5 Business Loan Options When You Have Bad Credit

Man completing a business deal

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Big banks are reluctant to lend money to people with bad credit, that goes for businesses too. So, if you’re in need of funding to expand your business, you’ll have to look for options outside of traditional lending. 

While the exact cut-off varies by lender, poor credit is generally any credit score below 580. Bad credit stems from late payments, debt collections and possibly even public records like repossession or foreclosure. The more negative information you have on your credit report, the lower your credit score will be. Your business can also suffer bad credit when it fails to keep up with credit obligations.

There are business loan options for bad credit, but be prepared to pay more. Your interest rate is tied to your credit score, so even if you’re able to get approved for a business loan with bad credit, you’ll likely have to pay a higher interest rate. That increases your cost of borrowing.

Have additional financial documents ready to present. Being able to demonstrate that you can repay your loan can help you overcome a bad credit score. If you can show a consistent cash flow or collateral to offer as security, you may have an easier time getting your loan application approved. Some business loan options for bad credit may require you to have been in business for at least a year and have a minimum amount of annual revenue.

Shop for a Micro-loan

Micro-loans are small, short-term loans for small businesses or those with low capital. Loan amounts are typically less than $50,000 so they're easier to get approval for. The U.S. Small Business Administration offers micro-loans that can be used for working capital or inventory purchase. The SBA's micro-loans can’t be used to purchase real estate or refinance existing debt. Many credit unions and non-profit organizations, such as Kiva.org, also offer micro-loans and may also have restrictions on how the loans can be used. Micro-loans, if you qualify, are one of the least expensive options.

Peer-to-Peer Lending

Peer-to-peer lending is a type of lending where multiple investors use an online marketplace to contribute to a single loan. Investors review your application and your profile, and decide whether to contribute to your loan. While your loan may be funded by multiple investors, you’ll have just a single loan and a single monthly payment.

The application process is faster than with a traditional loan and you may be able to access your capital much faster than if you went through the traditional lending process. You may have to personally guarantee the loan, which puts your personal finances at risk if the business is unable to repay the loan. You may also have to pay higher interest rates on the loan, but this is to be expected with any of the business loan options for bad credit. Funding Circle, Prosper and Peerform are a few peer-to-peer business lending options to consider.

Merchant Cash Advance

If you need access to cash in a short amount of time, a merchant cash advance may be a financing option. With a merchant cash advance, the lender loans an amount of cash based on your anticipated sales. The merchant cash advance can be repaid in one of two ways. You can opt to have the loan repaid from your future credit and debit card sales. Or, you can repay the loan by allowing periodic transfers from your bank account.

Pay close attention to the interest rates on the merchant cash advance and stay away from advances with higher interest rates, especially those with APRs in the triple digits. There’s no benefit to paying off your cash advance early, except that it can improve your cash flow. Check with your merchant services provider to find out whether merchant cash advances are available. 

Invoice Financing

Invoice financing allows you to get cash from your unpaid invoices. The lender actually purchases your unpaid invoices, advancing you a percentage of the amount owed and holding on to a portion of the total amount until the invoice is paid. Lenders will look at your customer payment history to determine the likelihood of them paying on time to approve financing and to set the rates. 

Interest rates can be high depending on your personal credit and customer payment timing. Weekly fees accrue on the loan until it’s repaid. You’ll have to consider the interest and the fees on the advance to decide whether it’s a viable option for financing your business. Lendio and Fundbox are two companies that offer invoice financing.

Ask Friends and Family

Depending on the amount you need to borrow, you may be able to tap into your friends and family members to get the cash you need for your business. A drawback is that you may have multiple loans to repay. You’ll also have to consider the impact on your relationship if your business fails and you’re unable to repay your loan. You can protect both people by getting the loan agreement in writing. Your family member may talk to a tax professional about the implications of investing in your business rather than giving you a loan. This option may provide a tax write-off in the event of business failure.

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  1. myFICO. "What Is a FICO® Score?"

  2. U.S. Small Business Administration. "Microloans."

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