Starting a Small Business: Loans for Bad Credit and How to Get Them

Starting a small business can be an exciting yet challenging endeavor, especially when access to capital is limited due to bad credit. Whether you are trying to fund your startup, purchase inventory, or manage cash flow, securing financing with less-than-perfect credit can seem daunting. However, having bad credit doesn’t mean you can’t get a loan to support your business.

In this article, we’ll explore loans for small businesses with bad credit, the types of loans available, and tips on how to increase your chances of getting approved—even with a poor credit history.

1. Understanding How Bad Credit Affects Small Business Loans

Bad credit can be defined as having a low credit score, often below 580 for personal credit. When your business credit is poor, lenders may see you as a higher risk, which can result in higher interest rates, lower loan amounts, or a rejection of your application. However, the definition of “bad credit” can vary across lenders, and many options are still available for entrepreneurs who don’t have stellar credit.

Impact of Bad Credit on Loan Approval:

• Higher interest rates: Lenders may charge higher interest rates to mitigate the risk of lending to someone with a poor credit history.
• Shorter repayment terms: Businesses with bad credit may be offered shorter repayment periods, which can result in higher monthly payments.
• Lower loan amounts: Lenders may only approve loans for small amounts if you have bad credit, which may limit the capital available to grow your business.

Despite these challenges, many lenders understand that small businesses often face financial hurdles early on. This is why several alternative financing options exist specifically for businesses with bad credit.

2. Types of Loans for Small Businesses with Bad Credit

While securing a traditional loan from a bank may be difficult for businesses with bad credit, several alternative loan options can be more accessible.

1. SBA Microloans

The Small Business Administration (SBA) offers microloans designed for small businesses, including startups. These loans typically range from $500 to $50,000 and are intended for working capital, inventory, and equipment. Although SBA loans tend to have strict requirements, they are often more forgiving of bad credit than traditional bank loans.

• Why It Works for Bad Credit: SBA lenders tend to be more focused on the business’s ability to repay the loan rather than just credit scores, making it easier for businesses with poor credit to get approved.

2. Alternative Online Lenders

Online lenders are an excellent option for small businesses with bad credit, offering more flexible criteria and faster approval times compared to traditional banks. These lenders typically use alternative data to assess your creditworthiness, such as cash flow, transaction history, and business performance, rather than just focusing on your credit score.

• Examples of Online Lenders: Kabbage, OnDeck, and BlueVine are popular online lending platforms that offer lines of credit or short-term loans for businesses with bad credit.
• Why It Works for Bad Credit: Online lenders often have more lenient requirements and faster access to capital. They also understand that small businesses may not have strong credit due to their limited financial history.

3. Merchant Cash Advances (MCA) | NOT RECOMMENDED

A merchant cash advance is an alternative form of financing where the lender advances funds to a business in exchange for a percentage of daily credit card sales. The repayment is tied directly to the business’s sales, so it’s flexible based on revenue.

• Why It Works for Bad Credit: MCAs typically don’t require a high credit score because they rely on future sales. If your business has consistent credit card sales or revenue, you may still qualify for this type of financing.
• Risks: While accessible, MCAs come with high fees and interest rates, so they should be used cautiously.

4. Invoice Factoring

Invoice factoring allows businesses to sell their accounts receivable (outstanding invoices) to a factoring company in exchange for immediate cash. This can help businesses with poor credit access capital quickly without relying on their credit score.

• Why It Works for Bad Credit: Since the loan is secured by your invoices, factoring companies are less concerned with your credit score. Instead, they focus on the creditworthiness of your customers.
• Risks: Factor fees can be high, and some businesses may not qualify if they lack reliable or reputable customers to whom they are invoicing.

5. Business Credit Cards for Bad Credit

If you are looking for short-term financing, a business credit card may be a viable option. Even businesses with bad credit can sometimes qualify for a business credit card, particularly secured credit cards, which require an upfront deposit that acts as collateral.

• Why It Works for Bad Credit: Secured business credit cards are designed for individuals or businesses with bad credit, and they provide a line of credit that can be used for everyday expenses and business growth.
• Risks: Like any credit product, if you don’t make timely payments, your business credit score could worsen.

3. Tips for Improving Your Chances of Getting Approved

Even with bad credit, there are steps you can take to improve your chances of securing a loan for your small business.

1. Work on Your Personal Credit

For many small business loans, personal credit plays a significant role in the approval process. If your business is new or lacks a credit history, lenders will often look at your personal credit score to determine eligibility. You can improve your personal credit by:

• Paying down outstanding debts.
• Disputing any errors on your credit report.
• Avoiding taking on new debt until your credit improves.

2. Prepare a Solid Business Plan

Lenders are more likely to approve a loan if they can see that you have a well-thought-out business plan. Your plan should clearly outline how you’ll use the loan, your projected revenue, and your strategy for repaying the debt. A strong business plan can make a significant difference, especially if your credit score is not ideal.

3. Offer Collateral

Offering collateral for a secured loan can increase your chances of approval. Lenders may be more willing to offer you a loan if you provide assets such as property, equipment, or inventory as collateral. This reduces the risk for the lender and improves your likelihood of securing the loan.

4. Consider Smaller Loan Amounts

If you’re concerned about approval, consider requesting a smaller loan amount. Small loans may be easier to obtain and may have more favorable terms for businesses with bad credit.

5. Build Relationships with Lenders

Building relationships with lenders over time can make it easier to obtain financing when you need it. Even if you have bad credit, consistent communication with lenders can improve your chances of getting approved for future loans.

4. Improve Your Business’s Financial Health

Lenders will often review the overall health of your business, including its financial performance, cash flow, and profitability. If your business shows strong financials and growth potential, you may be able to secure financing, even with bad credit.

How to Improve Your Business’s Financial Health:

• Track Cash Flow: Regularly review your cash flow statements to identify potential issues and ensure that your business remains financially stable.
• Reduce Debt: Pay off high-interest debts to reduce your liabilities, which can improve your chances of obtaining financing.
• Increase Revenue: Focus on strategies to increase sales and revenue to demonstrate your business’s profitability to lenders.

Tip: The healthier your business’s financial profile, the better your chances of securing a loan, regardless of your personal credit history.

Conclusion

Getting a small business loan with bad credit is possible, but it requires a strategic approach. By understanding the types of loans available, improving your business’s financial health, and taking proactive steps to manage your credit, you can improve your chances of securing the financing you need.

Remember, there are options beyond traditional loans, including SBA microloans, merchant cash advances, and invoice factoring, which may be more accessible for businesses with bad credit. Taking the time to explore these options and prepare your business for financing will help you make the right decision and set your business up for success.