If you’re a business owner trying to get small business loans, bad credit can stop you from getting the funds you are seeking. Fortunately, there are several options that might get you the capital you need.
How do you know what your credit risk is?
How can you get small business loans for bad credit?
And how do you repair your credit score if you have bad credit?
Is Bad Credit Stopping You from Getting Business Loans
If your credit score is less than stellar, lenders simply aren’t willing to take a risk on a business with bad credit, or if they do, the terms of the business loan could push your business further into debt. For better or worse, your credit score has become your "SAT score" when it comes to financing. If you have a high score, you'll have a pretty easy time getting credit offers from a wide variety of funding sources. If your score is low or nonexistent, however, you won't.
You may find traditional lenders willing to extend business loans for bad credit. However, be aware you may be charged higher interest rates and the terms of the loan contract may vary from loans for businesses with good credit.
Getting a Small Business Loan
Small business owners who have sustained business losses often experience difficulty in obtaining small business loans from a commercial lender. At best their damaged or bad credit often mandates a high collateral requirement. Due to the high risk that is assumed when providing small business loans for an applicant with bad credit, rates will be much higher than those for persons with ‘good’ credit. Approval or turnaround time can also be much longer. Even in the best of conventional circumstances, liquid capital may be procured “too little, too late.” This could put a business further into debt, diminishing both its credit rating, its credibility and even its solvency.
Related Read: Loan Amortization Schedule & Types of amortization
Bad Credit Small Business Loans
Bad credit is a red flag for lenders. It indicates you’ve either mismanaged your personal finances or fallen on hard times. Either way, lenders see you as higher risk — more likely to miss payments or default on a loan than a borrower with good credit.
Bad credit (defined by FICO as a score of 300 to 629) is one reason loan applications are rejected; the approval rate of business loans from big banks was just 23.3% as of June 2016, according to Biz2Credit. But alternative lenders provide options. They emphasize the strength and operating history of your business rather than your credit. Be sure to carefully compare all of your choices, weighing terms and annual percentage rate.
Is it possible to get a business loan with bad credit?
It very much depends on your circumstances and willingness to use differing forms of security, but it is possible to get a business loan with a bad credit history. It’s always worth speaking to a credit specialist about sourcing finance, especially if your credit file is poor.
Often, businesses that experience financial difficulties would look to take up a finance solution, more often than not, by visiting their bank. However, due to various reasons, the bank is no longer an option for many small firms, let alone business owners with poor credit histories. Because of this, we're starting to see more and more lenders who provide alternative methods of lending.
It's important to remember that with the boom of alternative lending platforms in recent years, more and more lenders provide finance options for businesses with bad credit — meaning the issue is becoming less and less relevant to finance applications.
Here are some ideas for small businessman with low scores faced with funding challenges:
1. Look beyond credit cards and bank loans for financing. Studies show that credit card and bank financing account for just 25 percent of the total funding needs of early-stage entrepreneurs. This statistic should provide you some comfort, because it implies that 75 percent of the money you need can come from other sources that rely less on your credit rating.
While there are credit cards and lending programs designed for individuals with poor credit, these options will typically charge a higher interest rate to compensate for the credit risk posed by a sub-prime borrower. One bank option for those with poor credit scores is a home equity line of credit, though I'd be wary of putting your home on the line to finance a risky early-stage venture.
Related Read: Balloon Loans For Small Business
2. Seek loans from your relatives and friends. Everyone likes the idea of entrepreneurship, which may be why, at some point, more than 50 percent of all business owners get financing help from friends and relatives. Chances are, your relatives and friends want to see you succeed and may be able to help make your business dream a reality. They also may not dwell on your poor credit score because they trust you, or they believe your business concept to be sound. (Banks used to evaluate your character and business conditions the way family and friends still do, but credit scoring models have made lending decisions more automated, resulting in the critical power your credit score holds over you.)
If you follow the advice I have shared in previous columns on identifying private lenders and understanding their risk profile , you should be able to get access to cheap, quick and patient business capital. Also, you can now use private loans from relatives, friends and business associates to rebuild your credit score if you use a loan management company to service the loan and report payments to credit bureaus.
3. Investigate microlenders and web-based lenders. There are several nonbank lenders on the internet that now offer microloans to entrepreneurs. These loans are typically in the $5,000 to $25,000 range. Some of these sites are excellent sources of capital for those with poor credit and will also report your payments to credit bureaus which can help raise your credit score if you make timely payments. Be sure to shop around and compare rates since each site offers a twist on how they price loans and spread risk to their lenders/investors. These sites include:
Related Read: Small business loans for minorities with bad credit
Can I get a business loan with bad credit?
Because these alternative lenders provide tailored small business loans, more businesses are now able to access finance solutions by using different forms of security.
If you have a strong credit score and a business operating at a healthy turnover, even with a history of past issues you could still be eligible for a loan based on your business’s turnover.
For businesses that are asset-rich and cash-poor, there's a high probability that lenders are willing to take equipment, vehicles, or commercial property as security. This guarantees them a lower-risk investment, as they're more focused on the security available than anything else.
Usually in the form of invoice factoring, some lenders will look past credit history and financial issues if the business being operated is functioning well and has debt owed to it in the form of invoices. With many variables, it's worth speaking to a specialist about invoice finance. If your business is suitable, it could be a useful solution that not only serves as an alternative way of sourcing finance, but helps you secure a more efficient income by fast-tracking invoice payments.
Here is a list of 20 alternative lenders and a summary of what each company claims to offer.
Accountable Capital: Accountable Capital specializes in loans for small and midsize business throughout the United States. The company offers merchant cash advances, business loans, lines of credit and working-capital loans. In addition, it has funding programs specifically for liquor stores and the medical and restaurant industries. There are no application fees, but the company offers 24-hour approvals, and bad credit is not an automatic disqualification.
Advance Funds Network: Advance Funds Network (AFN) offers a number of flexible business-financing options for small and medium-size businesses, including bad credit business loans, cash advances, invoice and purchase-order factoring, and equipment leasing. AFN's products are available to all businesses, regardless of credit score.
Advantage+: Advantage+ is a direct-lender equipment-leasing company that serves businesses throughout the country. Most new loans, which range from $2,000 to $200,000, come through equipment manufacturers, distributors, and dealers that use the lender's financing to help their customers buy equipment. About 40 percent of its loans come from existing or previous borrowers, with a growing number of requests coming directly from borrowers, through the Advantage+ website and word of mouth.
Advantage Lease: Advantage Lease is a nationwide provider of commercial financing products and services focused on small and midsize businesses. Advantage finances commercial equipment in most major market segments. The lender has expertise in certain markets, including office technology, industrial equipment, food services, office furniture, security and surveillance, health care, information technology, and software.
American Express: American Express offers merchant financing to small businesses that accept American Express cards. The financing is a commercial loan, not a purchase of receivables or a cash advance. A business must repay the loan in full, together with the loan fee, regardless of its future credit- and debit-card charge volume. americanexpress.com
American Finance Solutions: American Finance Solutions purchases businesses' future credit-card transactions, and advances that money to the businesses. After a business receives the advance, this lender deducts a fixed percentage of the business's daily credit card sales until the advance is paid in full. To qualify, businesses must have been in operation for more than a year and must process at least $5,000 in credit card sales each month. americanfinancesolutions.com
Amerifund: Amerifund has been providing equipment financing of between $5,0000 and $5,000,000 to companies across the United States for new or used equipment since 1995. The lender tailors specific leasing or finance programs to best assist companies in meeting their financial goals. Amerifund's lease, finance and working-capital programs provide flexibility, including structured terms that cater to the seasonality of your business, or programs that allow you to use the equipment for three to six months without any out-of-pocket payments. amerifund.cc
Apple Capital Group: Apple Capital Group, Inc., is an asset-based lender that specializes in equipment leasing and financing ranging from $25,000 to $500,000 for up to 60 months. They also offer small business, bridge and hard-money loans on short-term projects of under 12 months. Loan requests can be evaluated in less than 2 hours, with funding available in three days. applecapitalgroup.com
ARF Financial: ARF Financial offers a diverse range of loan products, including working-capital loans, lines of credit, bridge loans and mezzanine credits. ARF Financial offers loans ranging from $5,000 to $1,000,000. Approvals are granted quickly; funds are available in seven to 10 days, and collateral is not required on loans up to $750,000. arffinancial.com
Ascentium Capital: Ascentium Capital is a provider of equipment- and technology-financing solutions. Its finance platform paves the way for fast, flexible financing for virtually any business need. The lender provides financing and leasing for manufacturers, distributors, re-sellers and franchise organizations, as well as direct financing options for small, midsize and Fortune 500 companies. ascentiumcapital.com
Bad Credit Business Loans: Bad Credit Business Loans offers lending solutions for a range of companies that need quick financing in order to grow. Bad Credit Business Loans offers a variety of loan products, including alternative business loans, equipment financing, loans for women, bad credit loans, secured loans, SBA loans, trucking business financing, unsecured loans and minority-owned business loans. badcreditbusinessloans.com
Balboa Capital: Balboa Capital offers several small business loan products, including working-capital loans, franchise loans, equipment leasing, and flexible small business loans. The company makes quick credit decisions, offers loans of up to $250,000 and has no restrictions on how businesses can use the money. balboacapital.com
Biz2Credit: Biz2Credit is an online marketplace for small business funding. The company connects small businesses in need of funding with lenders. Biz2Credit can help small businesses obtain a variety of loans, including SBA loans, equipment financing, business-acquisition loans, commercial loans, lines of credit, franchise loans, real estate financing, disaster loans and merchant cash advances. biz2credit.com
Bizfi: Bizfi provides real-time pre-approvals and multiple funding options to businesses from a wide variety of funding partners. Bizfi's funding options include short-term financing, franchise funding, equipment financing, invoice financing, medium-term loans and long-term loans guaranteed by the U.S. Small Business Administration. bizfi.com
BizLender: BizLender is a provider of alternative funding solutions for businesses throughout United States. This lender offers business cash advances, merchant cash advances, and both secured and unsecured business loans. Funding of between $5,000 and $500,000 is available through BizLender. bizlender.com
BlueVine: BlueVine helps businesses free up cash trapped in their invoices by providing an advance on the amount due. There are no hidden fees, paperwork or obligations. The application is completely online, and there are no long-term contracts or termination fees. Once a business is approved, a credit line is set to be used as needed. bluevine.com
BoeFly: BoeFly is an online marketplace for small business loans. The site is a loan exchange that connects small business owners with more than 4,000 business lenders. BoeFly is a subscription service that does not charge any transaction fees. boefly.com
The Business Backer: The Business Backer specializes in small business financing. This lender offers a variety of loan types, including factoring, purchase financing, specialty financing, equipment leasing, traditional loans and lines of credit. To qualify, businesses must have been operating for at least a year, and must have annual revenue of at least $150,000 and a personal credit score of 550 or higher. businessbacker.com
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Business Credit & Capital: Business Credit & Capital specializes in offering merchant cash advances to retailers, restaurants and service businesses. The lender purchases a percentage of future revenue and advances those funds to businesses. There are no restrictions on how the money can be used. For businesses to repay the loan, the lender collects a daily percentage of sales. businesscreditandcapital.com
Business Loans Direct: Business Loans Direct offers a wide range of loans, including business cash advances, merchant cash advances, small business loans, merchant loans, restaurant financing, bar and nightclub financing, and medical practice financing. The application process is free, and upon approval, businesses receive their funds in as little as 72 hours. businessloansdirect.com
Having a poor credit history can often hinder business financeapplications, especially through the more traditional routes. If you believe your credit file is working against you it can be a frustrating time, especially if you're looking to push forward your business but have nowhere to turn