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Will a bad credit score keep you from getting a business loan? Having bad credit might make it harder for you to find a business loan, but it's not impossible—as long as you're willing to pay a higher interest rate than someone with good credit.
What is considered a bad credit score? The FICO® Score☉ , which is the personal credit scoring model used by 90% of top lenders, employs a score range of 300 to 850. A FICO® Score of 580 to 669 is considered fair (people in this range are typically considered subprime borrowers); a FICO® Score under 580 is considered poor. In addition to your personal credit score, however, lenders consider other factors regarding your business.
What Types of Business Loans Can I Qualify for With Bad Credit?
A bad credit score may keep you from getting a business loan from a bank or an SBA-guaranteed loan, which typically require a personal FICO® Score of at least 640. Fortunately, you have other options:
Also called accounts receivable financing, this involves selling your outstanding invoices to a factoring company. They pay you a percentage of the outstanding invoice (usually around 85%) and collect from the customer; then you receive the rest of the invoice minus the factor's fee.
Pros: May not require credit check; keeps slow-paying customers from affecting your cash flow
Cons: Only works if you have invoices; factor collecting on your invoices may confuse customers
You can get new business equipment without paying upfront by using an equipment loan. The equipment you buy serves as collateral, making it easier to get financing with poor credit.
Pros: No collateral of your own needed
Cons: May require a down payment; if you can't repay the loan, you could lose essential equipment
Business Credit Cards
You can use a business credit card to pay for inventory, materials or equipment. However, it's difficult to get a business credit card with poor credit. A secured business credit card, which requires a deposit to secure an equivalent credit line, can help build business credit but won't provide quick cash.
Pros: Fast approval process; some cards offer rewards; paying your bills on time could build your business credit score
Cons: High interest rate; personal guarantee required
Short-Term Lines of Credit
A business line of credit lets you borrow money up to a set credit limit. As a type of revolving credit, a line of credit allows you to carry a balance, as long as you make at least a minimum payment every month. As you pay back the amount you've borrowed, you can borrow it again without needing to get reapproved.
Pros: Good source of working capital; flexible repayment terms
Cons: Cost of carrying a balance can add up; typically must be repaid in six to 24 months
While term loans are typically repaid over three years or more, short-term business loans provide smaller amounts and are usually repaid in six to 24 months. They have similar uses as business lines of credit, but a short-term loan is installment credit, so you get a lump sum and repay it in regular installments over a set term.
Pros: Online lenders offer easy application process; predictable repayment schedule
Cons: May have high interest rates
Merchant Cash Advances
Businesses such as retailers and restaurants can borrow against their projected payment card sales and repay the advance via daily or weekly automatic withdrawals from their bank account. Payment amounts typically are a percentage of card sales.
Pros: Quick access to funds
Cons: Very high interest rates; frequent repayments can negatively affect cash flow
These very small loans (typically $50,000 or less) are available from many sources, including the SBA and Community Development Financial Institutions (CDFIs).
Pros: Some microloans target underserved communities such as women, people of color or veterans; lenders may provide business counseling
Cons: Business plan often required; loan uses may be limited
Where to Get a Business Loan With Bad Credit
A variety of online lenders offer business financing. Here are some of the most popular:
- BlueVine offers invoice factoring up to $5 million for B2B borrowers with at least three months in business, at least $10,000 in monthly revenue and a FICO® Score of 530 or better. Lines of credit up to $250,000 are available to borrowers with a FICO® Score of 600 or more, at least six months in business and at least $10,000 in monthly revenue.
- ForwardLine offers short-term loans that are typically 10% of a borrower's annual revenue, up to $150,000. You must have been in business for at least three years, have a FICO® Score of 500 or better and have annual revenues of at least $75,000.
- National Funding offers short-term loans, equipment financing and merchant cash advances tailored to a variety of industries, and says it can approve some applicants with credit scores as low as 500.
- OnDeck offers short-term loans of $5,000 to $250,000 and lines of credit from $6,000 to $100,000. You must have been in business for at least one year and have a business bank account, a FICO® Score of at least 600 and annual revenues of $100,000 or more.
- Rapid Finance provides short-term loans for $5,000 to $1 million, merchant cash advances of $5,000 to $500,000, lines of credit from $5,000 to $250,000 and invoice factoring for $20,000 to $10 million.
- ACCION Opportunity Fund makes loans of $5,000 to $100,000 to borrowers with at least 12 months in business, $50,000 in annual sales and at least 20% ownership of their business. Some 90% of ACCION clients are women, people of color or immigrants.
- Kiva makes loans of up to $15,000 at 0% interest. You must be over 18; use the loan for business purposes; cannot be in foreclosure, bankruptcy or under any liens; and must demonstrate your social capital by having a small number of your friends and family make a loan to you.
There are also online lending marketplaces such as Lendio and Biz2Credit where you can get matched with lenders whose products fit your needs.
How to Apply for a Business Loan With Bad Credit
Before applying for a business loan, check your personal credit report and try to improve your personal credit score by bringing late accounts current, paying down debt to reduce credit utilization, and making all your payments on time.
Develop a business plan showing how much you need in financing, what you'll do with the money and how you'll repay it. This can help you predict how the loan will benefit your business financially and how the payments will affect your cash flow—especially important if lenders require daily or weekly payments.
Next, explore your options and shop around. Some lenders can prequalify you for a loan without checking your credit score. Complete any applications that require a credit check within a few weeks. Credit checks cause hard inquiries on your credit report that may temporarily ding your credit score slightly, but most credit scoring models consider multiple loan applications within two weeks as one inquiry.
What to Consider Before Getting a Business Loan
When weighing business loans and lenders, consider all the costs. Compare the following:
- The loan or credit line's annual percentage rate (APR)
- Any required down payment
- The factor rate
- Fees, including origination fees, underwriting fees and closing costs
Use your financial projections to ensure you can realistically repay the loan.
The Bottom Line
Once you've been in business for more than a year, lenders evaluate your business credit score as well as your personal credit score. Start building your business credit score by obtaining a federal Employer Identification Number (EIN) and opening a business bank account. Ask your suppliers and business credit card issuers to report your account to business credit bureaus, and always pay your bills on time.