Business Loans for Bad Credit Scores

Bad Credit Isn’t the End with These Financing Options 

There are nearly 30 million small businesses in the US today, which translates to 99.9 percent of businesses. By starting a business, you will contribute to your local economy and create jobs. If you have a business idea or a talent that you want to turn into a business, you may need a loan to get started. Unfortunately, if you have bad credit, you may have a hard time getting a loan to fund your business. Lenders will pull your credit score, and if it’s low, they may reject your loan application.

While having good credit can make it easier for you to receive funding for your business, the key to securing funding often lies in the vision and value of your business idea. Several successful business owners started with bad credit but still received funding. In fact, getting a business loan with bad credit will allow you to repair your credit score.

Where to Get a Business Loan with Bad Credit

FICO considers scores between 300 and 629 as bad credit. If you have bad credit, traditional lenders like banks may charge high-interest rates or reject your business loan application altogether. Lenders consider borrowers with a low credit score as a high risk. Still, there are other financing options that you can consider.

Your Friends and Family

One of the best places to get your business loan is from your inner circle of friends and family members. A recent report by the Global Entrepreneurship Monitor revealed that four out of every five businesses get their finances from their personal savings, and assistance from friends and family. Your inner circle of friends and family won’t use complex credit-based algorithms to determine whether you qualify for a loan. Instead, they will make their decision based on how well they know you and the viability of your business idea. Therefore, if they consider you as a trustworthy and responsible person, they can lend you money to start your business. However, it is essential that you put the terms in writing to ensure that both parties are on the same page and to make the loan legally binding.


Microloans are an excellent option for funding your business. The SBA created this program, and it provides loans ranging between $500 and $50,000. These short term loans have low-interest rates, and you can use the funds for machinery, working capital, inventory, supplies, furniture, or equipment but not to pay for existing debts.

Apart from funding your startup, these programs also provide additional support — for example, business training, financial literacy, and free marketing support, among others. Depending on the company you choose, you may also get assistance in building your business credit. You can find lenders near you by contacting the SBA District Office in your area or check for a list of available lenders.

Revenue-Based Loans

For you to qualify for this type of financing, you will have to pay the financier with revenue from your business. This means paying an agreed percentage of profits from your business. Therefore, you won’t pay a specific monthly amount.

Alternative Online Lenders

When starting your business, alternative web-based lenders are a great choice if you’re unable to get finances from traditional lenders. These lenders have an easy application process and fast funding. Most of these loans are unsecured and often have a high-interest rate.

Accounts-Receivable Financing

Also referred to as invoice financing, accounts-receivable is an asset-based type of funding that allows you to access funds that are secured by outstanding invoices. When you choose this type of funding, the company you work with will advance you with up to 100 percent of the value of each unpaid invoice. However, the company will charge you a fee based on the value of each week; it takes your clients to pay their invoices in full.

Although account-receivable isn’t like other loans, it has a similar structure. This type of business loan works just like a small business loan, and the unpaid invoices are the collateral. The only difference is that if your clients pay the invoice as expected, you won’t have to make any payments to your lender.

Asset-Based Loans

If you’re starting a business and you don’t have a good credit score or a business history, you can easily secure a business loan by using your assets as collateral. You can use property titles or expensive items as collateral to obtain a loan. Because these loans are secured, you will most likely get your loan approved, and you can enjoy lower interest rates. However, you risk losing your assets if you don’t earn enough to repay the business loan.

Merchant Cash Advance (MCA)

When looking for a small business loan with a low personal credit score, you may consider applying for a merchant cash advance (MCA). This is more of a business financing than a loan. When you receive the cash advance, you will get a lump sum financing in exchange for a specific percentage of the sales you make. Therefore, despite having a below-average credit score, if you make consistent sales, then you can qualify for this type of financing.

Tips to Help You Qualify for a Loan with Bad Credit

Although nobody wants to be judged, when it comes to loans, you will be judged. Creditors often look deep into your credit history to determine whether or not to lend to you. Your credit score is used to determine how risky you are. If you have a bad credit score, most lenders won’t lend to you. But you shouldn’t panic. Even with a low credit score, you can still get a loan.

Before you can apply for your loan, you need to check your credit score. This three-digit FICO score will be used to determine whether your loan will be approved. In case you don’t know your FICO score, you can ask your bank to provide you with a free credit report, or you can request it directly from FICO though you may have to pay a certain fee.

Although you may have to pay more in terms of interest for your loan, your credit score isn’t written in stone. If you currently have a low credit score, you can build it and qualify for low-interest rate loans. You can opt for a secured loan to finance your business. When you offer an asset as collateral, lenders will be more likely to approve your loan. But avoid short-term title loans. They tend to have high-interest rates, and they aren’t worth the risk.

You can also get a co-signer with a good credit score to help get your loan approved. The interest rate of your new loan will be calculated based on the credit score of the co-signer. Therefore, ensure that you get a co-signer who has a good credit score and one that trusts you to repay your loan. Your co-signer will also be equally responsible for the loan, which means that if you fail to repay your loan, they will also suffer. Getting a loan will give you the opportunity to rebuild your credit score. Therefore, make your payments on time and in full.

Here are a few tips on how to improve your credit score:

Minimize credit percentage

Experts recommend that you should keep your credit card utilization below 30 percent. By lowering your credit utilization rate, you will prove to creditors that you can use credit responsibly without having to rely on it entirely. Therefore, a low credit percentage is correlated with a higher credit score.

Dispute any errors or negative information

We say to err is to human, but if that error affects your creditworthiness negatively, you’re not alone. According to the (CFPB) Consumer Financial Protection Bureau, the number one complaint they receive involves incorrect information posted on their consumer credit reports. CFPB revealed that credit report errors were on top of the list. In another study by the FTC (Federal Trade Commission), it was discovered that one mistake in your credit report could make you appear as a riskier client to lenders.

Negative information on your credit report is a reminder of your past financial mistakes. Although sometimes a business or credit bureau may be blamed for errors on your credit report, it’s your responsibility to have any unfavorable credit information removed.

Avoid opening a new line of credit or loan

Opening a new credit account or taking another loan may prolong the age of your credit accounts. The age of your credit account accounts for approximately 15 percent of your credit scores. There’s nothing much you can do if credit age is hurting your overall credit score. However, avoid closing old accounts. The age of your credit is determined by looking at the age of the oldest account and the average of all the available accounts. Therefore, if you have a new line of credit or you have taken a new loan, it will result in a lower average.

Maintain a variety of credit on your credit report

Consumers with the best credit scores often have a mix of various types of accounts. Of course, you should maintain your accounts responsibly. The available credit scoring models will observe whether you’re able to handle different loans to determine your creditworthiness.

Make payments on time

According to Experian, your payment history is an essential factor for both VantageScore and FICO, the two most common scoring systems. Your credit score will reflect your ability to pay your creditors. Paying your debt on time will prove to your creditors that you can handle future debt responsibly. Avoid anything that will indicate you’re a non-performer as it will harm your credit score.

Be careful

Did you know that when a person takes a look at your credit report, an inquiry is noted? Having several inquiries on your credit card report will indicate that you’re shopping for several loans or that lenders have rejected your loan application. Therefore, you may appear like poor credit risk, and this can negatively affect your credit score. Always be careful on who looks into your credit report. When looking for a loan, shop for one within a short time because the inquiries will be lumped together and calculated as a single inquiry.

Expert Q & A

Will my credit score be affected if I apply for new financing?

When you apply for a credit card or a new loan, financiers will evaluate your credit card information to determine whether you qualify for a loan, and under what terms. For financiers to access your credit report, they have to submit a hard inquiry. The inquiry reflects on your credit report, and your credit score will decrease because it indicates that you’re applying for a new loan. However, some lenders submit a soft inquiry which won’t affect your credit score.

How can I minimize my credit damage when financing my company?

When applying for a loan to fund your business, your credit score can make a big difference in the interest you pay. Consider holding off any other credit application in the coming months to protect your credit score from hard inquiries. You can also take advantage of soft inquiries, which enable you to gather your credit information without negatively affecting your credit score.

Which are the right steps when seeking for a loan with bad credit?

  1. If you’re thinking about getting a loan with bad credit, start by collecting information lenders may require — for instance, your credit score and credit report.
  2. Prove to lenders that you can repay the loan by having a co-signer with a good credit score or offering proof of income.
  3. Before you go shopping for a loan with a low credit score, talk to your bank or credit union as they understand your financial profile. It’s important to note that credit unions may be more willing to offer you a loan even with bad credit.
  4. Remember that applying for a loan will trigger a hard inquiry which can result in a deduction of five to 10 points on your credit score. Therefore, first, determine the best loans for you and avoid applying for just any loan you come across.
  5. Beware of several online scams that promise to give you a loan even with a bad or damaged credit score. While such offers may sound like the best option, they might be advance fee loan scams. The Federal Trade Commission advises that you should be careful whenever you find a lender who isn’t interested in your credit history.
  6. When your loan is approved, ensure that you make your payments on time to increase your credit score. Once you have a good credit score, you can refinance your loan.


What is the best advice for business owners who want to improve their credit score but have to take a loan?

As a small business owner, at some point, you will have to borrow money to help run your business. To get a loan, you will need a credit score. If you have a bad credit score, you will most likely get a loan with a high-interest rate. Ensure that you pay your bills on time, strive to use credit, correct any mistakes in your credit report, and avoid closing accounts to improve your credit rating. When you finally have a good credit score, you can refinance your loan and qualify for low interest rate loans.

Which types of financing should small business owners with bad credit watch out for? Which are some of the traps they might get into?

With bad credit, lenders will charge high-interest rates on small business loans. But the truth is you can get around the high-interest rates that title and payday lenders charge and qualify for low interest loans. To get a low interest loan, ensure that you find the right lender. However, don’t fall for online scammers. A right lender will be more willing to give you the best rate possible. Good lenders know that your credit score isn’t the only way to judge whether you can pay back a loan or not. To find a suitable lender, always do some digging by researching the company and the type of loan you’re applying for.

Avoid lenders that perform hard credit checks because they can hurt your credit score. Instead, seek lenders that perform soft credit checks because they won’t appear on your credit score. Such lenders will be more willing to give reasonable payment terms.

When looking for a good lender, start by searching online for reviews. If a lender has several bad reviews from unhappy customers who feel they were treated badly or feel like they were scammed, run away and never look back. Good online reviews are a good sign. You can do a simple Google search or look at sites like Yelp or BBB (Better Business Bureau).

Apart from identifying loans and lenders that you should avoid, you must look at the clauses added to an agreement, especially about consequences of a missed payment. It’s always important to understand the contents of the contract before you sign.

What else should business owners consider?

Apart from traditional lenders, you can get a business loan from alternative lenders. These types of lenders offer loans that banks often turn away. The main types of alternative lending include direct and peer-to-peer lenders.

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