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Securing a business loan can be extremely challenging with a low credit score, especially from banks and other traditional lenders. The good news is that it’s still possible to get a business loan with bad credit.
In this guide, we’ll walk you through several alternative financing options for bad credit, as well as ways to increase your chances of eligibility when applying for a business loan.
What Is Bad Credit?
Credit scores below 580 are considered bad credit. To determine your eligibility for a business loan, lenders will typically check your credit, pulling your FICO score. This is a calculated scoring model based on data reported to the three major credit bureaus: TransUnion, Equifax, and Experian.
FICO scores weigh factors such as your debt-to-income ratio and payment history, and range from 300 to 850.
Personal Credit vs. Business Credit
While personal credit scores are based on FICO, business credit scores are factored differently and reported through different business credit bureaus — Dun & Bradstreet, Experian Business, and Equifax Business.
Business credit scores range from 1 to 100, with credit scores under 50 deemed as bad business credit.
The Effects of Bad Credit on Business Loans
Bad credit scores not only impact your eligibility for a loan, but also the terms and interest rates if you’re approved. When you have low credit scores, you’re more likely to receive a smaller loan amount and higher interest rate to offset the risk. Also, providing collateral is almost always a requirement.
5 Ways to Get a Business Loan with Bad Credit
While having bad credit does make it challenging to meet loan eligibility requirements, it’s not impossible. You can use several strategies as a business owner to increase your odds of approval.
1. Write a Business Plan
Creating a business plan is a strategic way to stand out from other borrowers. With a comprehensive plan, you can highlight your company’s strong annual revenue, financial projections, and repayment methods.
Providing evidence of consistent income and cash flow management is attractive to lenders and takes the research off their plates. Solid business plans are a tried and true way to show transparency with your lenders and instill confidence in your business.
2. Offer Collateral
When credit scores are less-than-stellar, collateral is the next best thing. Collateral can be any value asset that a borrower provides a lender to secure their loan. It helps lenders offset any potential loss of funds if you default on your loan.
Offering collateral or a personal guarantee will make you appear as less of a financial risk to lenders. You can provide business or personal assets, including investments, real estate property, and inventory. Most lenders will ask for collateral at least the same value as the loan you’re borrowing.
3. Seek a Cosigner
In addition to personal guarantees, some lenders may also allow you to have a cosigner for the business loan. Just as with personal loans, co-signers will be responsible for taking over the loan repayments if the borrower cannot.
Having a co-signer with a strong credit history can help lenders feel more comfortable with granting loans to business owners with bad credit, significantly boosting your loan approval chances.
Tip:
Your co-signer's personal credit and assets will also be at risk, so choose someone who trusts and supports your business.
4. Improve Your Credit Score
While applying and waiting to hear back from lenders, you should still take steps to improve your credit score. If you have a business credit card, make sure you’re paying off the monthly statement in full and on time. This establishes a good credit history that lenders will notice.
Here are a few additional ways to boost both your personal and business credit scores:
- Paying off or reducing any outstanding debt
- Maintaining low credit utilization (no more than 30%)
- Checking your credit reports periodically to address any errors
- Making on-time payments of other loans
5. Explore Alternative Lenders
Traditional lenders like banks and credit unions typically have the strictest lending criteria for business loans. Fortunately, many alternative lenders, like private and online lenders, have more lenient eligibility criteria.
For example, most online lenders accept credit scores as low as 500, making it easier for small business owners with bad credit to get approved.
Types of Business Loans for Bad Credit
While securing loans from banks and other traditional lenders can be challenging, many online lenders offer alternative financing options for borrowers with bad credit. The following types of business loans have more flexible eligibility requirements.
Business Line of Credit
Similar to credit cards, a line of credit lets you borrow capital up to a pre-approved limit and only charges interest on the funds you use. Best of all, making on-time payments helps build your credit.
Equipment Loan
If you need to buy or upgrade business equipment, an equipment loan is specifically designed for doing so. Your equipment serves as collateral, making it easier to qualify with bad credit.
Merchant Cash Advance
With a merchant cash advance (MCA), you can receive an upfront deposit in exchange for a percentage of your future sales. Lenders are more willing to fund businesses with poor credit since repayments are based on revenue.
SBA Microloan
The SBA Microloan, a smaller loan funded through the U.S. Small Business Administration (SBA), doesn’t require a minimum credit score. It’s also accessible to new businesses or startups, granting up to $50,000 in funding.
Invoice Financing
If you’re waiting on outstanding invoices, invoice financing lets you turn those unpaid invoices into immediate, accessible cash. Lenders will provide you with a percentage of the invoice amount and receive the payment later from your customers.
Short-Term Loan
With short-term loans, you can borrow working capital with short repayment periods. These are generally easier to secure with bad credit because the fixed interest rate is usually higher than traditional loans.
| Loan Type | Summary | Perks | Min. Credit Score |
|---|---|---|---|
| Business Line of Credit | Borrow up to the set credit limit; interest charges only on borrowed amount | Flexible use, helps build credit | 550 |
| Equipment Loan | Receive capital up to 100% value of your equipment; assets serve as collateral | Equipment secures the loan | 550 |
| Merchant Cash Advance | Obtain lump sum loan upfront for percentage of future sales | Quick funds, payments based on sales | 500 |
| SBA Microloan | Small loans available through the U.S. Small Business Administration | Accessible to new startups/ businesses | No minimum requirement |
| Invoice Financing | Exchange percentage of unpaid invoices for instant cash; factoring fee 0.5%-5% | Quick funds, improves cash flow | No requirement |
| Short-term Loan | Borrow working capital with shorter repayment period and set interest rate | Quick funds, tax-deductible, no collateral | 500 |
Frequently Asked Questions
What is the minimum credit score for business loans?
Fortunately, there isn’t a standardized credit score for business loan eligibility. Still, high credit scores — personal scores of at least 670 and business scores of at least 30 — will increase your chances of eligibility and better interest rates.
Do all business loans require a credit check?
No, not all businesses require credit checks. Though most loans for small businesses prefer good credit history, some lenders don’t rely solely on your credit report for loan approval. Instead, they’ll lean more on collateral and proof of sufficient annual revenue.
What is the easiest loan to get approved for without a credit check?
Merchant cash advance (MCA) is the easiest loan to get approved for and doesn’t require credit checks. Remember: This quick access to capital usually has substantially high interest rates. This is why knowing what to look for in an MCA lender is essential.
The Bottom Line
While business loans for bad credit do exist, they’re still rare. Improving your credit score is a sure-fire way to increase your chances of eligibility. It’s equally important to choose a reputable lender who will work with you to find good deals.
At Clarify Capital, we leverage our network of 75+ lenders to secure you the best interest rates and terms. Our team of dedicated loan advisors has worked with small businesses in the lower credit score range and can tailor options to your needs. Speak with a Clarify advisor today to get started.
Emma Parker
Senior Funding Manager
Emma holds a B.S. in finance from NYU and has been working in the business financing industry for over a decade. She is passionate about helping small business owners grow by finding the right funding option that makes sense for them. More about the Clarify team →
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