There may come a time when you need to choose between business loans and your credit scores are low. By preparing in advance, you can quickly apply for the loan that best suits your working capital needs and your bad credit profile.
Best Loans for Low Credit Scores
Those with very good and excellent business credit get their pick of the top loan options out there, but that doesn’t mean you are excluded from some very valuable loan offers.
In fact, today’s loan market has evolved to include products designed specifically for those with bad credit or who are very new to business credit. These credit options are generally more friendly to those who haven’t built up a strong business credit history.
Skip trying to use a personal loan or business credit card to access more working capital, and look to these options instead.
Equipment Financing
If you need to purchase physical assets, equipment, or machinery for your business, you could be a good candidate for equipment financing. Businesses have used equipment financing for computers, restaurant ovens, manufacturing devices, and even office furniture.
Because this type of loan is tied directly to a physical purchase, it can be secured by the item you buy with the loan money. So, if you buy laptops for your entire office with the money, the laptops become collateral, and the bank can come to get them if you don’t meet the terms of repayment.
Even those with lower credit scores can sometimes qualify for equipment financing, due to there being collateral. New businesses that haven’t built up enough equity or have a long history of high sales can at least secure the loan with their new equipment purchase.
Some manufacturers or tech vendors also offer equipment financing on just their own wares. For example, buying all of your fleet vehicles from one automotive brand may give you access to equipment financing from that one particular brand seller.
Interest rates on this business financing can be higher than traditional loans simply because they are often given to those with newer business credit profiles or even bad credit histories. Repayment must happen quickly, as these are often short term loans.
Merchant Cash Advances
A merchant cash advance (MCA) is another type of small business loan that offers cash to businesses with an agreement to be repaid from a portion of future sales. Payments come out of these future sales as a percentage of revenue and can be used to improve your working capital.
They are most common for credit card sales since these revenues can be tracked more easily and even deducted from total sales to ensure repayment. MCAs generally cover short-term repayment periods and are based on past revenue figures to determine the total loan amount.
One downside to a merchant cash advance is that the cost is often very high and may include origination fees. It’s also not technically a loan, so it may not be subject to traditional loan regulations and fees. MCAs are considered to be a sale of future revenues, not a standard borrowing agreement.
Repayment happens as you make business sales, and the portion you owe the MCA company comes directly out of future sales. If you don’t make many sales in a month, this can alter your repayment plan. There is no benefit to repaying early to save on interest, as MCAs aren’t generally set up for early payoff.
A merchant cash advance may be available to even those with a very low credit score. Approval is based on historical sales and future sales projections. The cost for an MCA includes a factor rate and possible additional fees. It also doesn’t use a traditional interest rate because it is not considered a loan.
This business financing option is designed for business owners with fluctuating revenue who may not qualify at a traditional lender; even those with a history of bad credit may get approval.
However, be careful of this type of financing! The costs are extremely high – you’re usually better off avoiding financing like this because it can be a debt trap for your business.
Invoice Financing
A loan issued based on the value of your outstanding business invoices is considered invoice financing. The lender or bank uses the total of amounts yet to be paid to you by your clients and lends you money with the assumption that you can repay the money as these invoices are paid to you.
This is most commonly available for business-to-business (B2B) companies instead of those who work directly with consumers. The value of the loan is a percentage of the outstanding invoices, not the full amount.
Benefits of invoice financing include the ability to get approved quickly. The loan provider sees how much you will likely have coming to you in the next 30, 60, or even 90 days, which helps them evaluate your risk in repaying the money.
Because of this method, they can often extend credit to even those without a great credit past. Applications and approvals may be quicker than pages-long traditional business loan applications, as well. However, Interest rates are typically higher for this option than traditional business loans.
The collateral is the outstanding invoice money, so frequently, no additional assets are needed to secure the loan. If you are an online business without major assets, it could be a better fit than a loan that requires you to put your property or equipment down for security.
Don’t confuse invoice financing with invoice factoring. While similar, invoice factoring results in a sale of your invoices to a lender, who then takes over the collection and management of those accounts. They hope to recoup loan amounts by getting your customers to pay them.
With invoice financing, you maintain control of your collections process, which includes branding and communications. Invoice factoring leaves much beyond your control and is considered a sale of assets rather than a bad credit loan.
Online Business Lenders
While a brick-and-mortar bank isn’t likely to approve anyone with a bad credit score, online business lenders are more accepting of average or even poor credit. Some may have no credit score requirement at all, looking instead at things like your revenue, cash flow, assets, and potential.
These applications require you to have many pieces of information readily available, so do your homework in advance to see what you’ll need. The most up-to-date cash flow reports, for example, or proof of outstanding invoices can make the application process go faster.
Approvals may come quicker from online lenders, too, with decisions in a few hours to a few days. Be prepared to pay for the privilege of business funding, however.
The interest rates charged by online banks can be substantially higher, and they may not participate in government-supported programs, like SBA loans. Be careful that you don’t get into debt with too high of an interest rate in order to be able to make your payments and stay within budget for interest as well.
They may also pair you with what are considered alternative lenders, such as peer-to-peer lending companies.
Top online business lenders include OnDeck and BlueVine, both of which offer completely online applications and documentation services. If you want to get company funding without leaving your home or office, these are popular picks.
Industry-Specific Lenders
Finally, if you work in a sector that frequently needs cash to expand or stay up-to-date on the latest commercial technology, you may find lenders that cater specifically to your industry. These aren’t always widely advertised, so ask your professional organization where to look first.
Some online banks may have loans specific to your industry, too. These may differ only in application requirements or how the loan funds may be spent. Industry-specific loans may offer extra benefits that are unique to your business type.
Note that not all industry-specific lenders are truly doing business with just a single industry type. In fact, many of the loans that appear to be targeted to one or two industries are actually open to almost any business. Where they differ is in how they market the loans and the type of people they attract.
For this reason, don’t assume that a loan that appears to be just for salons, restaurants, or construction is truly unique or has perks that just these industries would enjoy. They may only feature a separate sales page for each business type, which then leads to the same loan application or financial offering.
Do your research to see if there’s truly a benefit to pursuing an industry-specific loan. You can also ask your existing bank if they have loans for your industry. Often loyal customers may find it easier to be approved, even with a bad credit score, and may get discounts on origination fees or other costs.
How Can I Get a Business Loan with a Low Credit Score?
While not always easy, it’s possible to get funding for your company, even if you’ve had a checkered past with finances and credit. Small business loans for low credit scores will usually come with some conditions, however, including higher interest and fees or the requirement of some type of collateral.
Depending on the type of business you’re in, you may find it difficult to meet either or even both of these requirements. You can help your chances of finding the best deal by following these steps.
Get Your Credit Scores
You should know your credit score and credit history before ever filling out an application for business credit. Get both your personal credit score and business score, and look for any discrepancies or errors in your complete credit reports.
This gives you an opportunity to request changes or make updates that could help you get a better credit opportunity when you’re ready to apply. Personal scores are widely available for free through various services, including many credit card statements.
You can get business scores at these business credit bureaus: Equifax, Experian, Dun & Bradstreet, Paynet, and the SBFE.
Shop Around
There shouldn’t be a rush to apply for the first funding option that you come across. In fact, taking time to research can do two things. First, it ensures you get a good look at all of the loan and credit products appropriate for your needs.
Second, it gives you a feel of the market and can help you find patterns in the offerings, such as interest rates, loan terms, repayment terms, origination fees, or loan amounts. By understanding more about the types of loans available, you can make a better decision when it does come time to apply.
Understand the Requirements
Each type of business financing mentioned above has its own rules and requirements for borrowers. What you’ll need to fill out the application varies. Take time before applying to know what documentation to bring.
Even the simplest loan applications will likely ask you for things like your annual revenue, years in business, and contact information. More involved loan applications, like those used by the Small Business Administration (SBA), have more stringent borrower requirements.
What is the Minimum Credit Score for a Business Loan?
Traditional business loans require pretty strong borrower credit ratings to get access to unsecured funding. That’s because the banks need to know that you’ll be able to pay back large loan amounts, especially for SBA loans or PPP loans through government programs.
Business loan applications usually require a business credit score. The SBA loans, for example, refer to the FICO Small Business Scoring Service, or SBSS. These scores range from 0 to 300, with banks preferring minimum credit scores of 155 for the pre-screen process. Bad credit rarely qualifies.
You may not have enough business credit history or a credit score established enough to get a loan with this information alone, and the bank may require your personal credit history to help them make a decision. Generally, a 690 or higher personal credit score is needed to get consideration for SBA loans.
For secured loans where you can use your purchases to guarantee repayment, there may be more wiggle room for a qualifying credit score. Still, the largest loans, like those needed to buy property, expensive machinery, or the latest tech, will want you to have a minimum 720 personal credit score.
Build Your Business Credit to Access Better Financing
If none of the small business loans for bad credit scores mentioned above seem like a good fit, you aren’t completely out of the game. In fact, there’s a relatively new way to build business credit that’s designed specifically for those who have very young businesses or have made some credit mistakes in the past.
Credit Strong’s program can help you build the business credit scores needed to get access to those more traditional banking products with lower rates and flexible repayment terms, such as those offered by the SBA and major banks.
How does it work? Apply online and get a decision in minutes. Funding is locked into a business savings account as you pay small loan payments over the course of 120 months. These payments are reported to your business credit profile, so you can continue to build credit as you fulfill your repayment terms.
In addition to building business credit, you can get access to your monthly Equifax Business Delinquency Financial Score Grade for free. This alerts you to any changes in your business credit, so you can stay on top of your progress and know about any errors or fraudulent activity.
When you’re done repaying, you’ll have an established business credit score. Pay it off early or cancel your account without penalties or fees. It’s a suitable alternative for those who want to avoid the high interest of a bad credit business loan and focus on raising their business credit score instead.
Bottom line
Whether you need cash flow to expand your business, replace outdated machinery, or cover payroll, finding an affordable loan option that will also rebuild your bad credit doesn’t have to be out of reach.
Those with no or bad business credit can work towards a higher credit score before applying. It’s now possible to achieve that minimum credit score you need for a “yes” on your next application.
