How to Get a Small Business Loan With Bad Credit

Susan GuilloryUpdated July 28, 2021

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Do you need good credit to get a business loan? For the many Americans who have bad credit, doing basic things like qualifying for a car loan, buying a home, or even leasing a cell phone can be a challenge, due to that low credit score. And for those who are business owners, the problems may be even more significant.Even if your finances are healthy, your personal and business credit can impact your ability to get a small business loan. And sometimes, of course, you might need that funding to start or grow your business.The good news is that there are still options, even when you have a low credit score. Let’s explore how you might be able to get a small business loan with bad credit so that you can take your business up a notch.

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

It can be difficult to get a small business loan with bad credit. But before we get into handling that problem, let’s first look at your credit situation in more depth.You may have two different types of credit score: One is for your personal credit, while the other is for your business credit.

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, as you might have guessed, a credit score for your business. Scores like these 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.

The thing is, many businesses don’t have a business credit profile. That 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 to determine whether you would be able to repay a business loan. Ultimately, you as an individual will be responsible for business debt if your company can’t pay for it.So it’s important to know as part of your research on how to get a small business loan with bad credit, that if you don’t have business credit established, your personal scores will likely be considered when you apply for a business loan.

What's Considered Bad Credit?

So if you’re looking into getting a small business loan with bad credit, you probably already know (or at least assume) that you have bad credit. But what credit scores qualify as “good” or “bad” credit?As it turns out, it’s not subjective. 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 having a debt to credit ratio above 30%. Other things may chip away at your score, like 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.The good news is: a bad credit score doesn’t have to be permanent. We’ll talk more about what you can do to rebuild your credit history later.

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

Even with bad 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. Let’s learn how to apply for a small business loan with bad credit.

1: Know Your Credit Scores

Arm yourself with knowledge before you apply for any loans. Start by looking at your credit scores, both business and personal, if you’ve got them. Knowing your scores will help you know which small business loan with bad credit is the best option based on those numbers.

2: Explore Your Options

Now that you know your credit scores, see which loans might qualify for. Many lenders post their credit score requirements on their websites, so you can quickly filter out the ones for which you’re eligible, based on your scores.Keep in mind that some bad credit loans may look at factors other than your credit score, like how long you’ve been in business or your company’s annual revenues, so it can be helpful to have those numbers handy.

3: Review Requirements

In addition to having a certain credit score, you may need to provide additional information for your loan application. That might include your profit and loss statement, your Social Security number, and/or a description of how you’ll use the money.You may also be required to provide collateral. Consider what you could use. Real estate, equipment, or even a down payment could all be potential options.

4: Have a Plan for the Money

Speaking of how you’ll use the money, it’s a good idea to build a budget for how you will spend these funds. Because you may pay a high interest rate, you don’t want to borrow more than you’ll need, and 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, research to find out how much money it takes to start a business. Have a solid plan for that financing so you can put it to good use to start or build your business.Also consider a plan for how you will repay the loan. It’s great to secure $100,000 for your business. But if you spend it all, you may not have enough to cover those monthly payments. Defaulting on that loan is the last thing you want to do, especially if you want to rebuild your credit.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

Part of how to get a small business loan with bad credit is knowing your options. There are a variety of financing solutions aimed at businesses with poor credit. Here are the best bad credit business loans and financing options for you to consider.

Short-Term Loans

Unlike traditional loans from banks or the Small Business Administration, 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 may be higher on these loans, but lenders often have lower requirements for qualifying credit scores.

Business Credit Cards

While not a loan per se, having a business credit card will allow you to make purchases for your company when you need them. And if you get a rewards card, you may receive perks that help offset the higher interest rates. Look for a card with a 0% APR introductory offer.

Invoice Financing and Factoring

If you invoice clients, those invoices might serve as collateral to help you get cash quickly. With invoice financing, you are advanced the value of your invoices. You 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 acts as collateral, 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 for one. If you’ve been turned down, consider how you can make yourself more appealing as a borrower in the future.Start by working to rebuild your personal credit. Make sure you pay your bills on time, and if you have credit cards, pay more than the minimum amount due each month. Work to lower or even eliminate current debt to try to get your debt to credit ratio to drop below 30%.It’s also a good idea to check your credit reports regularly so you can spot any discrepancies, especially if they might trigger a red flag to a credit bureau. For example, if you know you closed a credit card six months ago but it still appears on your report, contact the company to get your record updated.If you don’t have business credit established, start by opening trade lines with vendors who report to credit bureaus. If you buy office supplies from the same store each month, see if it offers payment terms that will not only give you some leeway in when you pay but will also help you build that credit history over time.

The Takeaway

It is definitely possible to get a small business loan with bad credit. The key is to know your credit scores, do the research to find out what you qualify for, and have a plan for how you’ll use the money. In the long run, your effort will pay off when you have the cash you need to make your business succeed.Ready to start looking for a loan with bad credit? Not to worry. Lantern by SoFi lets you fill out one simple form to get multiple offers from our network of lenders. See what offers you qualify for today.

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About the Author

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.

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