What is a bad credit business loan and how it works

Getting approved for a business loan when you have bad credit can be challenging, as almost every lender does a soft or hard credit check at some point. Typically, lenders typically want to see a good-to-excellent credit score and a solid track record of responsibly managing debt repayment.

But even with a credit score that is less than ideal, it’s still possible to obtain a loan for your business. The catch is that it will likely be more expensive, and you may need to provide an asset that acts as collateral.

Here’s everything you need to know about bad credit business loans, including how to find the best, most affordable one for your business.

What is a bad credit business loan?

A bad credit business loan is any loan product designed for business owners with poor credit. They have lower credit score requirements and more relaxed eligibility requirements. Since the lender is taking more risk to lend money, bad credit business loans come with higher interest rates and fees and may require more assurances that you won’t default on the loan.

There are many different types of small business loans for bad credit.

What is a bad credit score?

A bad credit score depends on the scoring model used by the lender. For personal credit, a bad credit score is often categorized as a FICO score of 300 to 579.

Lenders may also look at your business credit score if you have one. There are a handful of different business credit score providers. They include the FICO Small Business Scoring Service (FICO SBSS), Equifax Business, Experian Business and Dun & Bradstreet.

Each agency has its own business scoring models and may include multiple scores and ratings to assess creditworthiness. Some, like Experian and Dun & Bradstreet, provide scores that range from 1 to 100, with 1 to 49 suggesting high risk to lenders.

How a bad credit business loan works

Like any small business loan, a bad credit business loan provides funding that must be repaid over time and with interest. Some loans provide a lump-sum payment or a line of credit.

Some banks and credit unions provide bad credit business loans, but these are more widely available from online lenders.

You may also be able to obtain a loan with bad credit from community development financial institutions (CDFIs). CDFIs are specifically designed to provide credit and other financial services to underserved markets and populations to stimulate growth in these communities.

Funding times for bad credit business loans vary. Depending on the lender and their underwriting requirements, you may be able to obtain funding for a bad credit loan quickly, in some cases in as little as 24 to 72 hours after receiving approval.

The APR for bad credit business loans can be as high as 35 percent or more. But not all small business loans charge interest. Some charge a fee instead.

To get the best rates for a bad credit business loan, you may need to provide business collateral.

What is business collateral?

Business collateral is an asset your business can use to secure a business loan. This could be property, equipment, inventory or even outstanding invoices. Should you default on the loan, the lender can take that asset as payment.

For an asset to be eligible to be used as collateral, it must be owned outright by your business and not used as collateral for any other borrowing or debt you may be responsible for.

The amount and type of collateral you’re required to provide will vary based on many factors, including credit score, the loan amount you’re seeking and your ability to repay the debt. But when applying for a loan with bad credit, it is not unusual for lenders to require assets equal to the amount of the loan you seek.

The main advantage of collateral is that it can help you secure a business loan and possibly one with better rates and terms. As Michael Stone, Senior Vice President of Commercial Lending for Georgia’s Own Credit Union, notes, collateral can increase “the likelihood of approval and can support longer repayment terms and lower interest rates.”

Pros and cons of bad credit business loans

Before proceeding with a bad credit business loan, consider the benefits and drawbacks carefully.

Pros

• Flexible qualification criteria. Bad credit business loans often feature more lenient eligibility requirements.
• Fast funding. Depending on the lender, you may receive funding in as little as 24 to 72 hours after being approved.

Cons

• Higher interest rates. With a subpar credit score, you will generally be required to pay far higher interest rates than other borrowers to help offset the risk lenders take.
• Risking your collateral. Putting valuable assets on the line as collateral to obtain a loan can be risky. If you are unable to continue making payments on your loan, you may lose those assets.

How to qualify for a bad credit business loan

While it can be a struggle to find a small business loan with no credit check, it is possible to get a loan even if you have bad credit.

To increase your chances of getting approved for a loan with bad credit, the best thing you can do is improve your credit score before applying. If you can pay down an existing loan, make a few on-time payments or responsibly manage a business credit card, you may have a better chance of approval as you’ll appear less risky to a lender. You can also try finding a co-signer with better credit and updating your business plan to show you’re serious about your business and its finances.

Finally, be sure to only ask for a funding amount you can comfortably repay. Lenders will look at your current cash flow, annual revenue and existing debt, so you’ll want to request an amount that fits in your business budget.

Bottom line

Even with bad credit, getting a loan for your business is still possible, though the process may be slightly more challenging. You’ll need to shop around and explore the different options to determine what makes the most sense for you and your business.

Frequently asked questions

• Can I get a business loan for bad credit?

  Yes, it is possible to get a business loan for bad credit. Online lenders and even local community development organizations may provide to small business owners with poor credit. But you will likely pay more for the loan than applicants with good credit and may also have to provide collateral.

• What credit score do I need to get a business loan

  Though requirements vary from lender to lender, you’ll generally need a score of at least 500 to get a bad credit business loan.

• Can I get an SBA loan with bad credit

  Yes, even applicants with bad credit can qualify for a Small Business Administration (SBA) loan. SBA loan approval is generally based on such factors as how you make money, a character evaluation of ownership and where your business operates.

• What is the easiest business loan to get with bad credit?

  If you have bad credit and need fast financing, there are a few options to consider. Some alternative small business lenders offer business lines of credit and equipment financing to business owners with bad credit. These will likely be secured business loans, which require you to put up an asset as collateral that can be taken, should you default on the loan. Your business may also be eligible for invoice factoring, which focuses more on the creditworthiness of your invoiced clients than on your business. It’s possible to get funding for any of these loans in as little as 24 hours, depending on the lender and how quickly you can provide the required information.