Bad credit

Best business loans for bad credit September 2022

What is a bad credit score?

Individual small business lenders may have different guidelines on what defines a bad credit score; however, business loans with bad credit are generally for borrowers with FICO scores below 630.

Although lenders tend to focus on your personal credit score, some may also use your business credit score to assess your loan application. Your credit score reflects your business’ payment history with banks, suppliers and other creditors.

Where to get a business loan with bad credit

Banks and credit unions probably won’t approve you if you have bad credit. But these alternative sources may allow you to get a business loan with a less than ideal credit history:

Online lenders

CDFI

A community development financial institution, or CDFI, receives government funding to provide banking access to low-income or underserved communities. CDFIs are often banks and credit unions, but do not have the same strict credit requirements for loans that these financial institutions have. If you qualify for CDFI financing, you could get a competitive interest rate. However, funding may be slower than with online lenders.

Microlenders

If you have bad credit, you may be able to get a micro loan for your business. Microloans generally come from non-profit organisations. Since profit is not the primary driver for these organizations, they may be more willing to lend to business owners with poor credit histories.
Some microlenders also participate in the SBA microloan program and can work with new businesses that have difficult credit histories. Many of these lenders focus on providing loans to traditionally underserved businesses in their communities.

The disadvantage of a microloan lies in its name: micro. Funds are usually $50,000, which may not be enough for your business needs.

How to get a business loan with bad credit

It is possible to get a business loan even if you have bad credit. Here are four steps you can take to access the financing your business needs.

1. Check your credit

Before applying for a small business loan, check your credit to find out what lenders are going to see. You can get a free credit score on NerdWallet and get your personal credit report for free from the three major reporting bureaus on AnnualCreditReport.com. Business credit scores are available from Experian, Equifax and Dun & Bradstreet.

2. Boost your credit, if possible

If your credit score is lower than you would like, consider ways to raise it before applying for business financing. For example, look for errors in your credit reports and dispute them with the appropriate credit bureau. Other credit-building strategies can include more frequent payments and paying off or paying off debt, which can also strengthen your business credit.

3. Understand your eligibility criteria

Even if you have a less than perfect credit score, you may still qualify for a business loan. However, before comparing different types of business loans with bad credit, it helps to understand the criteria that lenders will use to evaluate your business.

In addition to your credit score, small business lenders are likely to consider the following:

  • How long have you been in business.

  • What is your annual income.

  • How strong is your cash flow.

  • What type of guarantee you can provide.

You should emphasize the areas where your business is successful in your loan application. For example, if you have significant collateral – consider offering more than the minimum – or offer collateral even if the lender does not require it. Your business strengths can make your application more attractive to lenders, even if your credit score is lagging.

On the other hand, the reasons for your low credit score can also influence a lender’s decision. For example, it will likely be harder to get an approval if a recent bankruptcy or default is what’s driving your score down.

4. Shop around and choose the best loan option for your business

Although a lower credit score may mean you have fewer options to choose from, you should still shop around and compare loan products.

Certain types of small business loans may be easier for businesses with bad credit to obtain, especially if you can secure the loan in some way.

Factoring or invoice financing, for example, can turn unpaid customer invoices into immediate cash and is ideal for B2B businesses. Although lenders can still check your credit score, approvals are mostly based on the value of your bills.

Likewise, a merchant cash advance can allow you to leverage your credit and debit card sales for financing. But this type of loan should be a last resort, as rates can reach triple digits.

Research different lenders and loan products to find the one that best suits your business needs.

A low credit score can lead to a higher interest rate, which could make it difficult to pay off your new loan and leave you in worse financial shape than when you started. By comparing loan offers to get the best possible deal, you will better position yourself for success.

Find the right business loan

The best business loan is usually the one that offers the lowest rates and the most ideal terms. But other factors, like funding time and your company’s qualifications, can help determine which option you should choose. NerdWallet recommends compare small business loans to find the best one for your business.