Business Guides

How to Apply For a Business Loan With Bad Credit

Last updated on June 2, 2021

Jacques Famy Jr

Are you ready to start a business or take your current business to the next level? Is bad credit holding you back from receiving a traditional business loan?

If you’re feeling discouraged, don’t give up yet. Getting a business loan doesn’t have to be impossible. If traditional lenders won’t provide you a business loan with bad credit, consider alternative lenders.

Alternative lenders, or online lenders, provide financing options for people with less than perfect credit. The best part is, securing business loans for bad credit is easier than you think! Let’s take a look at what you need to get approved for a business loan with bad credit and the different loan options available to you. After reading, you will be ready to secure a business loan in no time!

Steps to Get Approved For Bad Credit Business Loans

There are certain steps to follow in order to get approved for a business loan when you have a bad credit score. The process is far less lengthy and involved when working with alternative lenders compared to trying to get a business loan through a traditional lender, such as a bank. However, there is still preparation and work involved in making sure that you secure the best loan for your business.

Check Your Credit Score

You know you have low credit, but you’re afraid to look. Even though you might not want to, it is essential to know your personal credit score. Knowing your credit score, even if it’s poor, will help you narrow down what types of loans you are most likely to qualify for. You may be wondering:

Do I Need a Business Credit Score to Secure a Small Business Loan?

You won’t have a business credit score if you’ve been in business for less than a year because there simply isn’t enough information about your business’s debt management. Alternative lenders will consider your personal credit score if you’ve been in business for less than a year.

If you’ve been in business for more than a year, lenders will consider both your personal credit score and your business credit score. Traditional lenders often require a minimum credit score of 680 or more. Alternative lenders focus more on your personal credit score, working capital, and business revenue than they do on your business credit score.

If you want to improve your score as you go forward, consider these tips:

  • Pay all bills on time
  • Pay off debt as quick as possible
  • Check your credit score frequently
  • Stay below credit limits
  • Use a credit monitoring service

If your score improves, lenders will take notice. This will indicate to them that you have more financial responsibility, and your financing options will get even better. Even though there are loan options available to you if you have bad credit, it is always a good idea to be proactive about improving your credit.

Research Options

Once you’ve checked your credit score, you can begin to research your loan options. Online lenders will be your best bet for securing a small business loan with bad credit. Take note of what options are available to you, and try to find a loan that will give you the amount of money you need with the lowest interest rates. Make sure that whichever loan you pursue has a repayment term that works for you.

If you’re not sure which loans for bad credit are available to you, keep reading to discover your options.

Write Up a Plan

Many lenders will require a written business plan as a part of your loan application. If your application doesn’t require one, it is still a good idea to write up a business plan. Having a solid business plan written down will help you pinpoint if your bad credit comes from money management issues.

When you can see your patterns and goals clearly out in front of you, it will help keep you from making the same mistakes over and over with your business finances. There are many free business plan templates online that will help you get started.

Choose Your Collateral and Cosigner

If you put up collateral, it can improve your chances of securing a business loan with bad credit. Collateral is an asset that you can offer up to qualify for a loan. Oftentimes, collateral makes a lender more confident extending a loan because it protects their financial stake if the borrower fails to fully repay the loan.

Options for collateral include:

  • Cash in a savings account
  • Stocks
  • Bonds
  • Equipment
  • Boat
  • Car
  • Future paychecks
  • Jewelry
  • Antiques

It is recommended to avoid providing personal assets as collateral whenever possible, especially your home. If you go out of business, you don’t want to end up losing your home and your business because you can’t pay back your loan.

In addition to collateral, finding a cosigner is another way to boost your application. You can try to find someone with good credit to cosign on the loan with you. A cosigner agrees to take over loan payments if you can’t pay them. Because of this, it is vital to make sure your cosigner can afford to do so. Both of you need to be fully comfortable with the agreement before signing on.

Best Types of Poor Credit Business Loans

Now that you know how to prepare for securing a business loan when you have bad credit, let’s take a look at the different small business loan options available to you. Depending on your credit score, certain loans may or may not be available to you. Reference the following breakdown with the types of financing you can qualify for based on your credit score:

  • 700 or above: All business financing options are on the table such as traditional bank loans, bank business lines of credit, and small business administration (SBA) loans.
  • 640 to 700: Meets the minimum score for SBA loans. Medium-term loans and equipment financing are good options.
  • 600 to 640: Equipment financing, medium-term loans, small-term loans, and invoice financing are best.
  • 550 to 600: Eligible for invoice financing and merchant cash advances
  • 550 or below: Financing options are limited, but merchant cash advances are an option.

Short Term Loan

Short-term business loans are a type of small business loan that provides a fixed lump sum upfront and a fixed payback amount that must be repaid within a typical timeframe of 6 to 18 months. These types of loans are compatible with poor credit because they limit the loan amount and repayment time that businesses can acquire.

Short-term business loans require very little paperwork. Credit requirements are less stringent than traditional small business loans.

Short-term loans through AdvancePoint Capital require no minimum credit score. Your business needs to have been running for at least 6 months, and you can expect to make payments anywhere between monthly, weekly, or daily.

Merchant Cash Advances

Merchant Cash Advances (MCA) are also referred to as a Purchase of Future Receivables. This type of small business loan provides a lump sum of money up front to a small business owner.

The money is paid back by the lender taking a fixed percentage of future credit card sale batches until the set payback amount is fully paid. The fixed percentage never changes, so there is no term limit with MCAs.

However, estimated repayment periods often fall between 6 and 18 months. There is no minimum score required, and you need to have been in business for at least 6 months.

Business Cash Advance

Business Cash Advances, or Purchase of Future Sales Agreements, are similar to Merchant Cash Advances except that the advance is repaid by taking a fixed percentage of future overall sales. MCAs take a percentage of future credit card sales.

Payments are deducted daily or weekly from the business bank account, and the payment amounts are based on the fixed percentage of future sales. Business Cash Advances and Merchant Cash Advances are technically not “poor credit business loans,” but they are sensible financing options for your situation.

The repayment term is not rigid, but most advances are repaid in 6 to 18 months.

Invoice Financing

Invoice financing is also known as Invoice Factoring or Accounts Receivable Financing. This type of financing allows small businesses to quickly get cash from unpaid customer invoices. Some customer invoices can take up to 90 days or more to pay, which leaves your business waiting on its money.

Lenders can provide you a money advance of up to 85-95% of outstanding invoices from your customers. The remaining percentage is held in reserve. Some of it will be returned to you and the rest is subject to processing fees.

The invoices are ultimately collected directly from the client or customer, so the business owner’s credit is not a consideration.

Purchase Order Financing

Purchase Order Financing is a short-term financing option that provides the ability to pay suppliers upfront for verified purchase orders. Purchase Order Financing can finance an entire product order or a portion of it, depending on your needs.

If you need products made and shipped but don’t have the money upfront, this is a great option for you. The purchase order company will pay the capital amount to the supplier and then collect payment directly from you.

They will collect between 1-5% of each purchase order when you pay it back. There is no term limit and all types of credit are considered.

Business Line of Credit or Credit Card

Business lines of credit allow business owners to draw funds on an as-needed basis. Lines of credit provide a principal amount that you can draw from, and you will only pay interest on the funds you actually use.

A business line of credit is a very flexible option for small business owners who need cash flow, but credit requirements are more strict than other loans for bad credit. It is good to be aware of this when you apply.

A business credit card is similar to a business line of credit. A business credit card can be offered to a business owner if it is secured with a cash deposit. A business credit card will start with a small credit limit, as low as $300, but if you maintain good payment history, the credit can build up to thousands of dollars over time.

Secure Your Business Loan Today

Ultimately, poor credit does not have to get in the way of you and a good business loan. Many other factors are considered in the application process, and it is important to focus on building an overall strong financial profile for your business.

Continue to work on building your credit, and take advantage of the available options that can help your business grow. If you’re interested in securing a business loan even though you have poor credit, don’t wait to get started. Get a free quote with AdvancePoint Capital today, and you will watch your business grow in no time.

* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.