Finding guaranteed approval on small business loans for bad credit is difficult, but that doesn’t mean acquiring one is entirely impossible. Most owners often feel hopeless once they find themselves in a bad spot credit-wise. However, many lenders are willing to work with clients who have less than stellar credit ratings.
Small Business Loans for Bad Credit
It’s worth exploring the different types of business loans for bad credit especially if you need immediate access to funding. Entrepreneurs can get into a predicament such as a shortage of working capital or fleeting investment opportunities. Unless you have overflowing cash in your bank account, it’s likely sensible to apply for a small loan to resolve your problem.
Booster Financial is your reliable lending agency that you can turn to whenever you need fast funding despite poor credit. We are your alternative lender that can fill the gaps where traditional funding institutions cannot help. However, you will need to have the means to repay your debt on time. Otherwise, you could set yourself up for more money trouble.
Defining bad credit
At some point in your business, you’ll have a run-in with credit that may or may not affect your financial profile. For example, you can miss a bill payment or meet an unexpected expense that you can’t afford. These situations can negatively affect your credit score. Consequently, they can become the reason that you have limited access to different business loans.
Business credit scores work similarly to a personal FICO score, the most common credit rating model in the market. The credit score generally indicates one’s capability of handling debt. Achieving a higher rating means you can negotiate for loans and lines of credit with more favorable terms. Otherwise, you might find it hard to qualify for better business loans.
For startups and new businesses with little to no credit history, the lender will usually investigate the owner’s personal credit score as a basis for loan approval.
Factors affecting credit scores
- Time in business. Most lenders prefer businesses that have been operating for several months or years. These companies usually have more concrete financial information, which allows them to give them a more accurate credit rating.
- Revenue. Credit scores also vary depending on an enterprise’s monthly or yearly revenues. If the business brings in a relatively stable income, that can positively affect the score, too.
- Assets. Owning several commercial assets is also key to raising the credit score. Some lenders accept these properties as collateral, helping to decrease their risk of losing money in case of missing repayments.
- Existing debts. How timely you repay your outstanding credit cards and loans matter in determining your score. If you are a good payor, i.e., paying the exact due on time, then it can impact your credit rating positively.
- Credit and loan history. Credit scores are partly a result of how you managed your finances in the past. Every rating reflects the owner’s overall personal and business credit history. That’s why experts advise borrowers to never miss repayments and choose a loan amount that they can afford.
- Public records. Some lenders file reports to credit bureaus such as UCC filings. Liens and other judgments against you are also considered when figuring out your credit rating.
- Industry risk. Some industries are generally viewed as high risk by lending institutions. Casinos, gaming centers, restaurants, and bars are some of the businesses that banks consider risky.
Lending agencies evaluate whether an entrepreneur can acquire small business loans for bad credit. There’s a credit spectrum that lenders follow, which ranges from very good to very bad. The type of funding made available to you depends on your business or personal position on the said metric.
At one end of the spectrum, you can find borrowers with excellent credit ratings. These people can walk into big banks today and apply for a loan without needing a personal guarantee. On the other end are borrowing businesses that cannot get the same favorable treatment. Their best bet is to apply for business loans for bad credit that alternative lenders can offer.
Business credit scores range from very good (100) to very bad (zero). Typically, lending institutions require a minimum credit score for borrowing companies of 75. Traditional lenders like banks and the Small Business Administration or SBA rely heavily on business and personal credit scores to grant loans or lines of credit with extended repayment terms.
Requirements and criteria vary from one small-business lender to another. However, some loan providers can offer loans to a borrower with a below 630 FICO score.
|Credit type||Credit score range|
|Poor||300 to 579|
|Fair||580 to 669|
Small business loans for bad credit
Hard money loans
A hard money loan is any type of debt backed by collateral, which is an asset that your lender can seize should you fail to repay your loan. It is ideal for when your company struggles to get your preferred loan yet doesn’t have the time to build better credit. Alternative lenders that offer this loan look more into the value of your asset rather than your credit score.
One concrete example is a bridge loan. You can apply for one if you’re planning to redevelop your property. The lender secures the loan using the post-redevelopment value of the real estate. If you default on the loan, the lending agency can foreclose on the property.
Any term loan with a duration of three years or less or a business line of credit with one-year repayment is considered a short-term loan. Borrowers with good credit often choose this option since it’s quick and easy to qualify for. You can get a higher chance of approval with these small business loans for bad credit since online lenders focus on cash flow over your credit score.
Some lenders set up flexible repayments for short-term loans, such as daily, weekly, or bi-monthly. There are also some agencies that offer same-day or next-day funding options. However, with this type of business loan for bad credit, you are more than likely to pay a higher interest rate.
An equipment financing program lets you borrow funds to buy or lease equipment to maintain or improve your operations. It follows the principle of a term loan wherein there is a fixed term and payment schedule, as well as fixed interest rates.
Equipment loans are a type of small business loans for bad credit that require no other collateral except the equipment itself. They also have a shorter repayment period compared to traditional financing. Lenders also typically require less credit requirements than other loans.
Business credit cards
If your company needs to boost your cash flow or if you find yourself suddenly cash-strapped, a business credit card is an excellent option. It provides you with quick access to money at any time. Lending agencies often approve applications even when you have poor credit.
Business credit cards work similarly to personal credit cards with variable rates. The big catch is that they have higher annual percentage rates if your credit rating is low. However, it’s also a good way to build your way to a stellar credit score.
The Small Business Administration (SBA) provides government-backed microloans for owners who need to borrow up to $50,000. The SBA does not offer it directly but rather works with different lending organizations to administer this funding. Approximately, the average microloan for small businesses is around $13,000.
There are also microloans separate from the SBA’s programs. However, these loans typically have incredibly high interest rates. The key is to shop around and find the most affordable microloan before signing that closing document.
Your unpaid invoices can help you acquire money through the invoice financing program. In essence, it is not a loan in that you get funds by selling your outstanding invoices for less than their total value. The lender can then collect the payment from your customers directly.
Invoice financing is suitable for seasonal businesses or a company looking to expand to a bigger market. If your credit score is low, you might still have a chance to get approved for this loan.
Merchant cash advance
A merchant cash advance or MCA is an advance against your sales and not technically a loan. It is a lump sum payment that you can get in exchange for a cut on your debit or credit card sales. These business loans for bad credit let you have instant cash for various purposes, such as boosting your cash flow or purchasing necessary equipment.
Despite the benefits of MCAs, you should take great caution when deciding on applying for one. Not only is it one of the most expensive financings to get but it also can create loan stacking issues. The MCA also usually has no clear repayment term.
Where to get business loans for bad credit
Traditional lending companies like banks typically do not prefer to lend to new businesses and startups, especially those with poor credit scores. However, that does not mean you have no options for financing. Here are some institutions that are ready to provide small business loans for bad credit.
- Online lenders. Some online lenders like Booster Financial understand that startups also deserve access to different types of loans. Alternative lending agencies have term loans, invoice financing, lines of credit, and other options available.
- CDFIs. Community Development Financial Institution is a private-owned agency that helps strengthen communities that cannot easily access investment and banking opportunities.
- Merchant service providers. MCA providers can offer quick cash advances depending on how the business fairs financially. They provide easy approval, especially with businesses that show a high volume of sales despite bad credit ratings.
- Microlenders. Microlenders are like CDFIs since they focus more on startups and new companies that are underbanked or with insufficient credit history. You can strongly consider approaching them to fill small funding gaps.
Frequently Asked Questions
Can startups with poor credit get a loan?
Startups and businesses with little to no credit history often have a hard time qualifying for a business loan. Still, many alternative lenders specialize in providing loans for borrowers with bad credit. The trade-off is that this type of financing comes with higher rates and additional fees.
Should you have collateral when applying for a bad credit loan?
Small businesses for bad credit don’t necessarily require collateral except for specific loans like equipment financing or invoice factoring. However, the lender may ask you to prepare a blanket lien or personal guarantee, which is a legal document stating that you agree to give up your assets in case you default on your loan.
What credit score should I have to qualify for a loan?
Lenders typically approve borrowers with a credit score as low as 600, but some can accept a rating of at least 500. In general, the lower the credit score means higher interest rates and fees for bad credit loans.
How can I repair bad credit?
Repairing bad credit is a long process that requires plenty of patience and discipline. Firstly, you will have to keep up with your personal credit payments like credit cards and auto loans. You might also need to find ways to boost your revenue or ask suppliers to extend payment schedules to help you pay off debt.
What can I do if my loan application is rejected?
If you apply for a loan at the bank but get rejected, you might want to seek other lenders with more lenient eligibility criteria and requirements. You might also need to choose a specific loan (i.e., MCA, invoice financing, etc.) that focuses less on credit scores.
What business loans are suitable for bad credit?
Financing with collateral such as inventory or equipment can give you a higher chance of getting a loan. However, there are also lenders that are willing to provide you funding despite low credit. Working capital loans, merchant cash advances, and invoice factoring are some of your best bets for less hassle processing and approval.
Business loans can help you surpass any challenge that gets in the way of your company’s performance. The key is to find a lending agency that can assist you through the process of securing funds.
Booster Financial is one such loan provider that can give you quick and easy access to the money you need. We can also help you secure small business loans for bad credit and can potentially repair your credit in the process!
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