How to Get a Small Business Loan With Bad Credit
Last Updated October 10, 2024
Starting and running a business is an exciting process. You get to be your own boss, follow your passions, and add purpose to your career. However, this enthusiasm can quickly become frustrating as you start trying to fund your business. As a new business owner or a business with bad credit, it can be difficult to qualify for small business loans, making it challenging to scale your company.
But don’t lose hope! There are business loan and financing options available for those with poor or no credit. Read on to discover how you can get a small business loan with bad credit and which types of loans you can qualify for, so you keep your business heading in the right direction.
What Is Considered a Bad Credit Score?
Before answering this question, it’s important to note that business credit scores and personal credit scores are measured on different scales. While personal credit scores range from 300 to 850, business credit scores typically range from 1 to 100. With both credit scores, the lower the score, the worse the credit.
See our charts below to understand what is considered a good vs. bad credit score for both personal and business credit. Note that the personal credit ratings are based on FICO Scores, and the business credit risk levels are based on Experian’s Intelliscore Plus.
| Personal Credit Score Range | Credit Rating |
|---|---|
| < 580 | Poor |
| 580 – 669 | Fair |
| 670 – 739 | Good |
| 740 – 799 | Very Good |
| 800+ | Exceptional |
| Business Credit Score Range | Risk Level |
|---|---|
| 1 – 10 | High |
| 11 – 25 | Medium – High |
| 26 – 50 | Medium |
| 51 – 75 | Low – Medium |
| 76 – 100 | Low |
Can You Get a Small Business Loan With Bad Credit?
Yes, you can get a small business loan with bad business credit or personal credit, however it depends on the type of loan you apply for and other factors, such as the age of your business, size of your business, and your funding needs. It will also depend on the lender.
There are many banks that do not use hard information, such as credit score history reported by credit bureaus, in the underwriting for a loan. According to the FDIC’s 2024 Small Business Lending Report, 79% of such banks do not require a personal credit score and 70% of such banks deem credit scores “not most important.”
Since small banks are less inclined to care about creditworthiness when evaluating loan applications, it should come as no surprise that the same report revealed that small banks are more likely to grant loans for startups than large banks.
Though if you have poor business credit, know that any lender will likely require you to meet the following requirements to still have a shot at qualifying for a small business loan:
- Good personal credit
- Ability to put up significant collateral
- Exceed their minimum monthly or annual revenue requirements
- Proven, established business
- Well-structured business plan in place
- Working to improve your business credit
Traditional Funding Options Might Not Be Attainable
Small business loans from traditional lenders like large banks and credit unions will likely be difficult to qualify for with bad business credit. Even if you meet each of the conditions above, you may still have a tough time getting a small business loan from a bank with bad credit. There are additional loan options though!
Alternative Financing Options You Can Turn To
Alternative financing options, such as invoice factoring, accounts receivable financing, invoice discounting, SBA loans, and ACH loans, can provide you with the capital you need to get your business moving, even if you don’t have an ideal credit score. Alternative lending is commonly sought out by small business owners who can’t qualify for traditional bank loans due to a lack of creditworthiness.
Related: Does a Business Loan Affect Personal Credit?
Small Business Loans You Can Get with Bad Credit
While there are fewer small business loan options for bad credit available, there are still ones you can qualify for. Check out our list below for an overview of each:
Invoice Discounting
Invoice discounting companies offer loans against a business’ invoices, lending up to 95% of the invoice value. Invoice discounting is similar to invoice factoring (read more on factoring below), except that instead of providing a business owner with a cash advance, a discounting company provides them with a loan that must be repaid once the business owner has collected the invoice payments.
With invoice discounting, the loan qualification is largely determined by the likelihood that a business’ customers will pay their invoices in a timely manner, rather than being determined by the business’ ability to manage its debts, making it easier to qualify for if you have bad credit.
Invoice Factoring
While not technically a loan, invoice factoring is often lumped in with other loan products. Invoice factoring is the process of selling your outstanding invoices to a third-party factoring company which then provides you with a cash advance (typically 80 – 90% of the invoice face value). Once the invoices have been paid, you receive the remaining invoice value, minus a small factoring fee.
Like with invoice discounting, factoring companies heavily consider your customers’ payment histories, rather than your business credit score, to determine approval. However, there are two primary differences between invoice factoring and invoice discounting:
- Invoice discounting provides a business with a loan while invoice factoring provides a business with a cash advance
- With invoice discounting, the business owner handles the invoice collections process, while with factoring, the factoring company handles the collections process
Business Line of Credit
A line of credit is a type of loan a small business can use to access funds as needed up to a predetermined limit. Like a traditional loan, it may be difficult to qualify for a line of credit with bad business credit, but that does not mean it is impossible. Meeting other eligibility requirements may help a lender overlook your poor credit, and it also helps if you can show the lender that you are working to improve your credit score.
At the end of the day, you may only qualify for a smaller credit line than you originally wanted, but it is certainly possible to get a line of credit with bad business credit.
SBA 7(a) Loans
SBA 7(a) loans are designed to provide financial assistance to small businesses; however, it’s important to note that while the SBA backs up to 85% of a 7(a) loan, the lender determines whether a business is eligible to receive the loan in the first place. Some lenders have more lenient approval processes, but you typically need to have at least a 640 credit score to be eligible. If you’ve been in business for many years or your poor credit is due to extenuating circumstances, the lender may be more willing to approve you for an SBA 7(a) loan.
ACH Loans
Automated clearing house (ACH) loans do not typically require credit checks or collateral, making them extremely easy to qualify for. However, they come with their own set of risks and can be very expensive if you are not prepared to pay back the amount loaned in the timeframe that’s expected.
Because this type of loan is typically a short-term financing option, a business owner is often expected to pay it back quickly and at a high interest rate. The ACH lender usually sets up micropayments that automatically withdraw the amount due from your bank account, giving you little flexibility in the payment terms, which can disrupt your cash flow.
Merchant Cash Advances
A merchant cash advance (MCA) is very similar to an ACH loan. The primary difference between the two is that rather than experiencing ongoing withdrawals from your bank account as with an ACH loan, the MCA provider takes a percentage of each debit or credit card transaction a customer makes at your establishment. Similar to ACH loans, MCAs typically have high rates and provide short-term funding, carrying with them the same risks as ACH loans. Before taking out an MCA, you will want to be confident in your future sales to ensure you can repay the advance.
Related: How to Get Out of an MCA
Microloans
Microloans are business loans that provide significantly less funding than a traditional loan but are typically easier to qualify for. Microloans can be up to $50,000 (though the average microloan is $13,000), and they come from nonprofit and community-based organizations.
Microloans are largely geared towards businesses that have little to no credit history to aid them in building their credit profiles. Because of this, these loans tend to be more accessible to business owners that struggle to get financial assistance from traditional lenders.
Equipment Financing Loans
An equipment financing loan is a loan that a business owner can use to pay off a piece of machinery or equipment. Because the equipment itself is often used as collateral against the loan, lenders may be more lenient in looking past bad business credit.
Similar to the SBA 7(a) loans and business lines of credit mentioned above, being a well-established business and having strong annual revenue can also encourage lenders to approve an equipment financing loan when you have poor credit. Additionally, making a larger down payment could also improve your chances of getting approved.
How to Apply for Bad Credit Loans
Once you determine what type of loan you’d like to apply for, it’s time to start researching and gathering paperwork. Here is a step-by-step guide to applying for small business loans:
- With a loan type in mind, you can shop around and compare offers from multiple lenders. Look into banks, credit unions, alternative financing institutions, and government bodies like the Small Business Administration to find the right loan for you.
- Check the lender’s documentation requirements and prepare all relevant paperwork to ensure your application goes smoothly.
- Complete your application, and double-check it before submission.
- Answer any questions the lender may have, and wait for your loan approval.
It can also be helpful to actively work towards improving your business and/or personal credit scores before and during the application process. Lenders may take your effort into consideration when reviewing your application.
Can You Get Startup Business Loans With No Revenue?
You can get startup business loans with no revenue if you know where to look. If you need to get money before your business profits, research options like personal loans and equipment financing loans with no minimum revenue requirements.
In-Summary: Small Business Loans With Bad Credit
Getting a loan is one of the most well-known ways to fund your business. However, getting approved for a small business loan with bad credit can certainly be difficult. Before making a decision on what type of loan or alternative financing to get, be sure to research the product and consider its risks and benefits. Even with poor credit, you can still qualify for a small business loan if you meet other eligibility requirements and are actively working to improve your credit score.
If after reading this article you’ve come to the conclusion that a loan may not be the best financing option for your business, fill out an invoice factoring quote. Our team is happy to discuss how we can help you reach your financial goals.
Small Business Loans with Bad Credit FAQs
What are the best loans for small businesses with bad credit?
There are several loans available for new or small businesses that lack credit to qualify for standard bank loans. One of the best is invoice factoring, which actually isn’t a loan. Rather, it’s a sale of your outstanding accounts receivable to a third-party invoice factoring company in exchange for an immediate advance of up to 90% against the value of each individual invoice.
Can I get working capital loans as a small business with bad credit?
Yes, you can get working capital loans even if you have bad credit. Some examples include asset-based loans, merchant cash advances, and invoice factoring.
What credit score do I need for a business loan?
To qualify for a standard small business loan, you’ll generally need a credit score above 600, with a score above 700 allowing you access to the most desirable rates. However, even with a bad business credit score, you can still qualify for certain alternative lending options tailored for small business owners, such as invoice factoring.
Angela is the Director of Online Marketing at altLINE where she manages content production, marketing and sales operations, and digital PR. Angela joined altLINE in 2022 after several years of working in digital marketing across various industries including financial services and B2B. Angela loves creating content that helps readers better understand their financing options and helps them make informed decisions about factoring. Her work has been featured in publications like Search Engine Journal and Moz.
