Launching a new business or keeping operations running during hard times can be a tough feat. According to the Federal Reserve Banks, 81% of small businesses listed rising costs as a top challenge, making that the most prevalent financial issue in 2022. The same report found that 40% of small businesses applied for loans, lines of credit, or cash advances in 2022. But what if your credit score isn’t as high as you’d like? The good news is that poor credit doesn’t have to stop you. You can consider business loans for bad credit before emptying your savings account or asking friends and family for help. It’s possible to get a business loan if you have a fair or low personal credit score. However, you’ll likely need to look for alternative lenders and banks that specialize in providing business loans to individuals with bad credit. While there are business credit scores, they take time to build after establishing your company. In contrast, your personal credit score has likely been around longer and has more data. If you don’t have a business credit score yet, lenders will consider your personal credit score when assessing your loan application. In general, fair or poor personal credit scores range from 300 to 669. Most loan options for bad credit have minimum score requirements of at least 500. Lenders may also have minimum eligibility requirements based on annual revenue and how long your business has been operating. Older businesses that have more revenue generally have an easier time getting loans because they’re considered lower risk. That said, over 45% of lenders tightened their credit requirements for small-business loans in the Q2 of 2023. If you have a low credit score, you may need to look at bad credit business loans. Keep in mind: These tend to have higher interest rates than traditional loan products. Still, they can give you access to the capital your business needs. You also want to watch out for scams. Entrepreneurs with urgent business funding needs can be especially vulnerable to fraudsters.
Can you get a business loan with bad credit?
Here are the most common red flags to look for:
- Upfront costs (usually processing or credit-check fees). Real lenders don’t ask for money upfront.
- Approval guarantees, especially with no credit check.
- No website or a website with no contact information.
- Reaches out to you, offering a loan or debt relief with no solicitation.
- Credit repair offers (any claim they can quickly raise your credit score).
- Rushes the process and constantly creates a sense of urgency.
Best business loans for bad credit
Here are some of the most common types of business loans for entrepreneurs and small-business owners with low credit scores.
Long-term business loans for bad credit
Secured loans
You must put up collateral in order to obtain a secured loan, also known as a collateralized loan. These loans have a repayment period of three to10 years, with online lenders typically offering shorter durations. Examples of collateral you can use for business loans include real estate, equipment, inventory, and accounts receivable.
These have the advantage of offering interest rates on the lower side, but you risk losing your collateral if you can’t make payments.
Compared to other options listed here, secured loans tend to require higher credit scores, making them a better choice for those with a fair rating. You can find secured business loan options with minimum credit requirements in the 600s.
Best for: Businesses that have valuable assets they can use as collateral.
Term loans
With a business term loan, you receive a lump sum of money from your lender and repay it with interest on a fixed schedule. While many traditional banks and financial institutions require a credit score of at least 670, you can find loans from online lenders with minimum credit score requirements as low as 500.
Compared to other options, such as a working capital loan, you typically pay back a term loan over a longer period (closer to 10 years), which means you might be able to get lower interest rates. Also, your repayments are fixed, which makes it easier to predict cash flow.
Best for: Businesses that need a large sum of money upfront and can commit to fixed repayment plans.
Equipment financing
Equipment financing is a type of secured loan that’s specifically used when you need to buy new equipment but don’t have enough cash on hand. You put down a down payment and then pay off the rest of the equipment plus interest in installments over the usable lifetime of the equipment, which typically ranges from two to seven years.
It’s a secured loan because the equipment that you buy is used as collateral, meaning the seller can take it back if you can’t make payments. You can find equipment loans with minimum credit requirements as low as 500.
Best for: Businesses that need funding to purchase equipment.
Short-term business loans for bad credit
Working capital loans
Working capital loans are meant to help cover day-to-day expenses, such as rent or payroll, rather than investing in large purchases, like equipment.
These short-term loans typically last 18-24 months and can be especially helpful for businesses with highly seasonal revenue, such as landscaping and construction companies, that need help paying for expenses during the slower months.
You can find working capital loans with minimum credit requirements as low as 500, but you may need to put up collateral to secure the loan.
Best for: Businesses that need short-term assistance covering operational costs.
Merchant cash advances
Merchant cash advances (MCAs) are used to cover short-term costs, but they don’t work like traditional loans. Instead, the lender gives you money upfront, and you repay the debt by giving it a portion of your credit and debit card sales, which it collects on a regular basis.
You may find some MCA providers with no minimum credit requirement. But you’ll need a score of at least 550 for most of them.
This type of financing comes with factor rates instead of interest, typically ranging from 1.2 to 1.5. A factor rate of 1.2 means you’ll repay 120% of the amount you borrowed, along with service fees charged by the provider. The repayment period for an MCA is around three to 18 months.
While this is one of the faster and more straightforward ways to get money, it’s usually more expensive than traditional loans.
Best for: Businesses with a high volume of debit or credit card sales.
Line of credit
A business line of credit gives you access to funds that you can take out as you need, and you only pay back what you withdraw (plus interest). As such, it functions more like a credit card than a traditional loan.
A line of credit often has lower annual percentage rates and higher borrowing limits than business credit cards. As a result, it’s an excellent option for flexible short-term financing, with repayment periods ranging from six months to five years.
You can find business lines of credit with credit score minimums in the low 600s, but they may have higher requirements for annual revenue.
Best for: Businesses that need short-term financing and flexible repayment terms.
Invoice factoring
Invoice factoring is when you borrow against your unpaid customer invoices. Your lender will review the invoices, and if your customers have good credit, the lender will advance you a portion of what your customers owe, usually up to 80%-90% of the total value.
Once you’ve received your advance, the factoring company will collect your customer’s payment and give you the rest of your money minus interest and fees, which usually happens within 30-90 days. Typically, there’s no minimum credit requirement for you since it’s your customers’ credit that matters here.
However, only businesses that invoice clients can use this type of financing. It can also be more expensive than a loan, so it’s a good idea to compare your options carefully.
Best for: Businesses that need a smaller loan amount and have outstanding invoices.
Tips for securing a business loan with bad credit
Here are some steps you can take to improve your chance of securing a business loan if you have a low credit score.
Increase your personal credit score
Dennis Shirshikov, head of growth at real estate investing marketplace Awning.com, offers a few tips to improve your credit, such as “paying bills on time, keeping a low balance on credit cards, and not applying for new credit frequently.”
While scores don’t improve overnight, these steps will improve your credit report and help you become eligible for more types of loans and better terms.
Add a co-signer
Adding a co-signer during the application process can help with qualifying for a business loan, since your lender has a second person to rely on to make payments if you can’t. Choose a co-signer with a good credit history and higher score to improve your chances of getting approved and receiving better terms.
Get your financial documents in order
Your credit score isn’t the only factor lenders consider when reviewing your loan application. You can also show bank statements and present your business plan.
Josh Wood, founder and CEO of the tech hospitality company Bloc, explains that your business plan should “clearly outline your goals, financial projections, and how you plan to use the loan.” This information can tip the scales in your favor by highlighting your business’s strengths and demonstrating your commitment to paying back the loan.
While these tips can help you secure a loan, remember that it’s a two-way street. Yes, you want to get approved, but you should also evaluate potential business lenders.
Specifically, you can talk to your peers or read online reviews to ensure you select reputable lenders. From there, compare a few different business funding options by calculating the total repayment cost. That will give you a better idea of what you’d be committing to, so you can select the best business financing option for you.
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