Regardless, having bad credit is a serious threat to businesses and may prevent you from securing a business loan.
As you likely know, financial liquidity is vital for maintaining your business’s operations. That’s why businesses pursue additional financing. Unfortunately, if your business’s credit score is low, it can be difficult to secure the financing you require. And if you recently started a business, it can be even more challenging to qualify for startup loans with bad credit.
Fortunately, there are loan options for businesses with low credit scores. In this post, we’ll examine some of the steps that you can take to qualify for a term loan if you've been declined due to your credit score previously.
How to Apply for a Small Business Loan with a Low Credit Score:
1. Consider Alternative Business Funding Options
Many business owners don’t realize that loans aren’t their only financing option.
For example, a
merchant cash advance can be a viable option if you accept frequent credit card payments. With a cash advance, you will sell a portion of your future credit card earnings in exchange for immediate funds. Typically, your credit history isn’t as important in the application process, making cash advances a
good fit for businesses with poor credit.
Another notable option is business credit lines. To learn more about applying for a line of credit with bad credit, check out our
business credit line guide.
2. Apply for SBA Loans
If you’ve exhausted traditional financing, you might benefit from
Small Business Administration (SBA) loans. With this financing, the SBA will guarantee a certain portion of the loan, thus making it a lower risk for lenders. Although the businesses that the SBA works with must have exhausted traditional options (like bank loans), the SBA still requires businesses to have credit scores of around 650 or higher.
Regardless,
SBA loans are a great option, and businesses with low credit scores should determine if they qualify for these programs.
3. Ask Family and Friends for Help
If you haven’t been approved for a loan due to a low business or personal credit score, why not ask family or friends for help? In fact, personal networks are one of the most common sources of financing for new businesses.
Even though this might seem like a simple, safe option, we still suggest putting everything in writing. Having a signed and notarized contract will protect both parties.
In addition, it’s important to note that
financial relationships can cause tension with family and friends. Although having business financing is important, you should ensure that your relationships can withstand this added dynamic before asking for a loan amount.
4. Create a Crowdfunding Campaign
Over the past few years, crowdfunding has emerged as a popular financing source. To
start a crowdfunding campaign, you’ll need to set up a profile, explain your business ambitions, and share the campaign so that you can reach potential investors. Often, you will offer a product or service in exchange for donations.
For instance, let’s say that you’re developing a retail product. In your crowdfunding campaign, you’ll explain that anyone that donates at least $10 will receive a free sample of the product once it’s completed. It’s a win-win!
Still, we don’t suggest relying on crowdfunding campaigns, as many crowdfunding websites are becoming crowded with eager entrepreneurs. To stand out, you must create a compelling pitch and offer intriguing products or services in exchange. The more innovative you are, the greater your chances of securing funding will be.
5. Apply for a Business Credit Card
There are a wide variety of small business credit cards available, including
options available to business owners with bad credit. However, a low credit score usually means that you’ll receive higher interest rates and lower credit limits.
Secured credit cards are a particularly good option for businesses with poor credit. Your credit card is secured with a deposit that will cover your minimum monthly payment. This reduces the risk for alternative lenders, allowing them to extend credit to businesses with subpar credit.
6. Improve Your Credit, Then Reapply
If you’ve pursued the options above but have still been unable to secure financing, you should try to improve your credit score. By boosting your credit score, you could increase your chances of approval if you want to re-apply for a business loan.
So, how do you improve your credit score? First, ensure that there are no mistakes on your credit report. Someone may have stolen your identity, for example, using your name to establish a bank account, or credit lines that were never repaid.
Next, strive to pay off your debt, and pay future bills on-time. Although this can be tough, it will help you receive a better score. To help you create good habits, we suggest turning on auto-pay for electronic bills or signing up for a financial management app that reminds you of upcoming due dates.
From there, you should use credit frequently, always repaying it on time. This will benefit your “track record.” The more payments you make on time, the better your credit will be!
Conclusion: You Have Financing Options (Even If You Have Poor Credit)
Unfortunately, many business owners struggle to secure loans because of low credit scores. It’s important to address the underlying issues and to improve your credit score. Still, if you need financing immediately, there are programs available to those with low credit scores. We suggest considering all your options, so that you can receive the bad credit
business loan you need to succeed!
Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2019.