How to Get a Business Loan With Bad Credit

Even businesses with bad credit sometimes need a business loan. Knowing what your options are is important because small business loans can often positively impact a business’s bottom line as well as improve its credit rating and business credit scores. 

Take these immediate steps to get a small business loan if you have bad credit:

1. Check your personal and business credit scores. It's important to run your credit reports to determine what your credit scores are. Lenders use credit scores to determine if a business is creditworthy enough to be considered for a loan. Knowing your scores is the first step to qualifying for a business loan, even if you have bad credit. 
2. Research your loan options. Many business owners think the only way to get a business loan is through traditional lending options, like banks. There are many options available to businesses beyond traditional lenders. It's important to explore all your options to determine which business loan is right for your business. 
3. Write a business plan. There are good business plans and bad business plans. If you want to stand a chance of getting a business loan, it's in your best interest to make sure your business plan is as good as it can get. This may sound subjective, but the reality is that many lenders still require a business plan before they'll even consider lending money to a business. Making sure your business has a plan with sound, realistic financial projections improves your chances of getting a small business loan even if your credit is bad. 
4. Provide collateral value. You may be in a situation where you have bad credit but are in possession of valuable assets. The more collateral you can put down on a loan, the better your chances of getting a loan. Also, the better loan terms you will receive. When you put collateral down on a loan, it ensures you pay back that loan and makes lending money to your business a less risky proposition. This improves your chances of getting the loan. 
5. Find a cosigner. You may have bad credit, but it doesn't mean everyone does. If you have a partner or family member with an outstanding credit history, who's willing to cosign for you, it may be what you need to ensure you get a small business loan despite your bad credit. It's important to make sure that you repay your loan on time and in full because you don't want to hurt the credit of the person who cosigned for you. Default on the loan, and you may run into more problems besides with the lender, so be forewarned.

It's important to know what your loan options are when you have bad credit. You don't want to discount anything or jump to conclusions until you’ve thoroughly considered every possible loan option. In most cases, people with bad credit will have to rely on alternative financing means like online loans and alternative lenders. 

These types of loans are easier to get as they have less stringent requirements than traditional lenders, like banks. Getting approved for an alternative loan may be exactly what your business needs. 

Let's explore some financing options people with bad credit may qualify for:

Business Credit Cards

If you have bad credit, chances are you will not qualify for a business credit card. However, you are likely to qualify for a secured business credit card. 

A secured business credit card will require a deposit equal to the amount of credit card limit. If you don't have the money for the deposit, you may be able to convince a friend or family member to put down money for the deposit for you. 

Let them know you will give them access to the credit card records, so they know you're spending the money on business expenses and nothing else. This kind of strategy can be useful when working with friends and family members because when people know what you're spending the money on, it shows transparency, building trust. Exhibiting transparency makes it far easier to get their help.

Short-Term Loans

Short-term loans range from 6 to 24 months. This is how long you have to repay them. Both traditional and non-traditional lenders have short-term lending programs you may be able to take advantage of. 

If you have bad credit, you may want to stick with non-traditional lenders.

Short-Term Lines of Credit

A short-term line of credit ranges from 6 to 24 months. 

These are just like short-term loans, but these are revolving credit lines. The nice thing about revolving credit lines is that you only pay interest on the amount of money you use. 

If a short-term line of credit is for $10,000, but you only spend $1000, you only pay interest on the thousand dollars, not the $10,000. As you pay these lines of credit back, it helps improve your business credit score, making it easier for you to get lending in the future.

Factoring

Factoring is a financing option where you sell your unpaid accounts receivable.

The factoring company that purchases these receivables will usually purchase them for 80 to 85% of their value. Factoring is a great business loan option for people with bad credit because it's not your credit score that guarantees the loan; rather, it's your accounts receivables.

Factoring companies care more about the credit history of your accounts receivables than your own personal or business credit. For this reason, it's easy to get a factoring loan. How much credit you qualify for depends on the value of the invoices, not your business credit score.

Equipment Financing

Purchasing equipment for your business can be a wise investment. Technology is radically changing all the time. Keeping up with it can give you a foothold in the marketplace. 

It can help you compete and keep your business growing. Business owners with bad credit may find getting an equipment loan much easier than getting a traditional business loan. 

This is because the equipment that you're purchasing is used as collateral to guarantee the loan. If you default on the loan, the lender takes your equipment — plain and simple. You are still required to repay the loan, however.

Microloans

A microloan is a small loan, in the US they are defined as loans of less than $50,000. 

Generally, these loans are typically lent by nonprofit organizations, and they tend to lend money mostly to socially responsible businesses or businesses that represent underserved markets. 

If your business falls into one of these categories, you may qualify for a microloan. If you have bad credit, these organizations will often extend credit to your business; however, note that they may require some regular credit counseling to ensure your building good business credit.

Merchant Cash Advances

A merchant cash advance is a short-term loan. These are great loans for businesses in the retail or restaurant industries or any industry where the business has a high volume of daily credit card sales transactions. 

A merchant cash advance is a loan extended in which they (the lender) give you a set amount of money in exchange for a percentage of your daily credit card sales transactions. Because these companies are getting money daily from a percentage of your credit card transactions, they are more lenient with their lending qualifications. 

The easiest way to qualify for a merchant cash advance is to make sure you have a steady stream of credit card sales transactions that you can show these merchant cash advance lenders.

If you have bad credit, you may think you will never qualify for a business loan. This doesn't have to be the case — some lenders specialize in lending money to business owners who have bad credit.

Here are some practical advice tips on how to get a small business loan with bad credit: 

• Stay away from nontraditional lenders. Online lenders and alternative lenders require a fraction of the requirements than their nontraditional counterparts. We recommend looking into some alternative lending options rather than dealing with nontraditional lenders who will likely decline you in a heartbeat. 
• Check your credit score. Traditional lenders may require a 650 and higher credit score. This can instantly disqualify you from getting a business loan if you have bad credit. Alternative lenders may require just a 500 credit score rating. If you have over 500, you may very well qualify for a non-traditional business loan. 
• Stay in business longer. The longer your business stays in business, the more likely you are to get a business loan with bad credit. Traditional lenders usually require a minimum of three years of tax returns to qualify for their loan programs. Alternative lenders or nontraditional lenders and online lenders are much less stringent and require that you only be in business a year, sometimes less. If your company has been in business for a long time, then just having a record of your income statements that lenders can look at may help your case and help you get the loan, even if you have bad credit.

If you have bad credit, choosing a loan may seem like a silly thing to consider. You might be thinking that you'll take whatever loan you can get and be satisfied. The truth is, however, you still have options. It's important to realize these options so that you choose the best loan possible based on your particular circumstances.

Here are some factors to consider when choosing a loan: 

• Factor in loan terms: Decide how long it will take you to pay off the loan. Short-term loans range anywhere from 24 months or less. Midterm loans are anywhere from 2 to 5 years. Long-term loans are anything over five years. Generally speaking, the longer the loan, the lower the interest rate, but there are exceptions to the rule. Sometimes a short-term loan is exactly what your business needs to get a boost so that it can get back on track.
  If this is the case, you may want to consider applying for a short-term loan, though the interest may be much higher. You'll have to weigh the pros and cons of this when making your decision. For many business owners, a midterm loan (i.e., a loan anywhere from 2 to 5 years) seems more reasonable. It gives the business owner time to pay off the loan, and loan amounts are higher. You want to make sure your loan covers your needs because it can often be challenging to get a second loan if you are still carrying a balance from a previous loan.
• Understand the interest rate and annual percentage rate (APR): The interest rate is the rate of interest you will pay on your loan. The annual percentage rate or APR is the interest rate alongside any fees attached to borrowing the money. You should also know what the total interest will be over the lifetime of the loan. Once you have these numbers, it will be easier to make your loan purchasing decision. 
• Understand loan limits: As mentioned earlier, it's hard to get a second loan sometimes if you have outstanding debt. Get the small business loan you need now to cover everything needed. When you're assessing how much loan you need to buy, factor in how long it will take you to generate profits from the loan for your business. This is a good strategy as it will give you an indication as to whether or not it's a good time to take out a business loan or not. 
• Know the fees. Every loan has fees attached. Read the fine print. Repeat: Read the fine print. In some instances, it may be worth hiring an attorney who specializes in contract law to evaluate the loan application. A contract lawyer can make sense of all the legalese and straight talk to you about the fees and conditions and everything associated with your loan; lenders won’t.

It can be said that every lender is different, that every loan underwriter has different requirements before they'll extend a line of credit to you. You can do some things to improve your chances of getting approved for a small business loan, even if you have bad credit.

Here are some practical tips to help you qualify for a business loan with bad credit:

• Show business income. Your business needs to be making sales. Not necessarily a profit, but it definitely needs to be making sales. Lenders want to know that you have an actual business with customers who are actually buying your products. 
• Have adequate cash flow. 80% of businesses that go under fail as a direct result of poor cash flow. Ensure your business has an adequate cash flow to cover costs of doing business and other business obligations. Lenders especially like to see high cash flow margins from business owners who have bad credit. This shows the lender that the business has the capacity to repay the loan, despite your credit saying otherwise. 
• Keep your current debt up to date. The least amount of outstanding debt you have, the better. If you have bad credit, you want to make sure and keep your debt to income ratio as low as possible. You should never have more than 30% debt to income. You'll need to factor this in when applying for a business loan with bad credit. Make sure that you can take care of whatever you need to take care of by spending just 30% of the loan amount. Following this formula will help boost your credit score immensely. 
• State your loan purpose. Lenders want to know what you're going to spend the money on. If you asked a family member for a personal loan, one of the first things they'll ask is what the money is for. Outside lenders are no different. Business loan lenders want to make sure that you're spending the money judiciously, on something that will actually improve your business and increase your sales. Legitimate lenders want you to succeed. Predatory lenders just care about getting paid back and charging your high interest. Do business with legitimate lenders and stay away from predatory lenders. 
• Improve your business credit scores. It's never too late to work on improving your credit score. You may have a mountain of debt looming over your head but make sure you're paying something towards that debt, for as you do, your credit score will improve over time. At least you must show an effort. 
• Build business credit. You can build business credit by taking out short-term business loans through net-30 vendors. These vendors care less about your bad credit and more about making sure you pay them back in full each month. The more net-30 tradelines you have on your business credit reports (Dun & Bradstreet, Experian Business, and Equifax Small Business), the easier it will be to build your business credit. 
• Reassess your business plan for the loan. Many businesses don't put enough energy and effort into devising a solid business plan for small business loans. This is a grave mistake because lenders want to know that your business not only has the potential to make money but also has a high likelihood of finding success in your industry. Having a good plan tells the lender that the business is founded on sound logic and good business principles. If you’ve found it hard to build business credit in the past, it may be time to reassess your business plan. Make changes to your business plan that help your case and your business. 

Building a business is always a work in progress. It's a good idea to adopt an attitude of constant improvement. Make sure that you build not only your business credit but also work on your personal credit building skills. Over time, you'll find that your credit scores will improve, and your chances of getting a small business loan with better terms will become more of a reality. 

Even if you qualify for a high-interest loan, though, it may still be greatly advantageous. It doesn't really matter the interest rate in some cases, so long as it's improving your bottom line as well as growing your business, while steadily over time improving your business credit scores. The main thing to remember is you have options. Weigh these options out, determine if the options make sense from a financial standpoint, then move forward or not.