How Can I Get A Business Loan With Bad Credit?

Perhaps it has always been your dream to open a business of your own. You have a vision of a business where you can change the world for the better, all while getting some hard earned cash.

Of course, you may encounter some issues when trying to open a business. In specific, you may find it difficult to open a business and get a loan if you have bad credit. 

Thankfully, your dream of opening a business isn’t dead in the dust if you have bad credit. In fact, there are many options to help you to open your business if you have bad credit. Here’s everything that you need to know.

How Can I Get A Business Loan With Bad Credit

Credit Scores Explained

First of all, it’s important to establish what a bad credit score actually is. Unfortunately, many lenders are going to take your personal finances into account when they are figuring out whether you are eligible for a loan.

They will usually look at something known as your FICO credit score, and this is influenced by a range of different things. Primarily, your FICO credit score is characterised by 5 main parameters: capacity, character, capital, conditions and collateral. 

To make a long story short, your credit score is an illustration of how good you are at paying off debts and whether you tend to pay your debts when you are supposed to. It will also take your debt to income ratio into account. 

The FICO credit score is usually shown in rages. These are:

  • Exceptional - 800 - 850
  • Very Good - 740 - 799
  • Good - 670 - 739
  • Fair - 580 - 669
  • Poor - 300 - 579

You will usually find that a bad credit score usually refers to anything in the range of around 300 - 629. Many lenders will reject an applicant with a credit score this low. With that being said, however, there are many lenders that will still allow you to take out a loan for your business. 

How Do I Get a Business Loan With A Bad Credit Score?

The first thing that you need to do in order to get a business loan when you have bad credit is to have a full understanding of your current credit scores. Your credit score can illustrate a lot of things to a lender.

It will help the lender to understand how much of a risk it would be to loan you or your business the money.

Your credit score can have a huge effect on whether you can actually fund your business, so it’s in your best interest to take some steps to improve your credit options. This will help you to figure out the best sort of finance options for you that you will be eligible for.

Once you have established what your credit score is, the next thing to do is a little bit of research. Look into the kind of options that you will be eligible for based on the requirements.

You will usually find that most business loans will be given based on a few key factors: your annual revenue, years in business, and your personal credit score.

Now, if you’re just looking to start up a business or you’re new to the game, you’ll likely be eligible for different loans than someone who has been in business for many years. That’s why it’s so important to do some thorough research right off the bat. 

The last thing that you need to do then is to find the option that will work the best for your business. Consider your eligibility, and also think about the repayment terms. You should also do some research into the lender - what’s their reputation?

Look at reviews and speak directly with the company. You can then make a decision based on what sounds like the best option for you and your business.

Other Things to Do To Improve Your Likelihood of Getting a Loan With Bad Credit

If you’re looking for a business loan for your business, it’s always better to make the effort to improve your credit score beforehand. This isn’t always an option, of course, but it’s still worth mentioning.

You should try to find little ways to make improvements to your credit score before you go and hunt down funding for your business. If you do this then you will be eligible for more loans, so you aren’t as limited. Some things that you can do is find errors on the credit report.

If you find any problems then you can dispute them. You can also do things like making payments on a more regular basis, and paying off any debts that you have. This will affect not only your personal credit but also your business credit. 

Another thing that you can do is provide collateral to the lender. It’s always going to be a risk for any lender to give a loan to a small business - providing collateral can give your lender more security and thus can increase your chances of getting a loan.

You can primarily get invoice financing and equipment financing. You can look into both and see what will work the best for you.

There’s something else that you will also need to consider if you are trying to get a loan with bad credit. There’s a strong chance that you will need to settle for a loan with a higher interest rate if you have bad credit.

This is usually because a lender may come to the conclusion that you are less likely to pay back the loan on time, which will make you a higher risk. If you’re going to have trouble paying back the loan on time, then it may be best to wait before getting a loan.

Where Can I Get a Business Loan with Bad Credit?

It’s important to mention that you have a significantly lower chance of being accepted by a credit union or a bank if you have bad credit. It’s best to look elsewhere in these situations. There are a few sources where you can get business loans if your credit score isn’t ideal, however.

The first choice is an online lender. For the most part, an online lender will usually expect a personal credit score ranging from 500 to 650 at a minimum. With that being said though, there are a few online lenders that don’t have any minimum requirements.

They will usually look more closely at things like the cash flow of the business instead of that. You can get approved a lot easier with an online lender but you will tend to find that their rates are higher.

Alternatively, you can opt for a CDFI. This stands for Community Development Financial Institution. Here, you will receive government funding and these lenders don’t tend to have such strict requirements for credit score.

The interest rates are usually a lot better, but it may take longer for you to actually get the funding.

Microloans are another option. These tend to come from nonprofits. They can be pretty handy since you won’t necessarily need to have an exceptionally high credit score to work with many of these organizations. There are some downsides, however.

Usually microloans are relatively small - $50,000 is usually the maximum that you would be able to get. This often isn’t sufficient for some kinds of business, so it may not be the best option for you. 

The last option is using your business. You can do things like invoice factoring and financincing. Merchant cash advances can be useful for some kinds of business too. This should always be your very last option, however.

Summary

In short, it is indeed possible to get a business loan if you have bad credit. Admittedly, it may be a little bit harder for you to do this, but it is indeed possible if you are struggling and need a little bit of help.

If you want to get a loan then it’s always better to improve your credit score, however. If you are willing to wait and take extra steps to improve your credit score, you will find that you have much better options available to you.

The aforementioned options are still good if you don’t have the time to work on your credit score, however.