Small Business Loans with Bad Credit - Here Are Some Options

Small Business Loans with Bad Credit - Here Are Some Options
Lauren Ward
on March 22, 2020
Read in 3 min

Bad credit doesn’t make you a bad person, but it can become a problem when you need business financing.

Unfortunately, business loans with no credit check simply don’t exist!

Instead, you might be wondering how to get a loan for business or if there are any business loans for bad credit…

The short answer is YES: There are still plenty of ways to get funding, even if you can’t qualify for traditional loan options.

Explore different small business loans for bad credit below:

Finding a Term Loan

The traditional way to borrow money for your business is by visiting the local bank or credit union to apply for a term loan.

However, if you have poor credit this may not be the best option.

(Even if you were approved, you’d likely be subject to hefty interest rates.)

A better chance may be to approach a financial institution with which you already have a positive working relationship, whether that be through your business or personal accounts.

Pledge Collateral to Get A Business Loan with Bad Credit

With bad credit, loan approval will likely be contingent upon your ability to provide collateral, so don’t be surprised when you’re asked to put assets on the line in return for the term loan.

Some of the most commonly accepted forms of loan collateral include real estate, vehicles, equipment, and even inventory.

The amount you can borrow is typically a percentage of the assessed value of your collateral (usually between 60% and 80%.)

So if you pledge a piece of equipment worth $100,000 as collateral for your loan, you might get to borrow between $60,000 and $80,000.

Keep in mind that financing eligibility is different for startups than for established SMBs.

It can be quite difficult to get a start-up loan with bad credit or an unsecured business loan, so check out the next couple options before deciding on your financing strategy.

Choosing an SBA Loan

With federal guarantees and special programs designed to benefit small businesses, it’s no surprise that SBA loans are a popular choice among business owners.

There’s no specific credit threshold you must meet in order to qualify, but there are other credit-related requirements you need in order to be considered.

SBA Loan Requirements

  • For one, if you’ve defaulted on a loan in the past, you definitely won’t be able to qualify for an SBA Business Loan.
  • You should also look elsewhere if you’re behind on any government debts like federal student loans, back taxes, or an FHA mortgage.

So what kind of loan can you get from the SBA?

The most common is the SBA 7(a) loan program because these funds can be used for a number of purposes, including

  • Working Capital Loans
  • Refinancing Debt
  • or even Loans for Purchasing a Business.

On the other hand, you can get a business loan for large purchases (like commercial real estate or heavy machinery) with a CDC/SBA 504 loan.

Try an export loan if your company is starting to sell globally, or perhaps a microloan if you need less than $50,000.

While credit score isn’t a direct criterion, whether or not you can qualify for an SBA loan with bad credit will ultimately depend on the actual content of your credit report.

Invoice Financing Companies

Maybe your business is doing well enough, but your customers are always paying late.

Working capital loans may be hard to qualify for, but invoice financing or accounts receivable financing can give you quick access to the cash you need.

Rather than getting a business loan and receiving a lump sum that you repay over time, invoice financing allows you to borrow against your own accounts receivable.

Sounds great right? So here’s the catch:

The financing company takes a percentage of the invoice amount as payment for fronting you the money.

How much does invoice financing cost?

An invoice financing or “factoring” company typically purchases your invoices and pays you around 85% of their value upfront.

You’ll receive the remainder of the money when your customer pays the invoice, but the lender first takes out a 3% service fee.

They also deduct a fee based on how long it took the customer to pay.

This typically amounts to 1% each week the invoice was outstanding.

So if you sold a $1,000 invoice that took the customer three weeks to pay, you’d end up paying the lender 6%, or $60.

Invoice financing companies are less concerned with your business credit than they are with your customers’ credit.

They may perform a background check on your customers to gauge how quickly and likely they are to pay what they owe.

Despite the fees that come along with this type of financing, it’s a viable option if you have bad business credit.

Alternative Lenders

These companies differ from traditional financial institutions in that they don’t have brick-and-mortar stores or extensive staff to pay for.

In turn, this can allow them to offer reduced interest rates and fees. 

Some also use alternative eligibility criteria, meaning you can still qualify for loans with a bad credit score.

In addition, online lenders sometimes have a much faster underwriting process than traditional banks, allowing you to access much-needed capital as quickly as within a day.

The Bottom Line

Bad credit doesn’t have to be a barrier to growing your business.

With the expenses associated with loans, it’s important to find something that is accessible for you, meets your financial needs, and isn’t going to cost you too much.

It is possible to get a small business loan with poor credit– it just takes a little extra work!

Lauren Ward Finance Journalist

Lauren Ward is a freelance content writer focusing on personal finance, real estate, and lending.

Her work has been featured on Huffington Post, CBS News, and Kiplinger.

She previously worked at the Federal Reserve Bank of Richmond as well as several national non-profit organizations.

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Late Payments Hurt Your Credit Score

Please be aware that missing a payment or making a late payment can negatively impact your credit score. To protect yourself and your credit history, make sure you only accept loan terms that you can afford to repay. If you cannot make a payment on time, you should contact your lenders and lending partners immediately and discuss how to handle late payments.