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Key takeaways
- Bad credit business loans are available for business owners with poor credit histories, but they often come with higher interest rates and fees
- Understanding eligibility requirements and working to increase your credit score can improve the chances of loan approval
- Equipment loans and invoice factoring are alternative methods of business financing that may be easier to qualify for with bad credit
When you have fair or bad credit (a FICO score of 669 and below), getting approved for a business loan can be tough. The 2023 Small Business Credit Survey, the most recent data available, found that 43 percent of high-credit-risk business owners were denied funding, and only 13 percent were fully approved when seeking a loan, line of credit or merchant cash advance. Banks and credit unions, in particular, are quick to deny high-risk borrowers — only 18 percent of high-credit-risk applicants opted to apply with a large bank and 11 percent with a credit union. By contrast, 48 percent of low-risk borrowers applied with big banks and 62 percent of low risk borrowers were fully approved across all types of lenders.
Fortunately, some lenders offer business loans for bad credit borrowers. These loans help high-risk borrowers access funding. If you’re approved for a small business loan for bad credit, you may be charged higher interest rates compared to borrowers with good or excellent credit. You may also have to put up collateral to secure the loan. But if you need financing to help your business and don’t have other resources, these loans can be worth it.
Before applying, make sure you consider the benefits and drawbacks.
What is a bad business credit score?
There are three major credit bureaus used to assess the creditworthiness of businesses. Credit scores vary depending on the credit bureau and its credit scoring mode.
- Dun and Bradstreet rates business credit through Paydex (0 to 100), delinquency (1 to 5) and failure scores (1 to 5). A Paydex score of 0 to 49 is considered high risk, whereas a 5 for delinquency and failure is considered high risk.
- Equifax measures credit scores in three parts: payment index (0 to 100), credit risk score (101 to 992) and business failure score (1,000 to 1,880). The lowest number on the scale for any score indicates a bad business credit score.
- Experian has two parts to their business credit score: a business credit score (1 to 100) and financial stability risk (1 to 5). A business credit score of 1 to 10 is high risk, while a financial stability rating of 5 is high risk.
Even with variations, a business with a history of late payments, overspending or other financial issues will likely have a bad business credit score, decreasing their options for financing outside of a bad credit business loan. Also, if you have a new business that hasn’t established business credit yet, lenders will look at your personal credit score. A low personal credit score will also mean you’ll need to apply for a bad credit business loan if you need business financing.
What is a bad credit business loan?
A bad credit business loan is any loan or financial product open to borrowers with poor credit. They work like any other business loan: You can apply at a bank or credit union, but online lenders typically approve more bad credit loans.
Term loans and lines of credit are common funding options. But, there are more accessible types of bad credit business loans. These include merchant cash advances, which let you borrow against future sales, and invoice financing or factoring, which allows you to trade unpaid invoices for cash.
Bankrate insight
Bad credit business loans are available for businesses with low credit scores, but maintaining a healthy score is important. Owners should avoid utilizing more than 20 to 30 percent of their available credit and accumulating too much debt on a single card. Additionally, keeping accounts open rather than closing them and working to build business credit will improve their score.
Bad credit business loan pros
These loan products have advantages that could make them the right funding source for your business.
Accessible financing
Many business owners don’t have enough capital on hand to cover all their needs and goals. Business loans provide an external source of financing that can help you achieve short-term and long-term business goals.
Small business loans for bad credit offer accessible financing to business owners with subprime credit. This is helpful if you don’t have time to build credit before seeking a loan. Like with other business loans, the funds from a bad credit business loan can cover just about any business-related cost, including:
- Startup business costs
- Day-to-day expenses
- Equipment purchases
- Business expansion
- Emergencies
- Cover short-term gaps in funding
Fast approvals and funding times
You can generally apply for a bad credit business loan and receive a lending decision as soon as the same day or even faster.
Plus, the best fast business loans aren’t just for business owners with good or excellent credit. Many lenders are willing to work with borrowers with credit scores as low as 500.
Rebuild credit
Many lenders report payment history to at least one of the three major personal credit bureaus — Experian, TransUnion and Equifax — or business credit bureaus, depending on the business’s age and type of debt.
Payment history is the most significant component of your credit score, so making timely payments on your business loans could help build your business credit score, assuming you responsibly manage all other outstanding debt obligations. A higher credit score puts you in a position to qualify for more competitive loan offers in the future.
But, not all lenders report payments to credit bureaus. Check first before committing to a loan.
Bad credit business loan cons
Despite their attractive benefits, bad credit business loans also have their share of drawbacks to be aware of when evaluating your funding options.
Lower loan amounts
Some bad credit lenders offer much smaller maximum loan amounts than you’d find with traditional business loans.
If you have significant funding needs, you may have to take out several loans or resort to an alternative funding source if the lender doesn’t offer the loan amount you need. Or you could hold off on applying for a loan and work to improve your credit score to unlock better funding opportunities.
Higher interest rates and fees
To help offset the risk, bad credit business loans come with steeper borrowing costs to protect the lender if you default on the loan agreement.
That means higher interest rates on loans for bad credit borrowers. Depending on the type of loan, you can find interest rates from 35 percent to 99 percent or higher.
You may also find higher loan fees. For example, borrowers with good or excellent credit may pay low origination fees between 0.5 percent and 1.5 percent. But bad credit borrowers could see origination fees of 4 percent or higher.
Make sure to shop with multiple lenders before applying to find the option that offers the most favorable terms and helps you minimize borrowing costs.
Bankrate insight
Some high-risk business loans use factor rates instead of interest rates to calculate the cost of a loan. Factor rates typically range from 1.1 to 1.5 and are fixed costs that don’t change over the life of the loan. Make sure to convert factor rates to interest rates to compare with other loans and to make sure you choose the most affordable loan.
Collateral requirements
You may find that lenders aren’t willing to lend to you unless you put up collateral. The advantage of a secured loan is that the rates are typically lower than an unsecured business loan.
A secured business loan may seem appealing, especially if the terms are competitive. The downside is that you could lose your collateral if you fall behind on the loan payments. You may also be required to sign a personal guarantee, which means that the lender can come after your personal savings and assets if you default on the business loan.
If you’re confident making loan payments won’t be an issue, go with a secured loan. Otherwise, consider unsecured loan options, even if it means slightly higher borrowing costs, to protect your business assets.
Bankrate insight
Collateral is typically an asset that the borrower provides to the lender as assurance for repayment of the loan. It ensures that the lender is not the only party at risk if the borrower defaults on the loan. If the borrower is unable to repay the loan, the lender can claim the collateral as a means of recovering the borrowed funds.
How to get a business loan with bad credit
If you decide to move forward with a bad credit business loan, there are ways to increase your chances of approval. Here’s how to get a bad credit business loan:
1. Update your business plan: A business plan shows lenders that you have a strategy for your business, which includes future revenue and growth. Not every lender requires a business plan, but keeping it updated is beneficial.
2. Choose the right type of loan: Choosing the best business loan for bad credit is essential to meeting your business’s needs. Think about why you need the loan, if you have collateral to secure it, the ideal repayment period and what options have manageable interest rates.
3. Shop for the right lender: Once you know what type of loan you’d like, choosing the right lender is the next step. You’ll want to explore any lender that offers the type of loan you’re looking for and review its terms and conditions to ensure it’s the best fit.
4. Strengthen your loan application: Ensuring your loan application is as strong as possible will help increase your chances of approval. You can consider finding a co-signer, improving your credit score, offering a down payment or boosting your annual revenue before applying for a loan.
Bankrate insight:
While deciding which type of loan is best for your business, consider using a business loan calculator. The calculator can show you estimated payments based on interest rates, loan terms and loan amounts. That way, you’ll know you can afford the financing you ultimately agree to.
Alternatives to bad credit business loans
If a bad credit business loan isn’t the right fit for you, consider these alternatives:
- Check with several online lenders: Their eligibility guidelines tend to be more lenient. You could get approved for a loan with a lower credit score even if you’re a startup.
- Borrow from a friend or relative: You can take out an interest-free or low-interest loan from a friend or relative. Be sure to only borrow what you can comfortably afford to pay back and get the loan agreement in writing.
- Use a personal loan: A personal loan may be an option if you’re planning to open a business soon. Some lenders restrict the ways funds can be used, so confirm business expenses are allowed before moving forward.
- Use a crowdfunding platform: Consider raising funds for your business through a crowdfunding platform like Indiegogo or Kickstarter. You’ll generally have to provide equity in your business or something of value in exchange for donations. Still, you won’t have to pay the money back to donors.
- Apply for grants: Although they can be competitive, small business grants don’t require repayment and don’t take credit into account. Typically, they just require submitting an application to ensure you meet the eligibility requirements.
- Get a business credit card: While business credit cards will take your credit into account, there are secured and unsecured options for those with lower credit scores. These can help you build your business credit and may come with introductory offers, such as cash back or rewards.
The bottom line
Ideally, you want a small business loan that offers competitive terms and meets your funding needs. If you have bad credit, your options may be limited, but that doesn’t mean you’re entirely out of luck.
A bad credit business loan could be a solution, but it’s worth evaluating the benefits and drawbacks to decide if it’s a good fit.
Familiarize yourself with the small business lending process and shop around with multiple lenders to find the best deal on financing. Most importantly, run the numbers to determine if you should move forward with applying or explore an alternative funding source.
Frequently asked questions
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Typical business loans have minimum credit scores that fall into the good or excellent category, putting up a roadblock for business owners with lower credit scores. Bad credit business loans have more lenient standards. They are designed for business owners who are categorized as high risk due to low FICO and/or business credit scores. However, because the lender is taking on more risk, they are apt to require business owners with bad credit to put up collateral and pay higher interest rates.
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Repayment terms for bad credit business loans vary depending on the loan type. For a short- or long-term loan, you’ll repay the lender in predetermined amounts according to the loan agreement. For merchant cash advances, you’ll have fixed payments drawn from a business bank account or a percentage of sales revenue. Invoice factoring or financing will be repaid based on the agreement from the factoring company.Before agreeing to a bad credit business loan, review the agreement and repayment terms to ensure you can meet the conditions. Bad credit business loans often have higher interest rates and shorter repayment periods.
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Lenders will often cap the maximum loan amount for lower credit scores as there is significantly more risk associated with lending to bad credit borrowers. The amount you’ll qualify for will depend on the lender and their eligibility requirements. If you’d like to qualify for higher loan amounts, search for lenders willing to lend to bad credit borrowers. You’ll also want to continue to work on your credit score, make timely payments and provide collateral or a down payment as needed.
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