Best Small Business Loans for Bad Credit

Updated on:
October 27, 2023

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Starting or expanding a small business can be a daunting task, especially when bad credit stands in the way. Fortunately, the modern financing landscape offers a variety of loan options and alternative funding options for business owners facing credit challenges. Let’s explore the best small business loans, equipment loans, invoice financing, and merchant cash advance options for bad credit.

Understanding Your Credit: How a Low Score Can Impact Business Financing

Before diving into the options, it’s essential to understand the significance of your credit score. A credit score is a numerical representation of a person’s creditworthiness based on their credit history. Traditional banks and financial institutions often use this score, along with other factors, during the application process to assess risk.

So, can you get a business loan with a 500 credit score? The straightforward answer is: it’s challenging but not impossible. Traditional lenders, like banks and credit unions, often have a minimum credit score requirement that can be hard for some borrowers to meet. However, alternative funders and other financing options are often more lenient.

Merchant Cash Advance (MCA): A Go-To for Business Owners with Bad Credit

One of the most popular bad credit business loans isn’t a loan at all – it’s a merchant cash advance (MCA). An MCA provides businesses with a lump sum in exchange for a share of future revenue or sales. Unlike loans that rely heavily on FICO scores and history, MCAs are more concerned with a company’s monthly revenue moving forward. This makes them an attractive option for businesses with low credit scores.

Benefits of a Merchant Cash Advance:

  • Speedy Application Process: Many MCA providers can process your application and provide funding within the same business day. For those that need to improve their cash flow now, this is a great option.

  • Flexible Repayment: Since repayments are based on future revenue, during slow business periods, the repayment amount is typically lower. This is ideal for startup businesses with irregular cash flow or for seasonal businesses where revenue tends to ebb and flow.

  • Annual Revenue: Most providers are looking for annual revenue of $10K per month, but some funders will work with new businesses that are under this amount.

  • No Need for Collateral: When seeking out loans or financial assistance, businesses often have to provide upfront assets as collateral. This collateral is a form of security for banks, ensuring that if the borrower fails to pay back the loan, the lender has a way to recoup their money. This is typical of secured loans. Common types of collateral include real estate, equipment, inventory, or even accounts receivable. MCAs are an exception here, as they are not loans and do not require real estate collateral.

  • Credit Check: Instead of looking at credit scores, MCAs look at how much money a company will likely make in the future. This makes them good for businesses with not-so-great credit.

  • Down Payment: Down payments are not required with MCAs.

SBA Loans: What Are They and How Do They Work?

The Small Business Administration (SBA) doesn’t directly provide loans. Instead, they offer a guarantee to lenders, which makes it less risky for them to loan to startups and small businesses. SBA loans are known for their favorable interest rates and repayment terms. However, SBA loans are not known for being the is easiest to get approved. Many microloans or the SBA 7(a) loan program are especially challenging for businesses with bad credit scores.

The maximum loan amount for an SBA loan varies by program, with some offering up to $5 million. However, there are eligibility requirements are much lengthier, including a business plan, P&L statements, balance sheets, tax returns, and bank statements.

Other Bad Credit Business Loan Options

  • Invoice Factoring: This involves selling your accounts receivable to a factoring company. Instead of waiting for customers to pay, you get a percentage of the invoice upfront.

  • Equipment Financing: Specifically for purchasing equipment, lenders use the equipment as collateral, often allowing for financing even with poor credit.

Tips for Getting Business Funding with Bad Credit

  1. Prepare a Solid Business Plan: Regardless of your credit score, a compelling business plan can sway lenders in your favor if you are looking for a loan. Remember, most alternative funders do not put an emphasis on this.

  2. Consider Alternative Funders: Beyond banks, explore online funders and other providers offering bad credit loans. They are far more likely to look past good credit vs. bad credit to ensure that qualifying is easy.

  3. Review Your Credit Report: Sometimes, errors on your credit report can lower your score. Review your report and rectify any mistakes.

  4. Offer Collateral: Secured loans or equipment financing can be easier to obtain if you’re willing to offer collateral.

FAQs: Business Loans and Bad Credit

  • Can I get a loan to start a business with bad credit? Yes, though options might be limited. Consider equipment financing, or online lenders who are more lenient in their underwriting.

  • What is the difference between personal and business loans? Personal loans are based on an individual’s creditworthiness, while business loans consider the company’s revenue, financial statements, and business credit score.

  • Will my bad personal credit score affect my business loan application? It can, especially for newer businesses. Funders might look at the owner’s personal credit, especially if the business doesn’t have a long credit history.

  • Is it more expensive to get a business loan with bad credit? Often, yes. Banks might charge higher interest rates or fees for businesses with poor credit to offset the risk. Alternative funders of MCAs use factor rates instead of interest and some like The LCF Group offer early repayment discounts allowing a more affordable option.

  • Can I use a co-signer for a business loan if I have bad credit? Yes, some lenders will allow a co-signer and banks may require it. This can help improve the chances of approval and potentially secure better loan terms, but the co-signer will be responsible for the debt if the business defaults.

Navigating the world of business financing with bad credit can be overwhelming. However, by understanding the available options like merchant cash advances and being prepared with a solid business plan, small business owners can secure the funding they need to thrive. Always consider the interest rates, factor rate, and repayment terms to ensure you’re getting the best deal for your business needs.

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