What is a bad credit business loan?
A bad credit business loan is a loan that’s targeted toward business owners with poor personal credit. With most traditional lenders like banks, you’ll likely need good personal credit (typically a score of 690 or higher), but alternative lenders like online or nonprofit lenders may have lower credit score minimums.
What is a bad credit score?
A bad credit score, by industry standards, typically lands in the range of 300 to 629 (on a scale of 300 to 850). Personal credit scores ranging from 630 to 689 are generally considered fair credit.
There are several factors that can bring down your credit rating, including missed payments or bankruptcies, as well as the age of your credit accounts and the mix of credit types on your report.
Individual small-business lenders may have varying guidelines for what defines a bad credit score; however, bad-credit business loans usually cater to borrowers with scores below 630. Although lenders tend to focus on your personal credit score, some may also use your business credit score to evaluate your loan application. Your business credit score reflects your business’s payment history with banks, vendors and other creditors.
» MORE: Curious about checking your business credit score?
Types of bad-credit business loans
Here are some of the most common types of bad-credit business loans.
Loan type | Overview | Use cases |
Short-term loan | Lump sum of capital you borrow from a lender and repay, over a set period of time, with interest. Online lenders tend to have flexible qualification requirements. | Short-term expenses, specific projects or purchases. |
Line of credit | Gives you access to a set amount of funds, which you can draw from as needed. Lines of credit are also available from online lenders with flexible requirements. | Working capital, cash flow gaps, seasonal slows, emergency funding. |
Equipment financing | Asset-based financing where the equipment you purchase serves as collateral on the loan. You may not need to rely as heavily on traditional eligibility criteria because equipment secures the loan. | Purchasing equipment and machinery for your business. |
Invoice factoring | Unpaid invoices are sold to a factoring company at a discount in exchange for a cash advance. Lenders can be lenient with qualifications because your invoices provide security. | Business-to-business companies that have cash tied up in unpaid invoices. |
Merchant cash advance | Company gives you an upfront sum of capital that you repay using a percentage of your debit and credit card sales, plus a fee. MCA companies tend to focus on sales and cash flow when evaluating applications. | Businesses that have substantial debit and credit card sales. However, MCAs can have extremely high APRs, so they should be used as a last resort option. |
Revenue-based financing | Loans are underwritten to future revenue, and payments are a percentage of monthly revenue. Revenue-based loans rely less on personal credit and finances because your payments are guaranteed by monthly revenue. | High-revenue businesses that are experiencing cash flow shortages, or are looking to scale and grow. |
Microloan | Small-dollar loans, typically available in amounts up to $50,000. Issued by nonprofit and community organizations who often have flexible qualification requirements. | Day-to-day expenses associated with starting and/or growing a business. Can be a good option for traditionally underserved businesses. |
Pros and cons of bad credit business loans
Pros
Bad credit business loans help your business access capital you may otherwise not get to boost operations, grow your business or cover gaps in cash flow.
Making payments on a business loan can also help build and improve your business credit, which can help you qualify for more business funding in the future.
Bad credit business loans offer fast access to capital — some within as little as 12 hours of applying.
Cons
Because they are considered higher risk, lenders may not approve high loan amounts on bad credit business loans.
Bad credit business loans typically have higher rates and fees than traditional loans.
You may be asked to pledge collateral on a bad credit business loan to offset some of the lender’s risk.
Where to get a business loan with bad credit
Banks and credit unions likely won’t approve you if you have bad credit. But these alternative sources may let you get a business loan with a less-than-ideal credit history.
Online lenders
Most online lenders require a minimum personal credit score from 500 to 660. But a few have no minimum credit score requirement, focusing on factors like your business’s cash flow instead. Online lenders offer easier approvals and faster funding than other business lending options, but they typically charge higher rates — even for those with good credit.
CDFIs
A community development financial institution, or CDFI, receives government funding to provide banking access to low-income or underserved communities. CDFIs are often banks and credit unions, but they don’t have the same strict credit requirements for lending that those financial institutions have. If you’re eligible for CDFI financing, you could get a competitive interest rate. Funding can be slower than with online lenders, though.
Microlenders
If you have bad credit, you may be able to get a microloan for your business. Microloans typically come from nonprofits. Because profit isn’t these organizations’ primary driver, they may be more willing to lend to business owners with a thin or uneven credit history.
Some microlenders also participate in the SBA microloan program and may work with newer businesses that have rocky credit histories. Many of these lenders focus on issuing loans to traditionally underserved businesses in their communities.
The downside of a microloan is right in its name: micro. Funds typically top out at $50,000, which may not be enough for your company’s needs.
» MORE: Best business loans for startups with bad credit
How to get a business loan with bad credit
The higher your credit score, the easier it will be to get a loan, especially one with competitive rates and terms. If your credit score is lower than you’d like, consider taking time to build it up before continuing your search for financing. Credit building strategies include:
Looking for errors on your credit reports and disputing them with the appropriate credit bureau.
Making debt payments more frequently.
Paying down or paying off debt.
If you can’t wait for funding, here are seven steps you can follow to get a business loan with bad credit.
1. Calculate how much debt you can afford
First, you’ll want to determine how much debt you can reasonably afford. Lower credit scores may result in higher interest rates, which can make it difficult to repay a new loan — and leave you worse off financially than you were when you started.
To figure out how much debt you can afford, you should consider how much funding you need, possible interest rates, additional fees, as well as the repayment schedule (daily, weekly or monthly).
Your repayment schedule and term length will dictate the size of your payments, but also how much interest you end up paying. A shorter term means larger payments, but less interest, whereas longer terms mean smaller payments, but more interest over the life of the loan.
» MORE: Estimate loan cost with NerdWallet’s business loan calculator
2. Check your credit score
If you know that you’ve had credit challenges in the past, it’s more important than ever to know where your score stands before applying for a business loan. You can get a free personal credit score on NerdWallet, as well as pull your credit report from the three major reporting bureaus for free at AnnualCreditReport.com. Established companies should also check their business credit scores from Experian, Equifax and Dun & Bradstreet.
3. Understand additional eligibility requirements
Although business loan requirements vary, most lenders will use similar criteria when evaluating your application. If you have a lower credit score, these other requirements will be even more important to help you access financing.
Most lenders will 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. Research and compare business loan options
You may be able to find bad-credit business loans from online or nonprofit lenders. As you explore different options, you should compare them based on available loan types, interest rates, fees and repayment terms.
You’ll also want to consider how fast a lender can provide funds, their reputation and customer service, as well as qualification requirements.
5. Consider offering collateral or adding a cosigner
Once you’re ready to start the application process, you’ll want to prepare to bolster your business profile in any way possible to help increase your chances of approval.
For example, if you have significant collateral available, consider offering more than the minimum — or offer physical collateral even if the lender doesn’t require it. Your business’s strengths may make your application more attractive to lenders, even if your credit score is lagging.
You might also consider finding a cosigner to help you secure a loan. If you default on the loan, the cosigner assumes responsibility for repayment. The cosigner should have a higher credit score and ideally strong personal assets to improve your chances of approval.
6. Gather your documentation and apply
To complete your loan application, you may need to provide some, if not all, of the following:
Basic information about you and your business.
A business plan for a loan.
Personal and business bank statements.
Personal and business tax returns.
Business financial statements.
Detailed information about your collateral, if applicable.
Be wary of any lender that tries to rush you through the application process and/or won’t show you loan terms and rates upfront. Predatory lenders tend to take advantage of businesses that are having trouble getting financing — and they may try to promise guaranteed approval or loans with no credit check.
7. Review your business loan agreement
After you’re approved, your lender will send you a business loan agreement. It’s important to thoroughly review the agreement and make sure you understand all the terms and conditions.
For example, some online lenders will charge interest as a factor rate. You should always try and calculate these rates into an annual percentage rate to get a better sense of how much your loan will cost. You can also try asking your lender for an APR calculation.
It may be helpful to have a business advisor or lawyer read through the agreement as well.
» MORE: How to apply for and get a business loan
🤓 Nerdy Tip
Small-business owners, especially those with poor credit, can be targets for predatory lending, defined as a lending practice that deceives consumers into accepting unfair loan terms or loans they don’t need. As you look for lenders, watch out for red flags such as unclear rates or terms, aggressive phone calls or lenders that refuse to answer questions.
Alternatives to bad-credit business loans
If you’re not sure that a bad-credit business loan is right for you — or you simply want to explore other options — you might consider the following:
Small-business grants
Unlike business loans, small-business grants provide free access to capital that doesn’t need to be repaid. Grant applications can be competitive, but awarding organizations don’t typically evaluate businesses based on their creditworthiness. You can find business grants from federal and state governments, private corporations and nonprofits.
Crowdfunding
If your business has a strong customer base or large internet presence, you may be able to leverage your network to get financing. With crowdfunding, you use a crowdfunding platform to set up a campaign, providing details about your business and setting a funding goal.
You then share your campaign with customers, social media followers, friends and family in order to gather donations for your business. In exchange, you typically offer your supporters something in return; you might offer equity in your company or a reward, like a new product or exclusive access to an event.
Investors
If you have a unique business idea or plan on growing quickly, you might consider looking for investors to finance your company. Angel investors, for example, are usually high net worth individuals that fund early stage businesses in exchange for equity. These investors often provide business expertise in addition to capital.
You might also find investor companies that allow you to pitch your business with the hope of getting someone in the company’s network to invest. Although these investors may not prioritize your credit score when deciding whether or not to invest, you’ll likely need to be able to show high-growth and profitability potential.
Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.
A lower credit score may still result in a pricier loan, so building your credit first may qualify you for cheaper options.
