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How to Get a Small Business Loan with Bad Credit
April 25, 2022
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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. Having strong credit can be especially pivotal when you require 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 about working with startup businesses. Therefore, it may be challenging to qualify for financing right away if you have a limited credit history. Instead, you might need to wait until your business has been operational for a specific length of time. You can grow your credit history and prove your business’s legitimacy by doing this.

Don’t waste your time applying to a lender if you don’t meet their minimum credit score requirements. Instead, focus on ways to build business credit and 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 that you can share with your lender. Sharing a thorough business plan will likely help convince 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 can 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 you’ll be able to service more customers (and, in turn, earn more sales). Providing this information 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, a primary concern for lenders.

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3. Be Prepared to Receive a Higher Interest Rate

When applying for bad credit business financing from a lender, you’ll need to consider their offering rate. 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 pay back the loan amount responsibly. 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 challenging to manage, it might not be the right time for you to receive a loan.

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 before applying.

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

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. 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 the same as a small business loan. When you take out a cash advance, you’ll receive lump-sum funding in exchange for the provider receiving a percentage of your 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.

The financing provider will be looking for many deposits in small amounts during the application process. Therefore, your poor credit score could be overlooked by lenders if you meet this requirement.

Another notable benefit of cash advances is that your remittance is based on your credit card payments. So, if you have a slow month, your repayment amount will be smaller than during a busier time. Many business owners like this because they can 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 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 business line of credit from an alternative lender!

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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 contribute to why you have a low credit score, so make this a priority moving forward. Below, you’ll find a few ways to 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 a 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 to pay for monthly expenses. Setting a budget can be daunting, but it’ll help you avoid overspending in the future.
  • Utilize apps: Many financial apps 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.

It’ll be easy for you to pay your bills by their due dates and earn a good credit score by trying these tips.

Small Business Loans for Poor Credit: Qualifying is Possible

Hopefully, this post has provided you with helpful ideas on qualifying for a business loan with bad personal credit or business credit! Don’t get discouraged when going through this process, as alternative lenders 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 to get approved for financing, share your top tips in the comment section below!

Editor’s Note: This post was updated for accuracy and comprehensiveness in April 2022.

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].