Financing is a crucial part of owning a business, whether you’re just starting up or have been running one for several years. If your credit score is excellent, as in 600 or above, finding the right finance deal isn’t a problem. With a credit score dipping below this magical figure, you’re going to run into a few issues. All is not lost, however. There is a growing lending industry for business owners with bad credit. Here’s where bad credit business loans come into play.
Admittedly, the interest rates you pay are higher than average. There might also be additional charges to pay. All that being said, bad credit business loans are available in a variety of shapes, sizes, and structures.
You might need a business loan to inject some capital into your endeavor. But here are several other reasons why you might want to take out a business loan.
Why You Might Need to Take Out a Business Loan
Business owners take out small business loans for a range of reasons and through a variety of methods, such as borrowing cash from a bank, credit union, or online lender. These secured loans can be made using inventory as collateral or by offering accounts receivable as a backup. To be a business borrower is expensive, and there are certain risks. There are, however, certain occasions when there’s no other option but to take out a loan. Here are a few of the reasons why you might want to become a borrower.
To Purchase Equipment
If you need to purchase equipment for your business, there are two options. You can either lease or buy it. Purchasing offers several advantages. First, you can write-off $25,000 from your taxes that you can use in the first year. Second, in subsequent years, you can take advantage of its tax depreciation. Third, if you buy the equipment, you get to use it until it’s no longer functional, and then you can sell it for scrap value.
Loans designed for buying equipment are generally intermediate loans, with 10-15 year pay-off terms. When deciding whether to lease or purchase, it’s useful first to do a cost-benefit analysis.
To Purchase Real Estate and Expand Operations
If you want to expand your operations, you’re likely going to need to purchase more real estate, and this is a situation for which banks like to lend money. If you want to expand your business, it generally means you’re doing well, turning a profit, and improving your cash flow.
Financial providers usually offer mortgages for business owners who want to buy more real estate. Loan terms are either 25 or 30 years, and the bank uses real estate as collateral.
To Increase Working Capital
The term working capital refers to the cash you use on a day-to-day basis. If you’re a startup business, you might need some working capital to cover your daily expenses. The type of loan applied for this purpose tends to be a short-term rather than a long-term investment.
A working capital loan has a higher interest rate because it’s considered to be a riskier type of loan.
To Purchase Inventory
One final reason why you might want a business loan is to purchase more inventory, and that is the case usually if you’re starting up. When businesses are seasonal, you might also need to buy stock to cover your busy period.
How to Obtain the Financing You Need
If you’ve got plenty of cash in the bank, looking for capital isn’t going to be an issue. However, when it’s all tied up or needed for other things, the only option is to approach a lender.
Business owners who have an excellent credit score can expect to receive the best interest rates on their small-business loans. If your score is not looking quite so good, your loan will likely have a higher APR (annual percentage rate).
Before we go any further, let’s explain what we mean by a bad credit score.
What is a Bad Credit Score?
Three digits make up your credit score. These numbers range from 300 to 850 and are an indication of your financial health. Financial institutions use your credit score to help them determine if lending you money is a risk. It also has an impact on how easy and how expensive it is for you to borrow money.
The FICO scoring system is what creditors use. This score combines financial data held by Equifax, Experian, and TransUnion (the three major credit bureaus). These credit bureaus also use a scoring system of their own. It’s known as VantageScore.
The scores for either of these systems range from 300, which is the lowest, up to 850, the highest. A score that’s between 750 and 850 is considered to be excellent. A good score is one that ranges from 700 to 749. Any score that’s lower than 650 is deemed to be bad.
What Affects Your Credit Score?
Many different things can affect your credit score. However, two factors affect it more than anything else. They are:
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Your bill payment history makes up a sizeable portion of your credit score. For the FICO credit scoring model, bill payment accounts for 35% of the calculation. You can help your score by always paying your bills on time. Missing payments or making them late can affect your credit score considerably. More recent late payments also have a more significant effect than those from long ago.
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This is also known as your credit utilization ratio. It refers to how much of your available revolving credit you’re using. A credit card is one example of revolving credit. Calculating this figure is easy. Divide your revolving credit balances by the total limits on all these accounts. Aim to keep a ratio of 30% or less. A credit utilization ratio of 6% will mean you achieve one of the highest credit scores.
Several other factors can impact your score, but not as much as these two. They include:
- Credit mix – try not to put all your credit eggs in one basket. The right mix of credit is much better for your credit score. Aim for combining installment credit, such as mortgages, auto loans, and student loans, with revolving credit. Making use of different types of credit is an indication that you can manage your money. Don’t, however, be tempted to take out lots of different loans purely to improve your credit score.
- New credit – if you open lots of new credit accounts within a short time, it can be seen as an indication of financial problems.
- Length of credit history – this relates to the average time your credit accounts have been open. Older credit accounts are better for your credit score.
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What a Bad Credit Score Can Mean for You
Having a bad credit score can affect you in several ways. For example:
- Higher interest rates
- Problems getting a mortgage
- Lenders may deny your credit applications
- Difficulty getting a cellphone contract
- Being turned down for an apartment
- Job applications may be turned down
- Problems getting a business loan
The last one on the list is the one we’re concerned with here, so let’s continue discussing how to obtain the financing you need.
Knowing your credit rating helps you decide on the best business financing options for your needs. The next step is to understand the specific requirements needed for loan approval. In addition to your credit score, lenders will be looking at the number of years you’ve been in business and your company’s annual revenue.
Improving Your Chances of Obtaining a Bad Credit Business Loan
You can do your research and approach a selection of lenders whenever you want. The chance of a successful bad credit loan application increases if you prepare, and planning is particularly important if you’ve got a less-than-perfect credit score. It improves your chance of approval and also helps secure the best possible terms for your loan.
It’s fair to say that lenders consider lending money to small businesses a risky thing to do. It’s impossible to predict what’s around the corner, even if borrowers are experienced. With the blink of an eye, a company can fail, and not always because of the actions of the owner.
Being able to provide collateral is one way of increasing your chances of a loan. You have two options.
- Equipment financing – if you’re planning to purchase equipment with the loan, you can use the equipment as collateral. Defaulting on your loan means the lender can recover its losses by seizing the equipment.
- Invoice financing – you might be able to find a lender willing to approve your loan based on the value of your unpaid customer invoices. The invoices serve as collateral on your loan. If you choose this option, you’ll have to pay a fee, and the financing company will advance a percentage of each invoice to the borrower.
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Use a Co-Signer
Another option is to use a co-signer. This person should have a good to excellent credit score. Alternatively, the co-signer having a steady income is also very favorable. Above all, the co-signer takes on partial responsibility for the loan and has to be able to make the loan payments if primary borrowers default.
Different Types of Bad Credit Business Loan Available
In many ways, loans for businesses are similar to personal loans. There are also several different types. Let’s introduce some of them, and we’ll leave it up to you to decide if one suits your needs.
Apply for a short-term loan, and you’ll get a lump sum of money. The short-term loan is the most accessible type of loan to use, but you do need to be able to meet the repayments. Interest rates and the APR tend to be higher than other types of loans for businesses. Short-term usually means between 3 and 18 months. If you need the money in a rush, it’s possible to have access to the funds within a few days. Monthly repayment amounts cover the principal amount together with any interest.
Short-Term Business Line of Credit
A line of credit provides access to a specific amount of money, much the same as a credit card. Interest is charged on the open balance, but be aware that it’s often at a higher rate.
For this type of loan, you have to be able to provide collateral. Failure to repay the loan means the lender is allowed to recover losses by seizing the collateral. Invoice and equipment financing are popular types of collateral loans.
Merchant Cash Advances
This type of loan works in much the same way as a credit card. It is one of the most expensive options, so be sure it’s the right thing for your needs. A merchant cash advance takes the form of a lump-sum loan. This loan is made in exchange for a percentage of any future credit and debit card payments you expect to receive.
Working Capital Loans
This type of loan can be used to fund everyday expenses, for example, wages, inventory, taxes, and other costs. It’s not usual for this type of loan to be used to pay for long-term assets or investing.
Business Credit Cards
Applying for a credit card might be the smart thing to do if you need access to a small amount of spending power. Another benefit of a credit card is that it can help rebuild your credit score. Don’t apply for a credit card unless you’re prepared to repay your balances in full and on time every month. If your credit is poor or you have no credit at all, a secured credit card is the best option. There are also credit cards aimed at people with bad credit.
PayPal Working Capital
If you accept payments via PayPal, it’s possible to apply for business funding through the PayPal working capital scheme. Up to 5% of your annual PayPal sales can be borrowed. The APR ranges from 15% up to a staggering 120%.
Invoice financing is a form of a collateralized loan. A lender allows you to access an advance for outstanding invoices. It’s these invoices that act as collateral. Expect to be offered up to 85% of any unpaid invoice amounts. When the customer pays the invoices, you receive the remaining 15%, minus any lender charges. Fees usually take the form of a flat fee to process the transaction, usually 3%. Expect a weekly fee of around 1% on top, as long as the invoice remains unpaid. It’s not usual for an invoice financing lender to do credit checks, which makes this the perfect solution for those of you with a less-than-perfect credit score.
This is a loan that uses the equipment you’re planning to purchase as collateral for the loan. Because of the collateral, a lender is less likely to worry about your credit score. However, that doesn’t mean it’s necessarily an easy option. This type of loan often comes with long repayment terms, making it difficult to qualify. Credit scores of 600 and above should have no problem. If you do not use the collateral, these kinds of advances are considered unsecured business loans.
Now you’re aware of some of your options, let’s look at some of the factors to consider.
Factors to Consider When Applying for a Bad Credit Business Loan
If you’ve got bad credit and are looking for a business loan, there are several factors you have to consider. Bear the following in mind, and you could increase your chance of approval. You might also be able to negotiate better terms for your loan.
Personal Credit Score and Loan Approval – How One Affects the Other
If yours is one of the many startup businesses, it’s going to have no credit history. In these instances, a lender will look at your score. This is an excellent reason to work on your credit score as much as possible. To improve your credit score, you can do the following:
Check your credit report every year.
You’re allowed to request one free credit report for yourself every year. Request a copy of your report from all three credit agencies. Check it over very carefully. If there are any discrepancies, dispute them immediately. If the credit bureau finds there’s been a mistake and removes the information, your score will improve instantly.
Pay more than once per billing cycle, if possible.
Obviously, this isn’t going to be an option for everyone, but it’s worth considering. Paying down your bills from your checking account every two weeks, rather than monthly, improves your credit utilization ratio. And you already appreciate how important this ratio is.
Automate your payments or set reminders.
If you set up automatic payments, it means you won’t forget to make them. Another option is to put reminders on your planner, calendar, or your cell phone. Pay your bills on time, and your score will soon rise.
Keep in touch with your creditors.
Should you fall behind or miss a payment, contact your creditors as soon as you realize it’s happened. Address problems quickly, and you could ease the impact on your credit score.
Keep unused credit cards open.
Long credit history is essential. Closing unused credit cards will also affect your credit utilization ratio, and not in the right way.
Only apply for new credit if you have to.
Having new credit does increase your credit score, but it can also affect it negatively. If you’ve applied for several new accounts in a short space of time, it can damage your score.
Clear your maxed out cards first.
Doing this lowers your credit utilization ratio.
Mix up your credit.
A combination of credit has a positive effect on your personal credit score. Consider applying for an auto loan, student loan, credit card, or mortgage. Adding more credit to your history helps your score, provided that you make payments on time.
Consider consolidating your debt.
If you enroll in a debt consolidation program, you’ll be working towards eliminating your debt. Improving your debt situation will have a positive effect on your score. There’s also the option of applying for a debt consolidation loan, leaving you with one easy payment to make every month.
How Your Credit Score Impacts Interest Rates
If you’re lucky enough to have a good personal credit score, you’ll be able to secure the best rates for your business bank loan. The APR is likely to be higher if you apply for a bad credit business loan.
As long as the APR and repayments are manageable, don’t let it put you off. There is an advantage in the form of an improvement in your credit score. Every time you make a monthly repayment, you’ll be raising your credit score. With a high credit score, you can access the money you need to keep your business running and growing.
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Should You Apply for a Loan Online?
We’ll be looking at a handful of online lenders a little later, but for now, let’s consider whether an online lender is better than a traditional one.
If you apply for a loan from traditional lenders, such as banks or credit unions, you may find it challenging to meet their eligibility requirements. The application process can also be slower because more documentation is required.
Online lenders, on the other hand, come with several benefits:
- The process is much quicker
- Approval rates are much higher
- Less documentation has to be produced
- Funds are available much quicker
- Terms tend to be more flexible, which means you’ll be able to find a loan that suits your business’ borrowing needs
The Impact of How Long Your Business Has Been Operating
If your business is a well-established one, you’ll have no problems if you approach traditional lenders. A younger, smaller company, however, is going to have more of a problem. The good news is that there are alternative lenders you can approach.
One example is UpStart, an online peer-to-peer lending company that takes more than your credit score into consideration when approving loans. It’s thrown out the traditional FICO-based model and instead uses non-conventional variables to determine risk. National Funding is another example that offers startup financing for those of you who have been in business for less than a year.
What Else Do Lenders Consider?
You can increase your chances of qualifying for a bad credit business loan by better understanding the process. In addition to the points mentioned previously, there are a few more things that a lender considers when faced with a loan application.
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Annual revenue is a crucial part of any business loan application. The more coming in, the better. If your business revenue is high, it shows that you know what you’re doing and that your business is successful. Both of which means there’s less of a risk and lending you money is a worthwhile investment to make.
Knowing your business is profitable is something else a lender wants to know. It’s not essential, but it will improve your chances if you are.
If you already have other loan obligations, you may have a problem securing a second loan. Ideally, a lender would prefer to be the only one to whom you owe money. Being in the second position for payback is not the best place for a lender.
How well you manage your cash flow is an indication of whether you’ll be able to make your repayments. To help lenders understand your cash flow figures, you’ll be required to provide business bank statements going back at least three months.
A lender will be able to find out your past financial history by performing a “hard pull.” As well as noting the three digits of your credit score, they’ll also be looking for any bankruptcies, foreclosures, tax liens, or other red flags.
The Cost of a Bad Credit Business Loan
In addition to the principal amount you have to repay, there are several other costs involved when you take out a business loan. You can expect to pay some, if not all, of the following:
Annual percentage rate (APR) – this is the interest rate you pay on your loan every year.
Down payment – you may or may not be required to make a down payment when you take out your loan. How much varies from lender to lender, but the average amount is 25%. It’s also possible for you to cover the down payment by providing collateral. If you do not ensure payment or collateral, advances of this kind are considered to be unsecured loans.
Factor rate – this charge relates to the interest borrowers have to pay for a merchant cash advance. The rate depends on business stability, operating years, industry type, and average profits every month.
Origination fee – this is a processing fee lenders make when a loan is taken out. It might also be waived or included in the overall loan balance.
Underwriting fees – underwriters check information provided in a business loan application and make recommendations for the loan terms. For this, they charge a fee.
Closing costs – when you finalize a loan, there are charges involved. These might include recording fees, business appraisals, and loan-packaging fees.
Other fees – other fees you might have to pay include check processing fees, late payment penalties, and prepayment fees.
With the costs of a business loan clearly explained, let’s look at some of your business loan options if you’ve got bad credit.
Top 5 Business Lenders for People with Bad Credit
There are hundreds of business lenders to choose from, but to make your search easier, we’ve narrowed it down to five.
This company offers a range of different products. They include term loans, invoice financing, and business lines of credit. To qualify, your business has to have been operating for at least six months. For term loans and lines of credit, the minimum annual revenue is $100,000.
If your credit score is 600 or less, you can apply for invoice factoring, line of credit, or a term loan. Payments are fixed at a weekly rate over 6 or 12 months.
Term loan amounts are available up to $250,000, with interest rates as low as 4.8%. Fixed rates are offered with no origination fees. You can create an application online in minutes, and the funds could be in your bank account within hours.
In addition to the above requirements, to get the application process rolling, you’ll need to provide some necessary details about yourself and your business. You also need to approve a bank connection or provide three months of your most recent bank statements.
A bank or credit union does not provide SBA loans, but they’re a great way to finance a business, which is why we’ve decided to include them in our bad credit business loan reviews. SBA loans are guaranteed by the Small Business Administration, allowing lenders to offer lower interest rates and flexible terms.
Several types of SBA loans are available. They include the 7(a) loans, 504 loans, microloans, and disaster loans. To find out more about the different loans, visit the SBA website.
Kabbage is a lender that offers a business line of credit of up to $250,000. APRs start at 24%, which is higher than many other lenders. You do, however, have the opportunity to repay the loan much earlier, thereby saving money. A credit score of 555 or higher is needed to qualify, which is good news for those with a poor credit score.
Kabbage launched its service in 2011 and, to date, has helped more than 170,000 small business owners access more than $6.5 billion in financing. Loan amounts range from $500 to $250,000 and are repayable over 6, 12 or 18 months. The repayment cycle is monthly.
The costs of a line of credit are:
- Interest rates – 1.5% to 10% monthly, with an average fee of 4% for a six-month loan and 3% for a 12-month loan
- Expected APR – 24% to 99%
- No origination or maintenance fees
- Zero prepayment penalties or termination fees which means you can repay your loan early
- No additional fees
FundBox is a lender that offers many different loan options. They include SBA loans, invoice factoring, lines of credit, microloans, and commercial mortgages. Both short-term and long-term loans are available. To qualify for a loan, you have to have been in business for a minimum of three months and hold an annual revenue of $50,000. There is no minimum credit requirement.
The company has been in business since 2013 and serviced more than 70,000 small business owners.
Loans range from $1,000 to $100,000, and the funds can be available the next business day.
For those of you looking for more flexible terms, LoanBuilder is the answer. They offer loans of up to $500,000 with the option to select 13- 52-week terms. APRs start at 12%. To qualify, you need a credit score of 550 or more and more than $100,000 in annual revenue. Once your application has been accepted, you can expect to receive the funds within one to three business days.
The average interest rates quoted across the web are between 2.9% and 18.72%, which brings APRs into line with other lenders, who range from 12% to 136%.
There are no origination or maintenance fees, no termination or prepayment penalty fees, and no additional fees.
Rather than charging interest over time, LoanBuilder charges fixed fees for its loan.
How to Improve Your Chances of Getting a Better Loan in the Future
It may be that a bad credit loan is your best option at the moment, and you’ve now got a few lenders to choose from. But what about in years to come?
Your credit score may dictate your immediate needs, but there are things you can do to improve your chances of getting a better deal in the future.
Work on Improving Your Credit Score
This is crucial to improving your chances of getting better terms for a loan in the future. Personal credit matters a lot when you approach any lender, as with a low credit score, you’ll be paying a higher interest rate. There are also likely to be more charges. To improve your score, pay your bills on time, and keep all your credit balances below 30% of your credit limit. Try not to open too many lines of credit in a short space of time. Check your credit report at least once a year and report any false information or anything suspicious.
All three of the credit bureaus, Experian, TransUnion, and Equifax, offer free services and advice.
Build Your Business Credit
Your personal credit plays an important role, but so does the credit for your business. If you can work on building your business credit, it’ll give you a much better chance of securing financing. There are several things you can do:
- Open a business checking and savings account
- Obtain a federal tax ID number
- Secure lines of credit for your business
To keep your business credit looking good, follow the same practices as those for your personal credit.
Check Your Business Plan
Smart business people always have a business plan, but it’s important to remember to review it regularly. If you find you need less capital, assessing your business plan helps you find ways to cut costs. Why not, for example, look into using social media for marketing your business, rather than paying advertising costs. It’s also possible to build your own business website. That way you won’t have to hire a designer.
Boost the Creditworthiness of Your Business
You can improve the creditworthiness of your business by bringing new and more experienced partners on board. One of the reasons for doing this is that lenders often take all business partners’ personal income into consideration. Something else you can do is collect letters from vendors and creditors. These can be used to demonstrate your ability to repay your financial obligations and trustworthiness. All essential qualities for a lender to see.
Check Out Other Financing Options
With an improved credit score, you’ll be able to look for business funding in other areas. Second and subsequent loans will have better terms.
If you’re still short at the moment because you were unable to secure the full amount you required, there are options you can explore. An excellent place to start is by asking family and friends. Some private investors might be interested in investing in your business. Crowdfunding companies such as GoFundMe and Kickstarter are also avenues worth exploring.
Onward With Your Business!
Running a business is a rewarding thing to do. However, there are times when a little extra cash is needed. Just because your credit score is lower than you’d prefer, that doesn’t mean you have no options. Bad credit small business loans are a rapidly expanding industry, and more lenders are making services available. All the essential information is right here on this page. It’s time to go out and get what you want.
We’d like to hear about your experiences, and if there’s anything we can add, please let us know.