In this review, our experts highlight the terms, rates, and fees of the best business loans for bad credit and explain what makes each lender a good option. We also share potential downsides of each lender and provide a rating methodology you can use to select the best option for your needs.
Many traditional lenders such as banks will turn down prospective borrowers with bad credit. Luckily, there are alternative business lenders that offer loans to borrowers with credit scores as low as 550. Those lenders consider your annual revenue or monthly sales numbers when reviewing your application, rather than relying solely on your personal or business credit scores.
A bad credit score is anything below 670. More specifically, a score between 580 and 669 is considered fair, and one between 300 and 579 is poor. Small Business Credit Survey data states that about 59% of small businesses are in fair or poor financial condition.
How To Choose The Best Business Loans for Bad Credit
- Application process: While traditional lenders tend to have long and arduous application processes, alternative lenders often have much shorter ones. Our experts also found whether a soft or hard credit pull was done.
- Interest rates and fees: While bad credit business loans tend to have higher interest rates than traditional loans, that may be necessary to get the financing you need. Our experts looked at rates and any additional fees that may apply.
- Qualification process:We reviewed the minimum credit score, annual revenue, and business history requirements to ensure you meet them.
- Customer support: You will have a relationship with this lender for years, so we made sure the company is known for positive customer experience. How can you connect with a customer support rep? Chat? Phone? Email?
- Online user reviews: We found out what others had to say about a lender by reading reviews on websites like Trustpilot.
- Perks and bonuses: Lenders should work to get your business. What is this lender offering that makes it stand out? Some examples include payment flexibility, advertising transparency, and advanced technology.
What Is a Bad Credit Score?
Your credit score can directly impact your ability to get a good rate on a business loan.
The FICO Score, commonly used with loan applications, ranges from 300 to 850. Anything under 670 is considered a bad credit score. In that range, 580-669 is considered a fair score, while 300-579 is poor.
Types of Financing Available for Bad Credit
Among all small business borrowers, term-loans and lines of credit are the most commonly sought types of funding. More than 75% of borrowers applied for these financing products.
Here’s a brief recap of your options:
While traditional lenders offer most of these, they will have higher qualification requirements. Alternative lenders tend to be more relaxed in their requirements, but you will typically pay more in interest and fees.
Pros and Cons of Bad Credit Business Loans
- Can help struggling businesses overcome temporary setbacks
- Provides an opportunity to build credit
- Variety of choices, e.g. invoice factoring or equipment financing
- Higher interest rates
- Potentially high fees
- Time-in-business requirements may leave out startups
How to Get a Business Loan With Bad Credit
Let’s look at what you need to do to get a bad credit business loan.
Step 1: Check Your Credit Scores
Before applying for a loan, check your credit scores. Some lenders will look at both personal and business credit, so if you have both (not every company has business credit scores or history), check them to see where you fall with your numbers.
Step 2: Improve Your Credit Scores If You Can
You might want to work on improving your personal or business credit scores before applying for financing. Here are a few tips for boosting bad personal credit:
- Pay down existing debt
- Make any loan payments on time
- Avoid maxing out credit cards
- Don’t cancel older accounts–length of credit history is 15% of your FICO score
- Check your credit reports for fraud and errors
- Avoid credit repair scams
Over time, you may see your credit scores rise, which can help you qualify for better terms.
Step 3: Decide How Much You Need
Once you’re ready to start shopping for a loan, decide how much you want to borrow and what you’ll do with the money. Having a plan and budget can ensure that you maximize the money you borrow to help your business grow.
Step 4: Find the Best Deal
Next, shop around. Don’t necessarily take the first loan offer you get, since you might qualify for a lower rate elsewhere. Also, look beyond just the rate. You may want to work with a lender who will be there to answer your questions and guide you through the process, as well as one who is transparent about fees.
Step 4: Apply for the Loan
Once you’ve found the loans you qualify for, choose your top picks and apply. Each lender has a different application process and some may require more documents than others. You may be asked to provide some or all of the following documentation:
- Business licenses
- Business bank statements
- Tax returns
- Business plan
- Financial statements including your balance sheet, income statement, and cash flow
- Commerical leases
- Franchise agreements
- Third-party contracts
- Personal guarantee
Step 5: Get Your Money
Once your loan application has been approved, you could receive funds in as little as a few hours, depending on the lender. Use the funds wisely to grow your business! You may improve your bad personal credit at the same time.
Where to Get a Business Loan for Bad Credit
Businesses with bad credit face a steeper road to loan approval. According to the Fed, only 8% of small businesses regarded as “high credit risk” received all of the funding they applied for.
However, there are options:
- Banks: Traditional banks are less likely to approve bad credit business loans. However, Fed data shows that large and small banks remain the most popular option for small businesses, regardless of credit profile. For example, 44% of low credit-risk SMBs applied for credit through large banks, while 43% of high credit-risk SMBs did the same.
- Community Development Financial Institutions: Designed to provide financing to borrowers who might otherwise struggle to get funding, CDFIs include banks, credit unions, and venture capital funds. Only 2% of borrowers apply to CDFIs, per the Fed.
- Credit unions: Credit unions are slightly more popular with high-risk borrowers than low-risk ones: 9% vs. 8%. This likely reflects their reputation as being slightly more flexible about credit standards than banks.
- Online lenders: Fintech companies are a more recent addition to the financial services space. Operating solely online, these lenders are more than twice as popular with high credit-risk SMBs than low credit-risk firms, according to the Fed.
What Can You Do if You’re Denied a Small Business Loan Because of Bad Credit?
If your loan application is denied due to your credit profile, you still have options. Start by reviewing your application. Have you provided all the necessary documents–or would adding more information improve your chances? Consider reapplying with more thorough documentation.
If that’s not an option, consider your alternatives to improve your cash flow including other lenders, alternative loan products like invoice financing or merchant cash advances, or borrowing from friends and family.
Even with bad credit, you may be able to qualify for a small business loan. Your business may need an injection of cash to keep it moving forward or to take it up a notch, and your credit scores shouldn’t keep you from making that happen.