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How to Get a Small Business Loan with Bad Credit
September 16, 2021
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How to Get a Small Business Loan with Bad Credit

As you probably know, maintaining an above average credit score is immensely important while running a small business. This can be especially pivotal when you’re in need of additional working capital and want to apply for a small business loan from a traditional lender. Unfortunately, if your credit score is low, it can make it very challenging to get approved for financing.

In this blog post, we’ll offer tips on how to get a business loan with bad credit while also building your business credit and improving your chances of getting approved. Let’s get started, so that you can determine if procuring business funding with bad credit is possible for your company.

7 Ways to Get a Bad Credit Small Business Loan:

1. Research Business Loan Lender’s Credit Score Requirements

In the preliminary stages, conduct research and determine which lenders provide loans for small business owners with bad credit. This will be especially important if your credit score is under 500. Some online lenders are relatively lenient on this, but if your score is less-than 500, it may make business lenders less likely to work with you.

In addition to having a low credit score, some lenders may be apprehensive to work with startup businesses. Therefore, if you have limited credit history, it may be difficult to qualify for financing right away. Instead, you might need to wait until your business has been operational for a certain length of time. By doing this, you can grow your credit history and prove your business’s legitimacy.

Don’t waste your time applying with a lender if you don’t meet their minimum credit score requirements. Instead, focus on ways to build business creditand submit a loan application once your score has improved.

If you’re in a crunch and need additional working capital as soon as possible, try and find a small business lender with a lower credit score minimum.

2. Create a Clear Business Plan

When applying for small business loans with a low credit score, it is helpful to have an organized business plan in place that you can share with your lender. This will likely be helpful in convincing them that you can handle the repayment terms. Your business plan should include information such as:

  • Your Monthly Sales Earnings: Your business loan lender will want to see evidence of your business’s current monthly sales earnings. Hopefully you’ll be able to show improvement in your business’s finances over time.

Even if your credit score isn’t stellar, a lender may be more apt to work with you if they can see that your finances are on an upward growth trajectory. However, if your sales are low or unpredictable, they may not feel comfortable providing you with a business loan.

  • Use of Funds: Another section that you should include in your business plan is information on how you plan to use the loan. For instance, perhaps you need a term loan to purchase a new piece of equipment. Outline this in your business plan and explain how using additional financing for this cost will benefit your business’s long-term finances.

In the equipment example, you could explain how once you have updated equipment, you’ll be able to service more customers (and in turn earn more sales). This could convince a working capital lender to work with you, even if you don’t have an excellent credit score.

  • How The Loan Will Benefit Your Business: If you can prove that having access to business financing will benefit your business’s sales, you could be more likely to be approved. Once you have access to more capital, you’ll have an easier time repaying your loan, which is a primary concern for lenders.

3. Be Prepared to Receive a Higher Interest Rate

When applying for business financing from a lender, you’ll need to consider the rate they’re providing you with. If your business has a low credit score, it may result in you receiving a higher rate than a business with an above average credit score. This is because the lender will likely assess you as a higher risk customer that might not be capable of repaying their loan on time.

Due to this, you should consider whether you’ll be able to responsibly pay back the loan amount. If you don’t think you’ll be able to afford loan payments while also keeping your business operational, it might be better if you wait on taking out a loan.

Remember, your business credit score won’t improve if you miss loan payments. So, if you know that the terms and rates will be difficult to manage, it might not be the right time for you to receive a loan.

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4. Take Steps to Improve Your Credit Score

If you’re serious about getting a business loan despite your bad credit score, the answer is simple: improve your credit score prior to applying.

First, you’ll need to examine your business credit report so that you can see your score and determine if there are any discrepancies. If there are, you should report these issues to all credit bureaus so that your score can be adjusted.

It’s important to realize that raising your credit score isn’t something you can achieve overnight. Getting a better score will require you to form healthy financial habits, and then prove your financial responsibility to credit bureaus over time. This can be frustrating if you need access to a business loan as soon as possible, but it may be your best bet.

If you’re not in a rush to receive financing, you should focus on raising your score before applying for a business loan. Make sure to keep reading, because #7 suggests a simple way to help build your business’s credit.

5. Pursue a Merchant Cash Advance

If you’re interested in business financing options but have a low personal credit score, you may be better off applying for a merchant cash advance.

A merchant cash advance is a type of business financing, but it isn’t classified as a small business loan. When you take out a cash advance, you’ll receive lump sum financing, in exchange for the provider receiving a percentage of your personal credit card sales. So, even if your credit score is below average, you should still be able to qualify with proof of consistent business credit card sales.

During the merchant cash advance application process, the financing provider will be looking for a large number of deposits in small amounts. Therefore, your poor credit score could be overlooked if you meet this requirement.

Another notable benefit of cash advances is that your remittance is based on your credit card payments at that time. So, if you have a slow month, your repayment amount will be smaller than it would be during a busier time. Many business owners like this because they’re able to fulfill their obligations without set terms.

6. Ask Family or Friends for Money

If you’re in a bind and need immediate financing to keep your business up-and-running, consider asking a friend or family for some cash.

We don’t recommend taking a loan from a loved one in most cases, but if you know someone who’s willing to give you money to get by until you can apply for financing, you can improve your business credit in the meantime. Then, once your credit score increases, you can apply for a business loan or line of credit from an alternative lender!

7. Pay Your Bills on Time

One of the easiest ways to improve your credit score is to pay your bills on or before their due date. Paying bills late can be a contributing factor to why you have a low credit score, so make this a priority moving forward. Below, you’ll find a few ways that you can ensure that you pay your bills on-time.

  • Set a monthly calendar reminder: If you frequently miss bill deadlines, we suggest setting up calendar notifications that will remind you as the due date approaches. That way, you’ll have fair warning that the due date is upcoming.
  • Refine your budget: If you’re paying bills after their deadlines because you’re short on cash flow, you should improve your business’s budget going forward so that you can afford to pay for monthly expenses. Setting a budget can be daunting, but it’ll help you avoid overspending in the future.
  • Utilize apps: There are many financial apps that help business owners pay and manage their bills. If you’re interested in this type of technology, check out apps such as MintTimelyBills, and Bills Monitor.

By trying these tips, it’ll be easy for you to pay your bills by their due dates, and in turn earn a good credit score.
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Business Loans for Poor Credit: Qualifying is Possible

Hopefully this post has provided you with helpful ideas on how to qualify for a business loan with bad personal credit or business credit! Don’t get discouraged when going through this process, as there are alternative lenders out there who will provide loan options for small business owners with bad credit history.

If you’ve received a bad credit business loan or have successfully raised your score in order to to get approved for financing, share your top tips with us in the comment section below!

Editor’s Note: This post was updated for accuracy and comprehensiveness in September 2021.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].