Can You Get a Business Loan With Bad Credit?
As a business owner or entrepreneur, there’s a good chance you’ll need funding for your business at some point. For some, this is a natural step for launching or growing. For others, especially those with bad personal credit, it can be daunting.
The good news is that having bad credit doesn’t mean you can’t get financing. It’s not easy, and it will be an uphill battle, but it is possible. More alternative lending options are becoming available for entrepreneurs in this situation.
But like anything involving your business, it’s important to research and plan before applying for a loan or funding. The more you know about how your credit impacts your chances and what options are available, the better off you’ll be.
Why your credit score matters
Lenders use your credit score to measure risk. The lower your score, the riskier you and your business appear.
Traditional lenders generally look for a minimum credit score of 650, with many requiring a higher score, before approving your application. This provides a benchmark excluding all other factors.
For businesses operating for less than a year, your personal credit score will be the only thing considered. And even after you’ve established a business credit profile, your personal credit score is still tied to your business. This means both credit scores will be considered in a loan application if you’ve been in business for more than a year, with specific lenders weighing one profile more heavily than another.
How to improve your credit score for future loans
While you can still get a loan with bad credit, it’s always helpful to plan for the future. Displaying responsible borrowing behavior can improve your credit.
Make payments early or on time: Pay your bills reliably to showcase responsible repayment.
Maintain a low outstanding balance: Keep your loan and credit balances low to avoid being labeled with bad credit.
Avoid opening multiple lines of credit: Minimize new credit lines to prevent excessive spending and maintain on-time payments.
Separate business and personal expenses: Establish a clean credit history under your company name to increase your chances of approval.
Build your team: Add credible business partners to improve your creditworthiness and gain additional leadership for your business.
How to get a business loan with bad credit
A "bad credit" score falls between 300 – 629, but even within this range, you may be eligible for a loan. Improve your chances by following these steps:
Understand your credit position: Get your free credit report and examine your personal and business scores.
Provide collateral: Offer collateral, such as unpaid customer invoices, equipment financing, personal assets, or cash/savings/investment accounts, to mitigate risk for the lender.
Add a co-signer: Have someone with good credit and the ability to cover payments co-sign the loan.
Review eligibility requirements: Different lenders have different requirements, so research and find the lender that best fits your business.
Apply for a lower amount of funding: Ask for an amount that aligns with your business plan and financials to increase your chances of approval and repayment.
What types of business loans are available for bad credit?
While getting funded with bad credit may be challenging, there are several lending options to explore:
Traditional bank loans: Can be harder to get, but options exist, especially through the SBA.
Microloans: Easier to obtain due to lower credit requirements, but loan amounts are typically small.
Fintech lenders: Look beyond credit score and focus more on business track-record and financials.
Merchant cash advance: Suitable for those with cash flow problems who need a smaller amount, but high-interest rates apply.
Business credit card: Build business credit by securing a credit card in your company name and making on-time payments.
Home equity line of credit: High-risk option that uses your house as collateral.
Revenue-based loan: Requires a credit score over 550 and a yearly sales revenue of over a hundred thousand.
Friends and family: An option if you have willing investors, but not feasible for everyone.
What to consider before applying for a business loan
Before applying, consider these core elements:
Required documentation: Different lenders have different document requirements, so keep your planning and financial documents up to date and find alternatives to support your case if needed.
Annual percentage rate (APR): Understand the interest rate you’ll be paying on your loan and make sure it’s manageable.
Repayment schedule: Determine how long you have to repay the loan and explore options with different APRs and fees.
Down payment: Some lenders require a down payment or collateral, so be prepared.
Additional costs and fees: Be aware of processing, underwriting, late payment fees, and closing costs, and ask about them upfront.
Improve your chances by being prepared
Prepare ahead of time to improve your chances of being approved for funding. Research lenders, review your business plan and financials, and approach lenders with confidence and the necessary documentation.
Remember, no matter your credit score, business history, or current financial state, getting your plan in order is vital to acquire funding. Keep everything clear, easy to understand, and focus on the strengths of your business to increase your chances of approval, even with bad credit.
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I’m Andrew Brooks, a seasoned finance consultant from the USA and the mind behind phonenumber247.com.
My career is built on a foundation of helping individuals and businesses thrive financially in an ever-changing economic landscape. At phonenumber247.com, my aim is to demystify the complex world of finance, providing clear, actionable advice that can help you navigate your financial journey with confidence. Whether it’s personal finance management, investment strategies, or understanding the nuances of market dynamics, I’m here to share insights and tools that can propel you towards your financial goals.
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