matched with a loan offer that meets your company’s needs and qualifications.Let Lantern help you find the right financing solution for your small business.

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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