How to Get a Business Line of Credit with Bad Credit
If you have a poor credit score, it can hurt your chances of qualifying for a credit line, but it isn’t impossible to get improved. In many cases, if you show the lender that you’re working to improve your credit score, they may be willing to provide you with funding.
In addition, if the rest of your business is in good standing, some lenders may look past your bad credit score. For example, meeting the lender’s time in business, annual revenue, and industry requirements could help you secure financing despite your poor credit score.
In this post, we’ll provide several tips to help small business owners apply for a business line of credit, even if they have bad credit.
4 Tips to Help You Qualify for a Business Line of Credit with a Poor Credit Score
1. Be Honest with Your Business Lender
There’s no quicker way to ruin your chances of qualifying for additional working capital than to be dishonest with your lender.
If you have a bad credit score, you won’t be able to hide it from your business lender during the application process. Before they determine if you qualify for a credit line, they’ll need to run a credit check and will inevitably find out your scores.
Instead, be honest about your credit history, and ask your lender if there’s anything you can do to strengthen your application. Despite your poor credit, they may be willing to provide you with financing, but you may receive higher interest rates and a smaller credit line amount.
While honesty won’t necessarily get you approved, dishonesty will ensure the lender rejects your application.
2. Take Steps to Improve Your Business Credit Score
Because business credit and personal credit scores aren’t linked, you can build a strong business credit score even if you have poor personal credit. However, to do so, you’ll need to take the following steps:
- Incorporate or form a limited liability company (LLC)
- Obtain a federal employer identification number (EIN)
- Open a business bank account
- Register with Dun and Bradstreet to get a D-U-N-S Number
Completing these tasks will establish an identity for your business that credit bureaus will use to create credit reports for your company. Once you complete that step, you’ll need to pay bills on time and monitor your credit reports for any mistakes. In addition, you should try to pay off your business credit card balances.
Remember that it takes time to build your business credit score but doing so will help you get approved for financing even if you have bad personal credit.
3. Explore Alternative Lenders and Financing Options
Don’t give up after a single — or even several — rejections, especially if you haven’t tried applying to different types of lenders.
Relative to larger, established banks such as Bank of America, online lenders tend to have less stringent qualification criteria. The downside is that you may have to settle for a smaller credit limit. Regardless, it’ll be worth your time to evaluate multiple types of lenders to find the best fit for your business.
4. Improve Your Personal Credit Score
Business lenders will review your personal credit history when evaluating you for a business line of credit. That’s why it’s essential to work on improving your credit score.
According to myFICO, the five factors (and their relative weights) that affect your personal credit are as follows:
- Payment History – 35 percent
- Amounts Owed – 30 percent
- Length of Credit History – 15 percent
- Credit Mix – 10 percent
- New Credit – 10 percent
There are numerous ways that you can improve your personal credit. To start, commit to paying your bills on time, including credit card bills, rent payments, and vendor bills.
Another way to improve personal credit is to reduce your loan amounts owed. If you’ve taken out personal term loans, following the repayment term is essential. By doing this, you can fulfill your obligations and avoid damage to your credit score. Like being late on small business loan payments, taking too long to repay a personal loan can be detrimental to your credit profile.
In addition to the tips mentioned above, you should try to keep old accounts open and eliminate risky credit to improve your credit score. Ultimately, forming healthy financial habits will give you the best chance of building your credit score in the long term.
Other Funding Options to Consider If You Have a Bad Credit Score
There are many notable pros and cons to receiving a business line of credit, especially if you have a poor credit score. Due to this, it may be beneficial to explore other funding programs. Below, we’ll explore other notable funding options for business owners with credit score issues.
Bad Credit Business Loans
Like bad credit business credit lines, there are also term loan programs meant for business owners with bad credit. The application process and requirements will likely be similar to applying for a business credit line, but you should consider exploring both options.
Merchant Cash Advance
You’ll likely qualify for a merchant cash advance if your business accepts consistent credit card payments. In many cases, cash advance providers don’t disqualify applicants if they have a bad credit or FICO score. If they generate steady credit card sales, they’ll be able to remit their advance.
Many business owners struggle with cash flow shortages due to outstanding customer payments. If your business is affected by late customer payments, you may benefit from invoice factoring.
Typically, invoice factoring providers won’t be too concerned with your credit score. Instead, they’ll want to examine your customers’ payment history to indicate how risky a borrower you’ll be.
Conclusion: A Bad Credit Line Might Be Beneficial (But You Should Weigh Your Options)
After reading this post, you likely realize that getting a business line of credit with a bad credit score isn’t easy. Even if you qualify, you may have to settle for a smaller amount than you hoped to receive.
To give yourself the best chance of qualifying for a line of credit, be transparent with your lender and evaluate all your options. If you can’t find the right offer for your business, you may want to consider improving your score before taking out a credit line. If you have short-term funding needs, this may be challenging, but in many cases, you’ll receive a better offer once you improve your credit score.
In the meantime, work on building your business and improving your credit history by checking your financial health. You’ll be a more attractive applicant to lenders and make it easier to pay off your credit line balance in the future.
Have you taken out a line of credit for your business, despite your poor credit history? Tell us about your experience applying and utilizing this financing option in the comment section below.
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.