How to Get a Business Loan Even if You Have Bad Credit
Whether you’ve got a great idea for a new business or you currently run a business that could use an influx of cash, a business loan seems the most reasonable way to go.
But if you’ve got bad credit, is a business loan even an option for you?
Before you start applying for loans for your business, read on to learn how your bad credit may impact your chances - and what you can do about it.
Have Bad Credit? Why Getting a Loan Can Be Difficult
When you’re seen as risky, lenders worry that you may not be able to pay back the loan in a timely manner or in full. And defaulted loans quickly get expensive for lenders, running into the tens of thousands in fees and legal costs.
What Do Lenders Consider “Bad Credit?”
According to FICO®, the group that measures consumer credit risk, “bad credit” is defined as having a credit score between 300 and 579.
- Payment history. This is a measure of how timely you are with repayment of loans and payment of bills. Payment history is given the most weight in your credit score, making up more than one-third of your overall credit score.
- Total amount owed. This number includes all credit cards, home and car loans, student loans, bills in collections, judgments, and other debts. The total amount owed makes up another third of your credit score.
- Other factors. The final third of your credit score is split up among other information, including the length of credit history, a mixture of credit types, and new credit inquiries. Your length of credit history is measured by the oldest debt or loan on your credit report. The mixture of credit types measures all the different types of credit you may have, including student loans, consumer debt, and bills in collections. New credit inquiries are the total of times your credit report has been pulled by someone, whether that be in the application for a new credit card or loan, applying for a job, or when you’re looking for a rental.
If your credit score adds up to less than 579, many lenders worry that you’re at a higher risk of defaulting on a loan and are less likely to lend to you.
Downsides of Having Bad Credit
Having bad credit, either personally or as a business owner, can have a ripple effect on your personal and professional life.
Some of the ways that a bad credit score can affect you include:
High Interest Rates
With bad credit, you’re seen as a risky person to lend money to.
That means, if you do qualify for a loan - mortgage, car loan, personal, or business loan - your interest rates could be much higher than they would be if your credit was better.
The more money you borrow, the more you’ll pay in interest over time, which can create a self-perpetuating cycle of being unable to pay off your balances.
Denied Loan & Credit Applications
Some lenders won’t want to take a risk lending you money, no matter how high they make the interest rate.
This could mean you fill out loan application after loan application and the rejections just pile up.
When you fill out an application for a rental, whether that be for a personal residence or office space, landlords often run a credit check. This helps them ensure that you’ll have the financial resources to make rent each month.
If you have bad credit, landlords may be less likely to rent to you because your history indicates you may not pay your bills.
If you have bad credit, utility companies may require that you pay a hefty security deposit to get your water, power, or even internet hooked up.
Higher Insurance Premiums
Insurance companies check your credit history as part of the application process. Their argument is that a lower credit score may indicate a higher risk for making claims against your insurance.
Your low credit score could mean your insurance company charges you higher premiums for your home or business insurance, regardless of how many claims you’ve actually filed in the past.
Minimum Loan Amount
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Bad Credit Business Funding Options
Having a poor credit history, however, doesn’t mean you’ll never be able to get a business loan.
There are a variety of lenders with lower minimum credit score requirements - some between 500 and 650 - and still others that require no minimum credit score.
If you’re looking to fund your business without a traditional loan, either because you’re worried you won’t get approved or you don’t want to pay higher interest rates, there are some other options to consider.
Short-Term Business Loans
While these are loans, they’re typically paid back on a shorter time frame and don’t require the high credit scores of longer-term loans.
Short-term loans usually are issued in periods of three to 18 months, so they’re great if you’re looking for a quick start-up boost or an infusion of cash to get you over a hump. They’re paid back in daily or weekly ACH transfers directly from your business account, so repayment is very hands-off if remembering to pay your bills on time is a problem.
However, these short-term loans come with higher interest rates, meaning you’ll pay back a fair bit more than you initially borrowed.
Additionally, the frequent drafts can cause a cash flow problem for you if you forget to account for them or if you hit financial troubles.
Short-term loans are geared toward those with a credit score of at least 500
Short-Term Business Line of Credit
If you’re looking for a less costly, more flexible financing method, a short-term business line of credit may be for you.
Lines of credit are different from loans mainly in the way that you get the funds.
With a loan, you receive the full loan amount upfront, then you repay that amount over time. A line of credit, on the other hand, allows you to withdraw up to the approved amount. You then repay that line of credit and, if you need further cash, you can withdraw more from the available funds.
If you want the option of withdrawing more money if you need it down the line and have a credit score of around 550 or more, a business line of credit is a great option.
As with business loans for bad credit, you likely will pay a higher overall interest rate than someone who has better credit. However, you’ll pay less interest on a business line of credit than on a traditional loan.
Also, many short-term business lines of credit withdraw repayments monthly instead of daily or weekly, making it less likely to negatively impact your cash flow.
If you’ve been in business for a while, you may have unpaid client invoices sitting and causing you to have cash flow problems.
These unpaid invoices can be offered up as collateral - the same way you’d offer up your house or car for a traditional loan.
Typically, lenders can advance you 85 percent of the amount you have in outstanding invoices. When customers pay back your invoices, you’re given the remaining 15 percent, minus any fees you may have incurred.
If, for example, you need a quick infusion of $10,000 and $12,000 in outstanding client invoices, you could utilize invoice financing to get that $10,000.
Companies that offer invoice financing usually charge a flat fee, typically around 3 percent to process the transaction. An additional fee, usually 1 percent, is charged each week the invoice remains outstanding.
With invoice financing, many companies don’t even run a credit check or have the minimum required credit scores to receive funding. This makes them a solid option for business owners with bad credit scores but who have a steady flow of work being done.
If your business needs funding to purchase expensive equipment, such as heavy machinery, equipment financing may be an option.
Equipment financing essentially works the same as a car loan. You are given a loan equal to the value of the equipment, less any down payment you may have, and the lender directly pays the company you bought the equipment from.
You then pay back the lender in installments until the loan amount is paid off.
Once you pay off the loan, you fully own the equipment, making equipment financing more attractive than renting or leasing equipment.
Merchant Cash Advances
These are the riskiest - and expensive - financing option for business owners with bad credit.
Merchant cash advances are only available to business owners who accept credit cards as payment.
With a merchant cash advance, financing companies advance business owners a certain amount of money. The advance, plus fees, is then paid back out of daily credit card sales.
When business is good and you’re taking in more money, financing companies will offer you more money; when things are slow, you’ll receive less money.
If you don’t bring in enough money to cover the advance quickly, the fees accrue and continue to balloon your total bill.
How to Improve Your Credit (and Your Chances of Getting a Loan)
If you have bad credit, there is hope of you getting a business loan if you take measures to improve your credit score.
Here are 5 things you can do to improve your credit score, and your chances of getting a loan:
Pay Your Bills on Time
If you’re even a few days late on paying your bills on a regular basis, it can really impact your credit score.
To the credit reporting agencies, past credit payment history is an indicator of future performance. Frequently paying your bills late may show lenders that you’re going to continue to be late on your bills.
Pay all your bills on time, not just loan payments. Everything, including your rent, utilities, and phone bill can be reported to the credit reporting agencies.
If you pay your bill late or settle for less than what’s due, it can negatively impact your credit score.
To help you pay your bills on time, set calendar reminders or set up auto-payments if you often forget. After a while of prompt payment, you may see your score improve.
If you’re late on bills, make a plan to get back to current as quickly as possible.
Pay Off Debt & Keep Balances Low
Your credit utilization ratio, which is the proportion of available credit you’re using, plays a big factor in your credit score.
Lenders typically like credit utilization ratios of 30 percent or below, and those with the best credit scores have very low credit utilization ratios. A low credit utilization ratio indicates to lenders that you haven’t maxed out your cards and you’re likely to handle any future credit responsibly.
There are two major parts to keeping your credit utilization score low:
- Pay down any outstanding balances as much as possible
- Use your credit wisely to avoid using too much of your available balances
Only Open Accounts when Needed
Some people think that applying for different types of credit helps them have a good mixture of credit types, which may look favorable to lenders.
However, when you apply for new credit, even if you don’t plan on using it, the credit reporting agencies take notice and note that on your credit report.
When a lender looks at your credit report and sees several inquiries for new credit, it may look as if you’re trying to get lots of additional lines of credit, which can make you a risk.
Don’t Close Unused Cards
If you’ve paid off a credit card, you may be tempted to close it so you can’t use that credit again.
However, it’s best to keep your unused cards open as long as they’re not costing you money in annual fees.
When you close a card, that decreases the amount of available credit you have. This then changes your credit utilization score. If your credit utilization score is too high, it can impact your credit score.
From time to time, the details on your credit report are incorrect. These inaccuracies can impact your credit score.
Carefully check over your credit reports and, if you find inaccurate information, report it and make sure it’s removed.
Explore Small Business Loan Options Online
At The Credit Review, you can do just that. Search lenders, read reviews, and more before ever filling out an application.
Why is getting a business loan difficult when I have bad credit?
When you have bad credit, lenders view you as more of a risk since they are concerned about whether or not you will repay them in full -- especially for business financing, which can be as high as thousands of dollars.
What are the downsides of getting a loan with bad credit?
A bad credit loan will generally come with high interest rates, smaller amounts, and shorter repayment terms.
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