How To Get a Business Loan With Bad Credit

When applying for a business loan with bad credit, it helps to be prepared. These loans might be harder to find and qualify for, but they are available. By researching lenders that work with bad credit and understanding the factors lenders consider beyond a credit score, you can increase the likelihood that you are approved. To make the right decision for your business, it helps to understand what counts as bad credit, potential loan options, ways to strengthen your application, and how to watch out for predatory lenders and scams.

What Counts as "Bad Credit" for a Business Loan?

Each lender and loan type has different standards for what is considered bad credit. As a general rule, a personal credit score below 630 is considered bad. 

Your credit score is only one part of the loan approval process. Lenders will also weigh other factors, such as your time in business, revenue, and cash flow. If you’re pursuing equipment financing or a real estate purchase, the equipment or real estate may be used as collateral to reduce the risk involved in issuing the loan.

Loan Options Built for Bad Credit

Depending on the lender and loan type, the answer to “Can I get a business loan with bad credit?” is a qualified yes. In general, you can choose between online lenders, alternative lenders, loans backed by the Small Business Administration (SBA), revenue-based financing, merchant cash advances, and nonprofit lenders.

• Online or Alternative Lenders: While these lenders have higher approval rates than traditional banks, they also charge higher interest rates. In exchange for the higher cost, these lenders often provide faster approval and funding processes.
• SBA Microloans and 7(a) Loans: These loans are generally partially guaranteed or fully guaranteed by the SBA, which reduces the risk for lenders. Microloans have a maximum loan amount of $50,000 and are designed for small businesses and startups. SBA 7(a) loans are issued by participating lenders, are partially guaranteed by the SBA, and have maximum loan amounts of $5 million. Eligibility requirements, credit score expectations, and approval timelines vary based on the program and lender.
• Invoice Financing: This type of financing is when the business borrows against unpaid invoices. Because invoices play such a strong role in this loan type, lenders often place a heavy emphasis on the value and quality of the receivables.
• Revenue-Based Financing: You can get a business loan with bad credit by using your company’s revenue. These loans base funding and repayment on your sales and cash flow, making this funding option more accessible for people with poor credit. 
• Merchant Cash Advances: A merchant cash advance is when a business is given an upfront sum in exchange for a share of its future revenue. Merchant cash advances generally use factor rates instead of interest rates. While they are typically more accessible for businesses with bad credit, they can also be quite expensive.
• Nonprofit and Community Lenders: Often, nonprofit and community lenders are more willing to work with bad credit. The actual loan amount, terms, and qualifications involved vary from lender to lender.

How To Strengthen a Bad-Credit Loan Application

If you’re applying for a business loan with bad credit, there are a few things you can do to strengthen your loan application.

• Offer collateral. By using equipment, real estate, or receivables to back the loan, you can reduce the risk involved for the lender and increase the likelihood of your loan getting approved.
• Bring in a co-signer who has a stronger credit score.
• Maintain accurate financial statements and cash flow projections. These can be used to demonstrate your creditworthiness for merchant cash advances, revenue-based financing, and other loans that look at your company’s financial situation.
• Lower your existing business debt. This can improve your cash flow and ability to cover existing and future debt payments, which can affect whether your loan is approved.

How Collateral and Co-Signers Can Offset Bad Credit

As a borrower, you can choose to pursue a secured or unsecured loan. An unsecured loan does not require you to pledge specific assets as collateral. With a secured loan, collateral is used to offset the lender’s risk. For example, the lender may be able to repossess or foreclose on pledged equipment, vehicles, or real estate if the debt isn’t repaid. Because this allows lenders to recoup some of their losses, they are often more willing to provide a loan to someone with bad credit.

If you don’t have collateral or are unwilling to use something as collateral, you can use a co-signer instead. A co-signer who has a strong personal credit score can help tip the scales in your favor, even if you don’t have collateral to offer.

Questions To Ask Before Accepting a Bad-Credit Loan Offer

Before you apply for bad-credit loans for your business, you should be proactive about reading through the loan documents, researching the lender, and comparing the loan to your other options. As part of your research process, you should always ask the lender the following questions.

• What is the total amount I will pay over the life of the loan?
• Are there any prepayment penalties if I want to pay off this loan early?
• What is the repayment schedule for my loan? 
• Does the loan use a factor rate or a standard interest rate?
• What is the loan’s APR? 
• Are there fees outside of the APR that I will be expected to pay?
• Will I need to sign a personal guarantee?
• How quickly will my funds be available?

Watch for Predatory Lenders and Loan Scams

Unfortunately, scammers sometimes target bad-credit borrowers. To avoid loan scams and predatory lenders, pay attention to the following red flags.

• The lender uses high-pressure tactics to get you to sign up quickly.
• You are expected to pay unusually high financing costs.
• The lender wants you to pay upfront fees before the loan is funded.
• The repayment terms are unusually challenging to fulfill.
• You are encouraged by the lender to repeatedly refinance or take out new loans, leading to more debt.
• The lender guarantees that you’ll be approved without a credit check.
• You can’t verify the lender’s physical address, or they don’t provide one.
• The lender requests that you send in a payment through a wire transfer or gift card.
• You are unable to verify the lender’s identity.

How To Verify a Lender Is Legitimate Before Applying

To make sure you are working with a legitimate lender, it’s important to check with the state’s financial regulator or attorney general to confirm that the lender is licensed. Then, you can look up the company with the Secretary of State (SOS) or the applicable agency in your state to see if they are registered. 

If you’re working with an unfamiliar online lender, it’s important to do your due diligence. Before submitting information or an application online, use EntityCheck’s SOS Business Search to quickly confirm the lender’s business registration and status before you submit an application. This step can help you spot at least one red flag, although additional investigation may be necessary.

Frequently Asked Questions

Can I get a business loan with a personal credit score under 600?

It is possible to get a business loan with a lower credit score. While many lenders prefer higher credit scores, other factors may also be considered. For example, some loans only rely on the company’s commercial credit history, revenue, and financial statements. The presence of collateral, the type of lender, and other factors can also play a role.

The type of financing matters. Equipment financing, invoice factoring, and merchant cash advances are more likely to provide funding for owners who have bad credit. However, invoice factoring and merchant cash advances can be costly, so it’s important to review the total cost of any funding source carefully.

Do all bad-credit business loans require collateral?

No, you don’t always have to use collateral to get a business loan for poor credit. Unsecured loans do not use collateral, but lenders will generally charge a higher interest rate to offset the increased risk. Alternatively, they may ask for a personal guarantee. If you agree to the personal guarantee, you are personally responsible for paying the loan if the business does not do so.

What's the difference between a predatory lender and a legitimate high-rate lender?

Charging a high interest rate doesn’t mean that a lender is predatory. Higher rates offset higher risk levels, so legitimate lenders may charge high interest rates for riskier loans. In comparison, a predatory lender uses unfair or deceptive practices that prevent the borrower from repaying the loan. The predatory lender’s goal is to seize the collateral or lock the borrower into never-ending debt.

While there are many different types of predatory lending schemes, there are a few common signs you can watch out for. A predatory lender may charge high fees for originating the loan, penalties for paying off the loan early, and inflated interest rates. They may also encourage you to repeatedly refinance, which can increase the overall costs you have to pay.

Are merchant cash advances a good option for bad credit?

Merchant cash advances can be a viable option, depending on your situation and which loans you qualify for. If you cannot get a business loan with bad credit, then a merchant cash advance may work. However, this type of funding source comes with higher fees and financing costs, which can make repaying the advance difficult.

Merchant cash advances use factor rates instead of interest rates, so it’s important to consider the overall fees involved when considering your options. A factor rate of 1.4 on a $10,000 advance means you’ll end up repaying $14,000. 

How can I check if a business loan offer is a scam?

When applying for a business loan with bad credit, there are a few things you should do to verify whether the loan offer is a scam. First, search the company’s name on Google with the words “scam” or “complaints.” You should also check with the SOS or similar agency in your state to see if the company is appropriately registered. If you are concerned that the offer is from someone impersonating the company, use the actual number from the company’s business registration or professional website to call them and verify your loan offer. 

To use the phone number or address from the lender’s website, you must make sure that you are on the genuine website. Don’t use a link from the offer or any emails. Instead, use Google to find the website. It is also a good idea to check the domain name for misspellings or the wrong domain extension.

You can use EntityCheck’s SOS Business Search tool to confirm the company’s business registration, standing, and phone number on record. Afterward, you can use the Better Business Bureau (BBB) to review the company’s track record with consumers.

How do I verify a lender is a real, registered business before applying?

Before you apply for a loan, you can see if the lender is properly registered by looking them up with your SOS or the applicable entity in your state. EntityCheck’s SOS Business Search makes this process easier by allowing you to quickly look up a lender’s registration status and standing right away