While a bad credit FICO score falls between 300 and 579, in the world of business loans, a bad credit score can mean anything less than a FICO score of 670. And unfortunately, having a fair or bad FICO score can affect your chances of getting approved for a business loan.
According to the Federal Reserve’s 2024 Report on Employer Firms, 76 percent of low-credit-risk businesses were at least partially approved at major banks, while just 46 percent of businesses with medium to high credit risk were at least partially approved.
Despite the challenges for approval, that doesn’t mean you can’t qualify for a business loan with a lower personal credit score. The right lender and type of bad credit business loan should provide you with the funding you need.
That said, you can’t expect the best interest rates and terms. Lenders may offset the extra risk with rates up to 99 percent or short terms of 24 months or less. Let’s look at strategies for getting a business loan with bad credit.
Can You Get A Small Business Loan With Bad Credit?
Even with a FICO score below 670, you can still be eligible for a small business loan. Even though you officially have fair credit, you can wind up having to settle for exorbitant interest rates or a business loan for those with bad credit.
Your credit score is a predictor of how well you might manage to repay a business loan since it shows how you have paid off debt and other obligations in the past. Your loan possibilities and the number of lenders ready to take on the danger of lending to you will be restricted if your credit is fair or poor.
It can be necessary to use other business finance, including merchant cash advances, for those with FICO ratings in the 500s.
How to Get A Business Loan With Bad Credit
Even with poor credit, there are intelligent things you can do to increase your chances of being granted a business loan.
- Update Your Business Plan
A business plan is a written document that describes your long-term business growth strategy. A business plan is often required by lenders, particularly when you’re first starting.
If this is not your first time developing a business plan, you should revise your current one. Typical topics to concentrate on are:
| Section Of The Business Plan | What To Update |
| Executive Summary | Emphasize the salient features of your business plan, the worth of your offering, and the anticipated development in revenue. |
| Market Research | Obtain up-to-date information about your target customer’s demographics. This could be an excellent opportunity to conduct surveys or interviews to gather detailed input on how to make your product better |
| Budget And Future Revenue | It’s possible that your early revenue projections depended on market averages. You can use the revenue growth history of your company to refresh your numbers after a certain amount of time in business. |
| Key Objectives | Examine and discuss the key objectives your company is pursuing, along with the performance metrics you’re employing to get there. |
- Choose the Right Type of Bad Credit Business Loan
There are many various sorts of company loans available to you, and you may use them for a variety of purposes. Consider these factors while selecting the best business loan for bad credit:
- What the loan is for or why do you need it
- Which loans have the lowest interest rates available to you?
- What kind of collateral do you have to obtain the loan?
- The required repayment period
Bankrate Insight
Any asset you employ to get a business loan is known as collateral. Collateral entails the possibility of asset seizure and utilization by the lender as a means of repayment in the event of default. However, by utilizing collateral, you can frequently obtain better conditions or lower interest rates because the lender will find the loan to be more secure. Collateral may be required to get business loans for borrowers with poor credit.
- Choose the Right Lender
Various lenders have different credit standards that vary according to their mission and acceptable amount of risk. When selecting a lender for a business loan with terrible credit, keep the following in mind:
- Compare rates from several lenders: Different loan kinds, repayment schedules, and incentives for early loan payback may be offered by lenders. Examine the variations among lenders for bad credit to determine which characteristics best fit your requirements.
- Verify the requirements to apply: Lenders have certain requirements that you must fulfill to be given credit. These requirements include, among other things, your credit score, time spent in business, and annual revenue.
- Examine fees and interest rates: A business line of credit may be subject to origination or draw fees, among other costs assessed by business lenders. Lenders with poor credit may also impose exorbitant interest rates. Find out which lenders have the best fees and rates for you.
- To find out what kind and how much of a loan you can get, prequalify: Many lenders let you begin completing the application and verify your eligibility with a mild credit check. To find the loan with the best terms, you can do this for several lenders.
- You may want to look at conventional banks and credit unions as lenders: Conventional lenders have the tightest lending requirements but also offer cheap interest rates for business loans. You may be eligible for an equipment loan or credit line if your credit is fair. If not, your best option is to locate institutions that offer community initiatives such as the Lift Local Business Loan offered by Huntington Bank.
- Online money provider: The likelihood of finding an investment home with an Internet lender is higher. These typically reduce the required FICO score to 600 or less.
- CDFIs: Certified to assist in the development of specific communities, usually low-income and minority areas, Community Development Financial Institutions (CDFIs) are organizations. Their goal is to provide underserved businesses with banking and financing services.
- MDIs: Banks and other financial institutions classified as Minority Depository Institutions (MDIs) are mostly controlled by members of underrepresented groups. They provide resources like services for languages and are typically found in minority communities.
- Show Strong Finances
Lenders use your credit history in the past to make assumptions about your potential for loan repayment. However, your business’s funds are just as crucial to approval as your credit. You should think about the minimal requirements that the lender has set, which could be as follows:
- Annual revenue: Some lenders may grant a loan if you can demonstrate a steady stream of income and haven’t previously missed vendor payments or defaulted on a loan. While traditional bank lenders can demand $150,000 to $250,000 in annual income, online lenders frequently want to view at least $100,000 in revenue.
- Time in business: To demonstrate consistency, you could also need to fulfill time in business standards. For traditional lenders, these are normally two years; for online lenders, they are usually six months to two years.
- Cash flow: Bank statements from the last three months or more are typically requested by lenders. When comparing your earnings to accounts payable, they will be searching for evidence of a healthy cash flow through your company.
- Present-day indebtedness: Lenders will use the debt-to-income ratio and debt service coverage ratio (DSCR) to determine how much debt your company currently has. A 1.25 to 2 DSCR, which indicates that your present profits are sufficient to cover your debts, is frequently preferred by lenders.
- Find a co-signer
A co-signer is someone who signs the loan contract, agreeing to repay the loan if the business owner can’t make payments.
Finding a co-signer improves your chances of getting approved for a loan if your credit isn’t strong enough to qualify on your own. They can also help you get a lower interest rate since the lender will consider their credit history alongside yours.
While co-signing may help the borrower, the co-signer takes on a huge responsibility and potential burden if they have to make good on their promise.
- Show Strong Annual Revenue
Lenders use your credit history in the past to make assumptions about your potential for loan repayment. However, your business’s funds are just as crucial to approval as your credit.
Certain lenders may grant a loan if you can demonstrate a steady stream of income and haven’t previously missed vendor payments or defaulted on a loan.
To prove stability, you might also need to fulfill time-sensitive business requirements. For traditional lenders, these are normally two years; for online lenders, they are usually six months to two years.
- Improve Your Credit Score
Spend some time raising your credit score if you want to apply for a business loan soon but can postpone. Ultimately, better scores translate into better conditions and interest rates on business loans.
Here are several methods to raise your company’s and personal credit scores:
- Examine your credit record: Before you begin submitting applications to negative credit lenders, you should be aware of your personal and company credit scores. You can then determine which loans you are eligible for: Get in touch with the credit agency to have inaccuracies, such as a debt that you have paid off, removed from your company credit report so that your score can be increased.
- Be mindful of how you use credit: Approximately 33% of your FICO score is determined by the amount of credit you use. It’s generally advised to use no more than 30% of your available credit for credit utilization. Try to pay off debts like credit cards or lines of credit, and if you can, ask for a raise in your credit limit.
- Pay your bills on schedule: Establish automatic payments for all business suppliers, loans, and utilities. In this manner, you won’t run the danger of inadvertently missing a payment.
- Request a credit card: Obtaining a company credit card will help you establish a more favorable payment history. To prevent interest, you might charge regular expenses to the card and make sure you pay them off within the time allowed for grace. While not all credit cards are accepted for bad credit, the Spark 1% Classic is intended for credit building and has no annual cost.
- Allow credit for open commerce: When purchasing materials, you can obtain a credit line with some commercial providers. If the vendor notifies the credit bureaus of your payments, this enhances your company credit. The loan balance must be repaid within 30 to 90 days.
What Is Bad Credit?
When assessing a business owner’s creditworthiness, particularly if the enterprise is young, lenders frequently look at the owner’s credit score. However, lenders might take into account the company’s credit score when your payment history for the business grows.
When considering personal and company credit rating systems, bad credit is defined as follows.
Personal Credit Score
Any FICO score below 670 can be categorized as fair or bad credit since lenders and credit bureaus view a score of 670 or higher as indicative of good credit. To further describe fair and poor credit, the FICO system further breaks down credit score ranges:
- Poor credit range: 300–579
- In fairness, 580 to 669
- Credit that is good to excellent: 670 and above
Business Credit Score
Compared to personal credit ratings, business credit scores are based on distinct variables and are reported by different credit bureaus. The credit score, which normally ranges from 0 to 100, also appears differently.
The most popular credit bureau for businesses is Dun & Bradstreet. It offers a PAYDEX score, which primarily represents the money you pay to merchants and company suppliers. Scores for PAYDEX range from 1 to 100:
- Poor credit: 1 to 49
- Credit range: 50 to 79
- Excellent credit: 80 to 100
Types of Business Loans For Bad Credit
For the best chance of being approved, you can either apply for a loan from a bad credit lender or consider specialized bad credit business loans. Considerations for business loan types:
Term loan
A business loan that extends over a predetermined length of time, such as two or ten years, and lends a specific sum. Usually, loan funds are used for a specific purpose that has been disclosed to the lender.
Business line of credit
A loan for which company owners are approved for a maximum amount say $150,000. As they repay the initial loan, the business owner may take money out of that account whenever they choose and apply it to another loan.
SBA microloan
A loan supported by the Small Business Administration and made available through community lenders and charitable organizations. The maximum available loan amount is $50,000.
Working capital loan
A term loan that permits the company to use the funds as working capital for expansion, new equipment, or operational costs. Usually, these are two-year or shorter-term loans.
Equipment loan
A term loan intended exclusively for the purchase of equipment that is secured by the machinery being used as collateral
Invoice Factoring or Financing
Unpaid bills are used in this loan application to be authorized for funding by a different lender. It typically charges a percentage of the bills as the lender’s fee and advances up to 90% of the unpaid invoices.
Merchant Cash Advance
With this alternative loan, the amount advanced is determined by the future credit or debit card sales of your company. It can also demand you to pay back a portion of your sales until the loan is repaid. These loans frequently have strict daily or weekly repayment schedules.
Alternatives to Business Loans for Bad Credit
You may choose one of the following alternative funding choices if you are ineligible for or require a choice other than a poor-credit business loan:
- Grants for businesses: Businesses can receive free money from grants without having to pay back any money or pay interest. They may originate from corporations, nonprofit organizations, or state or local governments. To receive the funding, though, you’ll need to outbid other companies.
- Credit cards for businesses: Even with poor credit, business credit cards are still available. Take the Capital One Spark 1% Classic, for instance. But compared to someone with a higher credit score, you can have fewer options or pay more interest. You can use the card to pay for business costs, but to avoid paying interest, think about paying the entire debt off each month.
- The crowdsourcing model: You can raise money for your business through crowdfunding, usually with no repayment obligations. However, you might have to provide investors with incentives, such as merchandise or even stock in your company.
- Loan amongst peers: Through peer-to-peer lending, you can obtain a business loan from a group of private lenders. Much as with a conventional company loan, you may have to pay interest and must return the money within the allotted time. Kiva is a crowdsourcing and peer-to-peer lending network that provides interest-free loans up to $15,000.
- Programs for credits with a specific goal: Specialized purpose credit programs, such as those offered by Chase and other banks, are intended to assist underprivileged business owners in obtaining loan approval. These loans have less stringent credit, business, and down payment requirements.
The Bottom Line
Bad credit may make it more difficult to qualify for a business loan, but it does not always preclude you from acquiring one. It could be necessary for you to look for alternatives to traditional loans or apply to lenders who have more flexible standards.
Redesigning your company plan and reviewing your credit record are two more actions you may do to increase your chances of receiving a bad credit business loan.