How to Get a Business Loan If Your Credit’s Not So Hot

Most small businesses will need funding at one time or another to keep operations running smoothly or for expansion. However, if your credit score is less than ideal, you may feel like there aren’t any financing options available to you.

With the evolution of non-bank, alternative lenders, there are options for people who might have less-than-stellar credit.  Here’s what to do if your credit is struggling and you need business financing.

First thing’s first: You should be aware of what your credit score is before you begin looking for financing. And when I say “your score,” I mean your own personal credit score. While some lenders will look at your business’s scores, most will focus primarily on an individual’s credit score. You can go to annualcreditreport.com to pull your reports and scores from the three bureaus. You can also use a service like Credit Karma to monitor your credit year-round.

Once you know your credit score, you’ll be able to zero in on the best type of loan for you. Many people have different definitions of “bad credit” so you can use this guide.

If your score is over 700, you’ll be in a good position to qualify with many lenders, including banks. With a score above 650, you’ll could also be candidate for a Small Business Administration (SBA) or long-term online loan. If your score falls between 550 and 640, you’ll want to consider some of the bad credit loan options from alternative sources we discuss below. Scores below 500 will unfortunately make it difficult to qualify for most loans.

If your credit score is on the cusp of being strong enough for you to qualify for a loan, there are other factors lenders will consider that may work in your favor. They’ll look at your business’s finances — annual revenue, profitability, current debt, cash flow, and past payment history — as a means to determine how risky you will be as a borrower. Even if your personal credit score is marred by past payment issues or defaults, a strong business history can sometimes open up other financing doors.

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If your credit falls below the 640 mark, you’ll be in tougher territory when it comes to financing options. However, there are still some small business loan options available to you, each with different structures, features, and pros and cons for you to consider.

One of the best ways to become a more appealing loan candidate is to offer up collateral to a lender. If your business requires equipment purchases, you might consider an equipment loan. Similar to a car loan, lenders will advance you the money to purchase the necessary item; you’ll pay off the loan in installments, and when you do, you’ll own the equipment outright. If your credit score is below 600, though, these loans can be difficult to secure.

Invoice financing is another type of collateralized loan to consider. If your business invoices other businesses for your products or services, lenders will offer you a cash advance, usually around 85%, on outstanding invoices. Once the invoices are paid, you receive the remaining 15% from the lender, minus any associated fees.

Short-term loans usually have 3- to 18-month terms and are most often repaid with daily ACH payments. There’s no collateral involved here, so the APRs on these loans tend to be higher and, with daily repayments, short-term loans can cut into your cash flow. However, because of the loan’s short-term and daily repayments, lenders are willing to take on riskier borrowers, making these loans a good option if your credit score is over 500.

Merchant cash advances (MCAs) are an option if your business processes credit cards. These types of financing companies will advance you a certain amount of cash and then tap into your credit card sales, taking a percentage to cover repayment of the loan plus fees. While this allows you to repay more of the loan when business is strong, and less as business ebbs, it also means you’re losing a portion of your daily cash flow. Plus, with fees ranging from 70% to 350%, MCAs are the most expensive loan product out there.

If you have less-than-stellar credit, consider your loan options carefully and select the loan that is best for you and your business model. Then work to build your credit for a better loan in the future. Make payments on time, build your bank balance, monitor your credit score, and keep your company in business.

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