Best Business Loans for People with Bad Credit
To establish or grow your company, you can get a small business loan with bad credit.
Traditional banks and credit unions may be hesitant to offer a business loan if you have a bad credit history. If you have a low credit score, alternative lenders, which give alternatives to traditional banks, can help you get a small-business loan.
Some of these lenders have no minimum credit score requirements and approve loans based on factors like income or time in business.
You can obtain the best bad-credit business loan to start or expand your small business if you understand how bad-credit small-business loans work. Here’s what you’ll learn:
- What does it mean to have bad credit?
- Is it possible to acquire a business loan if you have bad credit?
- What are your options for obtaining a small-business loan?
What Are the Best Small-Business Loans for People with Bad Credit in 2021?
U.S. News researched crucial aspects such as customer service ratings, qualification standards, and loan possibilities before conducting an in-depth review of the leading bad credit small-business loan companies.
What Exactly Is “Bad Credit”?
A FICO score of less than 670, which is considered fair or poor credit, is considered bad credit. A FICO score of at least 530 is required to qualify for a bad credit business loan, but you could get better terms with a good credit score of 670 or higher. Bad credit business loans are typically targeted for owners with low credit scores. Your personal credit score, as well as your business credit score, may play a role in whether or not you are approved for a loan, especially from traditional lenders.
Business credit scores have different scoring ranges and interpretations than personal credit scores. Your business credit score is based on your payment history on business-related accounts. If your company has no credit history, such as a startup, your personal credit will be utilized entirely to assess the risk of a loan.
Is It Possible to Get a Small-Business Loan If You Have Bad Credit?
Small-business owners with low credit scores will have fewer options for financing, particularly from traditional lenders.
Getting a small-business loan approved can be difficult because it considers not only credit history but also cash flow and collateral. The bottom line is that candidates with good credit and consistent income have an easier time getting approved.
When a business owner has weak or inconsistent cash flow, banks and lenders often place a greater emphasis on the company’s recorded financial history and assets. Those with poor credit scores may have trouble getting a loan approved. However, if you have strong credit, you may be eligible for regular bank loans, SBA loans, or other small-business financing.
What Small-Business Financing Options Do You Have If You Have Bad Credit?
Small-business loans come in a variety of shapes and sizes, with some being easier to obtain than others. Alternative lenders, such as online lenders, may be able to help people with bad credit to get small-business loans that are more accessible than loans from traditional lenders.
Alternative lending refers to a wide range of loans issued outside of traditional financial institutions to consumers and company owners. Alternative lenders fill a void left by risk-averse banks, which may turn down some consumers – especially when traditional lenders tighten credit requirements in the wake of the coronavirus pandemic.
Alternative lenders, unlike many traditional banks, typically make loans online and do not have physical locations. These types of loans for small businesses are available from alternative lenders and traditional lenders who specialize in bad credit:
Lines of Credit
Business lines of credit are similar to business credit cards in that they can help you when you’re short on cash. A lender approves you for a pool of funds using a business line of credit, often known as a revolving line of credit. A business line of credit, like a business credit card, has a credit limit, which is the maximum amount you can borrow. You will only be charged on the portion of money that you borrow from your business line of credit.
Term loans are typically large sums of money that you borrow from banks and pay back with fees over a certain period of time. Secured and unsecured business loans are available, but secured business loans require collateral, such as equipment. Unsecured business loans are mostly based on your credit, but may need a personal guarantee.
Invoice Financing or Factoring
If your small business is having trouble with cash flow issues because customers aren’t paying their balance in full, invoice financing – or invoice factoring, which is closely related – is a viable solution.
With invoice financing, you sell your invoices at a discount to a lender in exchange for a cash advance. The lender pays you the majority of the invoice amount up front and holds a portion – typically 20%–until the bills are paid. Borrowers pay a portion of the invoice as a factoring fee, plus interest on the cash advance until it is paid off.
With equipment loans, lenders typically finance 80% to 100% of the cost of your equipment. The equipment acts as collateral for the loan. Alternative lenders may be more likely to offer equipment loans to small businesses with poor credit than traditional lenders.
Merchant Cash Advances
A merchant cash advance, or MCA, is a loan based on your company’s projected sales that can provide immediate cash flow. The advance is usually repaid as a percentage of your daily credit and debit card receipts, plus fee. Lesser-risk borrowers will pay lower fees and have better borrowing terms than those who are higher-risk.
How to Get a Small-Business Loan?
Obtaining a company loan necessitates the preparation of a thorough application, especially if you have poor credit. Take the following procedures before applying for a small-business loan to increase your chances of approval:
- Boost your personal credit score. You should present your personal finances as attractively as possible. Making on-time payments, dealing with delinquencies, and paying down amounts when possible can all help you improve your personal credit score. Errors, such as inaccurate balances, should be disputed and corrected.
- Improve your company’s credit score. Consider opening a small-business credit product, such as a business credit card or line of credit, if you want to develop a business credit history. If you need to increase your company credit score instead, Rod Griffin, senior director of public education and advocacy at Experian, one of the three major consumer credit agencies, explains that the methods are identical to how you would rebuild your personal credit score. To improve your company’s credit score, catch up on any late loan payments and make sure your vendors are paid on time.
- Make a strong business plan. To increase your chances of getting funding, write a well-thought-out company plan with a mission and strategy. Financial statements should be included in your business plan. You can promote your management team’s background, expertise, and creditworthiness if you have a good management team.
- Look for additional strategies to improve your credit score. If you have a poor credit score, you can improve it by requesting reference letters from personal and business creditors, as well as vendors, confirming timely payments.
When you’re ready to apply for a business loan, be sure you can answer the following questions:
- What is the purpose of this loan?
- What are your plans for the loan proceeds?
- What kind of collateral will you put up, such as business equipment or other assets?
- Have you applied for any other loans for your company?
Along with your résumé, you will most likely be asked to provide personal information such as your Social Security number, home address, and phone number. Your business and personal financials, as well as legal documents such as articles of organization, will be required by any sound lending program.
How Do You Choose a Loan?
When selecting a small business lender, pay close attention to the lender’s:
- Criteria for eligibility
- Loan options
- Customer service
Keeping these factors in mind can assist you in locating a lender who has a better probability of accepting your loan and providing you with the best terms and fees.
Requirements for Eligibility
It’s pointless to apply for a loan that you don’t qualify for. Before you apply, find out what a lender considers a standard for acceptance.
Inquire about these and other factors:
Minimum years in business
- Minimum annual revenue
- Minimum personal credit score
Find a lender that offers the loan you require, such as a business line of credit, invoice finance, or a term loan.
Also, be sure the loan limits and conditions are appropriate for your needs. You won’t want to apply with a lender that only issues small, short-term business loans if you need a $250,000 loan with a seven-year repayment term.
Look for a loan with the lowest fees, such as:
- Underwriting fees
- Closing costs
- Additional fees
- Annual percentage rate, or APR
- Down payment
- Factor rate
- Origination fee
Read lender reviews to learn how businesses rank each lender’s products and customer service.
Trustpilot, which ranks organizations based on an aggregate of consumer ratings, and the Better Business Bureau are two good review sites for alternative lenders.
What Can You Do If Your Small-Business Loan Application Is Rejected?
You have a few options if you aren’t approved for a small-business loan or can’t secure enough financing because of poor credit:
- Reduce the loan amount. You may need to work with less funding than you planned. Reevaluate your business plan and identify areas where you reduce expenses.
- Add in some business associates. This change can help your company’s creditworthiness by allowing lenders to examine all owners’ personal income and collateral.
- Seek out funding that is unique. Consider enlisting the help of friends, family, private investors, and potential customers to invest in your company. You can raise money for your project by using Indiegogo, Kickstarter, or GoFundMe.
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