If you have bad credit, chances are you've had difficulty getting a traditional loan from a bank or credit union. Most lenders will not give loans to business owners with bad credit scores, meaning you might wonder how to find the proper funding for your venture. Thankfully, several funding options exist for bad credit business loans, including those listed below. These alternative forms of financing are viable solutions for those who may be struggling with their credit score.
- Short Term Loan
- Merchant Cash Advances
- Business Cash Advances
- Invoice Financing
- Purchase Order Financing
- Business Line of Credit
How Bad Credit Affects Traditional Small Business Loans
Many traditional lenders, such as banks and credit unions, will not give out loans to business owners with bad credit; most small business loans require good to excellent credit in order to qualify. If your credit history is less than stellar, or you have a low personal credit score, you most likely won't qualify for traditional loans. Being turned down by the bank or credit union can be frustrating. Thankfully there are other options available to business owners with poor credit.
What Is a Bad Credit Business Loan?
Bad credit business loans are the perfect solution for people with low credit who need a business loan. They are alternative financing options for business owners struggling with their credit scores. Your approval rates for business loans (and the interest rates you're given) are based on your own individual credit score. Lenders believe that your personal spending habits translate to business. Thus, they use personal credit scores to make decisions.
Credit bureaus do their own calculation to develop a FICO score based on a preset algorithm. Credit scores can range from 300 to 850, with higher numbers considered a better score. You can easily do a credit check online or through your bank. Lenders no longer look at just your credit score. They have developed their own risk models to determine your personal credit, including looking at what tradelines you have. Lenders will take into account the following:
- Credit cards
- Installment loans, such as mortgages and car loans
- How many trade lines do you have
- How long of a payment history do you have with those trade lines
You won't need a minimum credit score with most bad credit business loans. However, the better your credit history, the more loan options and financing available. There are many solutions to finding business loans with bad credit, so don't let it stop you from starting or running your business. If you want to build your business credit as a startup, keep up with your payments and aim for business growth.
Why Does Personal Credit Score Impact Business Loans?
The personal credit score of small business owners is a key indicator of how well they will repay their loans. Traditional and alternative lenders take into account the credit score of the business owner because if they have poor credit, it usually means they haven't been reliable at paying back credit in the past. Credit history determines how much a lender will give and at what rate. If the business owner has bad credit, lenders may be more cautious, noting past behavior. Your loan options may be limited if your credit is low.
Building and Maintaining Business Credit
If you need to build better business credit, there are some guidelines you can follow. You can qualify for more financing options at better rates with good business credit. Knowing how to build your business credit is essential to your future financial success, whether your business is new or old. Here are a few tips for getting better business credit:
- Register your legal business name.
- Obtain a Federal Employer Identification Number (FEIN) or (EIN).
- Open a business bank account.
- Open a business credit card.
- Establish business credit history with vendors and suppliers.
- Register your business online with internet directories.
Once you have done all of these steps, you will be on your way to building business credit. If you want to maintain your business credit as a business owner, then paying bills on time and filing taxes properly are two essential steps. There are a few other ways to maintain your business credit, including:
- Always pay your bills on time.
- Monitor your personal and business credit.
- Separate business and personal finances.
- File and pay taxes on time.
- Continue to open business credit lines with vendors and suppliers.
- Do not overextend your business with short-term loans and other debt.
Best Loan Options For Bad Credit
Here is a list of the best loans for bad credit.
Short Term Loan
Short-term business loans are an excellent bad credit business loan option because the amount of time to repay is short. This helps lenders ensure they will get their money back. Short-term loans also limit the loan amount businesses can acquire so that the payments are affordable.
This bad credit business loan option comes with a fixed amount provided upfront, with a fixed payback amount. The loan amount can vary depending on your business needs. Repayment terms are typically 6 to 18 months, making them short-term loans. The fixed payback amount is called a "factor cost" and is not principal and interest like other loans.
Unlike traditional small business loans, short-term business loans require less documentation. Typically you will need to show your bank statements and fill out a one-page application process, which can often be done online. They are more forgiving than traditional small business loan options, making them a great choice for business owners with poor credit.
Rates: from 1.09% up to 1.45%
Loan Terms: 6 to 18 months
Fees: Origination Fees that range from 0%-5%
Payments: Monthly, Bi-Weekly, Weekly, and sometimes daily Monday-Friday, to reduce risk.
Personal Credit Score Standards: All credit is accepted, from bad to excellent credit scores. No minimum credit score is required to get a business loan.
Time in Business: 6 months or more
Special Features: Fast application process online. Approval can be the same day to 24 hours.
Merchant Cash Advance
A merchant cash advance is sometimes called the purchase of future sales agreements. It involves an advance of a "lump sum" of money to business owners with a discounted purchase price to pay back. The advance is paid back by taking a fixed percentage of future credit card sales until the payback amount is paid back in full. This financing option has no term limit because the fixed percentage never changes.
Your time frame for paying back this type of advance will depend on your future credit card sales volume. Business underwriters try to predict 6 to 18 months for repayment, however, the payments are connected to credit cards and sales. So, how fast you pay it back will depend on how many sales you make.
Though merchant cash advances are not technically loans, they offer an excellent financing option for business owners with struggling credit. They are a great finance solution for restaurants, because of their reliability and flexibility.
Rates: 1.15% up to 1.45%
Terms: No term limits estimated payback periods are 6 to 18 months
Fees: Typically 1% to 3% Origination Fees
Payments: Fixed percentage splits from future credit card batches
Personal Credit Score Standards: All credit profile types considered from Bad Credit to Excellent Credit. No minimum credit score required.
Time in Business: 6 months or more.
Business Cash Advances
Business cash advances are another option for business owners with bad credit. They are also known as purchase of future sales agreements. Much like the previous option, there is a fixed "lump sum" of cash with a discounted purchase price to pay back. However, this advance is repaid with a fixed percentage of future overall sales, not just credit card sales.
With business cash advances, the payments are deducted from a business bank account at a fixed daily or weekly payment amount. This type of financing offers a great alternative option to a traditional business loan, especially for those with questionable credit. They are expected to be paid back in 6 to 18 months, but the period may be shorter or longer depending on sales.
Rates: 1.10% up to 1.45% Factor Rates
Terms: No term limits estimated payback periods are 6 to 18 months
Fees: Typically 1% to 3% Origination Fees
Payments: Fixed ACH payments are weekly or daily Monday-Friday
Personal Credit Score Standards: All fico credit score types from Bad Credit to Excellent credit profile is considered. No minimum credit score required.
Time in Business: 6 months or more.
Special Features: Fast application process online.
Invoice Financing
An additional type of financing for business owners with bad credit is invoice financing, or accounts receivable financing. Businesses can get cash quickly from unpaid customer invoices, so they don't have to wait for their customers. With invoice financing, you can get an advance of up to 95% of purchase orders or outstanding invoices. It's a great way to improve the cash flow of your small business.
Credit is not an issue with this type of alternative financing because credit score is not evaluated so there is no minimum credit score. The only documentation typically required is:
- An application
- Accounts receivable report
- Contact information of the companies you invoice on a regular basis
Fees: Typically 1% to 1.75% of the invoice amount. Additional fees for delayed payments
Personal Credit Score Standards: Companies that are invoiced will be credit vetted. Business owners issuing invoices credit profile is not evaluated.
Purchase Order Financing
Purchase order financing doesn't require any cash out of pocket. It's an excellent short-term finance option that allows suppliers to pay upfront for verified purchase orders. This kind of advance frees up cash flow for your business. Depending on the individual case, the process can finance an entire order or just a portion of it.
When a supplier is ready to ship the order, they will request payment. The purchase order financing company then advances the capital to the supplier and collects payment directly from the customer. The funder will then subtract their fees and send the balance as an invoice. In this way, the purchase order financing entity works as both an advancing company and a collection company.
Rates: None
Terms: No term limits
Fees: Each Purchase Order will cost between 1% to 5%
Personal Credit Score Standards: All types of credit profiles are considered. All business owners’ credit involved in transactions is evaluated.
Processing Time: Once relationships are set up for Purchase order financing, advances and collections can occur daily. It takes a few days to set up a purchase order financing relationship.
Time in Business: No time in business requirement.
Business Line of Credit
A business line of credit is available to business owners with bad credit. It is a revolving business financing option that allows owners to draw funds when needed. Though business lines of credit aren't open-ended forever, they offer incredible opportunities for financing. Business lines of credit are flexible and can greatly help with cash flow.
Lenders tend to be harsher in their requirements for this type of funding. You will need to make sure you're eligible. Lines of credit do not offer as large a sum as a small business loan, but they are great when your company needs cash on-demand or to make a purchase.
Rates: Factor Costs 1.09% up to 1.28%
Terms: Open revolving line of credit, renewed annually, semi-annually to annually
Fees: Origination Fees range from 0% to 3%
Payments: Monthly, Bi-Weekly or Weekly payments
Personal Credit Score Standards: All types of credit profiles considered.
Processing Time: Same day to up to a week, depending on lenders.
Time in Business: No time in business requirement.
Finding the Right Bad Credit Business Financing
If you are struggling with your credit score and feeling down about finding the right financing for your business, don't be discouraged. There are financing options out there for those lacking the right credit scores for a traditional small business loan. From a merchant cash advance to invoice financing, you can find alternative funding that will help your business with cash flow needs and lump sum amounts. Keep your business running smoothly with the right financing, even with low credit.
