Business Lines Of Credit For Bad Credit: Are They The Best Option?

For businesses with bad credit, obtaining financing can be a challenge. A business line of credit can be an attractive option, as it provides flexible access to funds for a variety of business expenses. However, it's important to consider whether a business line of credit is the best option for your specific situation.

Key Points:

• Bad credit business lines of credit are available from a limited number of lenders but often come with collateral requirements. 
• Business lines of credit can offer businesses a revolving credit line they can draw on as needed. 
• Online lenders often have less strict credit requirements and can provide fast funding. 

Can I Get A Business Line Of Credit With Bad Credit?

Yes, it is possible to get a business line of credit with bad credit, although it can be more difficult and may come with higher interest rates and fees. Lenders will typically look at a variety of factors when considering an application, such as the business's financial history, cash flow, and collateral.

Additionally, some lenders may require a personal guarantee from the business owner, which means that they will be personally responsible for repaying the debt if the business cannot. It's important to shop around and compare options from different lenders to find the best terms and rates for your business's specific needs.

What Credit Score Do You Need For A Business Line Of Credit?

The credit score requirements for a business line of credit can vary depending on the lender and the specific product. Generally, traditional lenders may require a credit score of 680 or higher, while alternative lenders may be more flexible and may consider borrowers with scores as low as 500.

However, keep in mind that a lower credit score may result in higher interest rates and fees, and may require a personal guarantee or collateral to secure the loan. It's important to check with individual lenders to determine their specific credit score requirements for a business line of credit.

What’s Considered Bad Credit?

According to one of the major credit bureaus, Experian, a bad credit score is anything under 670. A very poor score is anything under 580. 

Is My Business Credit Score The Same As My Personal Credit Score?

Nope, your business and your personal score are separate. While personal scores range from 300 – 850, business scores range from 0 - 100. Still, both are based on similar factors like repayment history and credit utilization. 

Why Is My Personal Credit Score Important When Taking Out A Line Of Credit? 

Just like it takes time to build up your personal score, it can take some time to build up your business score. If you haven’t been in business long, your business will likely not have the best score yet. Your personal score may be better, though.

Using this when seeking out a business line of credit for bad credit can help you get better rates than your business score could provide. Plus, there are some lenders that will want to see both scores before approving your credit line. 

Do I Need To Sign A Personal Guarantee To Get A Business Line Of Credit With Bad Credit?

Some lenders that only check your business credit will require a personal guarantee. This means that you’ll be personally responsible in the event that your business can’t repay the loan or credit line.

Many lenders won’t require this, but doing so may still be a good option for bad credit borrowers as it shows your willingness to take on more of the financial burden.

How To Get A Business Line Of Credit With Bad Credit

Getting a small business line of credit with bad credit won’t be a different process than those with good credit. You can expect the process to look like this:

Research potential lenders: Take some time to look at the lenders available specifically for bad credit borrowers. Take a look at both online and local options and compare fees, interest rates, and collateral requirements.

Gather your financial information: It’s best to gather the documents you need before officially applying. Some of the items you’ll need are your tax returns, business plan, cash flow projections, and collateral details.

Apply and submit your application: If you use an online lender, the application process shouldn’t be terribly long. Most advertise anywhere between 5 - 20 minutes. You’ll spend that time answering personal and financial questions about you and your business.

Wait for approval: Once you’ve submitted your application, you’ll have to wait to hear if you’ve been approved. Online lenders often advertise a wait time of just a few days, while traditional lenders can often take weeks to give you a decision.

Pros And Cons Of Bad Credit Business Lines Of Credit

Here's a table outlining some pros and cons of bad credit business lines of credit

It's important to weigh the pros and cons of a bad credit business line of credit and consider alternative financing options to determine the best fit for your business's specific needs.

Is A Bad Credit Line Of Credit Right For Your Business?

With so many different lending options out there, it can be difficult to determine which one works best for your business needs. Well, a business line of credit is best for businesses that need:

Flexible credit requirements: Business lines of credit work similarly to other credit cards in that there are options for bad credit borrowers, they just come with higher interest rates. So, if you can stomach the double-digit rates, you shouldn’t have too much of a problem finding an option that works for you.

Short-term funding: Lines of credit shouldn’t be used for long-term funding. As a matter of fact, most of them can’t, with short repayment periods.
Revolving credit: If your business needs to make multiple purchases in a short amount of time rather than one big purchase, a line of credit could work better for your needs.

Where To Get A Business Line Of Credit With Bad Credit

Some borrowers may be surprised that there are a lot of places willing to lend to bad credit borrowers. There’s no denying that the list won’t be quite as long as those with better credit, but there are still options. Here are a few places to try:

Big banks: Banks like Chase, Bank of America, or Capital One, offer lines of credit. While big banks often have long wait times, since they offer such a wide range of funding, they often have something even bad credit borrowers qualify for. Just know that you’ll likely pay extremely higher interest rates.

Credit unions: Some credit unions offer business lines of credit. The lending experience is typically more personal, and having bad credit isn’t necessarily disqualifying. Meeting with an in-person teller can help you understand the options you have available.

Online lenders: While there are dozens of online lenders these days, some of the more well-known are Ondeck, Bluevine, and Fundbox.

How To Find The Best Business Line Of Credit With A Bad Credit Score

When you have bad credit, finding the best loans specific to your needs may be a little more difficult than for those with good credit. Here are a few tips to consider when looking for the best bad credit business line of credit:

Focus on improving your credit score: The only way to find more options is to raise your credit score. If you know you need financing soon, spend time improving your score. Make sure to avoid applying for too many other loans beforehand, stay up-to-date on payments, and pay down other debt to keep ticking your score up.

Looking for lenders: And then look for more. When you have bad credit, you need to take the extra time to narrow down your search only to lenders that have a high chance. Here’s our list here of the best line of credit lenders.

Apply only if you’ve been in business for at least a few months: Most lenders, even the most lenient ones, will require that you’ve been in business. This shows them that you have a consistent income and can make payments immediately.

What Can You Do If You’re Denied A Business Line Of Credit?

Even if you’ve researched lenders and tried to improve your credit before applying, there’s still a chance you may not be approved for your line of credit. In the event that this happens, you shouldn’t panic. Take the following steps:

Understand why you were denied: Most companies will send a letter or email explaining why you were denied a loan. It may not be credit-related at all. If you’re still unsure, though, they should also provide you with a contact number that you call.

Double-check your credit profiles: If the reason you were denied was because of your credit, take a minute to look at a free credit reporting service like Credit Karma or Credit Wise and see if anything looks off.

Surprisingly, errors on your credit report happen more often than you might think. Looking at these services can also show you why you may have a poor score. Do you need a wider variety of accounts? Have you missed payments? Do you have too much debt already? From there you can take steps to adjust.

Look into alternative sources: If you applied through a traditional bank, take a shot at applying through a credit union or online lender. Both of these options tend to have more lenient credit requirements than larger banks. 

Alternative Funding Options For Those With Bad Credit

SBA Loans

The Small Business Administration offers business loans for most industries. These loans are popular options because they often have affordable interest rates. While the qualification requirements can be tough for some of the loan options, the SBA offers many loan options, some that bad credit borrowers may qualify for.

Term Loans

Major banks offer business loans in addition to business lines of credit. Business loans are a better option for businesses who want to make one major purchase. You’ll get a lump sum of cash, a predetermined interest rate, and a repayment schedule that’s easy to manage. These loans come in either secured or unsecured. Those with bad credit are better off sticking to secured loans. 

Cash Advances

A merchant cash advance is only meant for those who accept payments. You get a lump sum of cash through a merchant cash advance and then pay it back using a certain percentage of your debit and/or credit card sales. Plus, you’ll pay an additional fee to the lender.

Invoice Factoring

Invoice financing is another short-term loan option for those who have unpaid invoices.  Invoice factoring loans give you cash for your business expenses when you haven’t been paid yet. When your invoices do eventually get paid, you’ll automatically pay back your lender.

Equipment Financing

Equipment financing is another form of business loan, but it must be used, as its name implies, for equipment purchases. While it’s likely that you’ll need to put up the equipment itself as collateral, this allows bad credit borrowers to qualify.

Building Your Business Credit Score To Improve Your Financing Options

Building your business credit score is a critical step in improving your financing options, especially if you have bad credit. A strong business credit score can help you qualify for better terms and rates on loans, lines of credit, and other types of financing. Here are some tips for building your business credit score:

Establish a business credit profile: To build your business credit score, you first need to establish a business credit profile with the major credit reporting agencies. This includes registering your business with Dun & Bradstreet, Experian, and Equifax.

Pay bills on time: One of the most important factors in building your business credit score is making on-time payments on your bills and loans. Late payments can have a significant negative impact on your credit score, so make sure to pay all of your bills on time.

Keep your credit utilization low: Similar to personal credit scores, your business credit score can be affected by your credit utilization ratio. This is the amount of credit you are using compared to your total credit limit. Keeping your credit utilization low can help improve your credit score.

Monitor your credit report: Regularly monitoring your business credit report can help you identify any errors or fraudulent activity that could be negatively impacting your credit score. You can request a free copy of your credit report from each of the major credit reporting agencies once per year.

Build relationships with suppliers and vendors: Building relationships with suppliers and vendors who report to credit bureaus can help you build positive credit history. Make sure to pay your bills on time and establish a good track record with your suppliers and vendors.

By following these tips, you can build your business credit score over time and improve your financing options, even if you have bad credit.

What To Watch Out For When Applying For A Business Line Of Credit With Bad Credit

If you have bad credit and are considering applying for a business line of credit, there are some important things to watch out for. Here are a few things to keep in mind to avoid potential pitfalls:

High interest rates and fees: Lenders may charge higher interest rates and fees for business lines of credit for bad credit than for borrowers with good credit. Make sure to carefully review the terms and fees associated with any offer you receive and compare it to other financing options to ensure you are getting the best deal.

Collateral requirements: Some lenders may require collateral to secure a business line of credit for bad credit. This means you may have to put up personal or business assets, such as property or equipment, as security for the loan. If you default on the loan, the lender can seize the collateral.

Personal guarantees: In addition to collateral, some lenders may require a personal guarantee from the business owner. This means that you will be personally liable for repaying the loan if your business is unable to do so.

Repayment terms: Business lines of credit for bad credit may come with shorter repayment terms and stricter repayment requirements than other financing options. Make sure to review the repayment terms and requirements carefully to ensure that you can meet them.

Scams and fraud: Be wary of lenders who offer guaranteed approval for business lines of credit for bad credit or who ask for upfront fees or deposits. These may be signs of a scam or fraudulent lender.

By being aware of these potential pitfalls, you can make an informed decision about whether a business line of credit for bad credit is the right financing option for your business, and how to choose a reputable lender.

Using Collateral To Secure A Business Line Of Credit With Bad Credit

If you have bad credit, using collateral to secure a business line of credit can be a way to increase your chances of being approved for financing. Collateral is an asset, such as property, inventory, or equipment, that you pledge as security for a loan. If you default on the loan, the lender can seize the collateral to recoup their losses.

Here are some things to consider when using collateral to secure a business line of credit with bad credit:

Types of collateral: The type of collateral you can use to secure a business line of credit will depend on the lender's requirements. Some lenders may require real estate or other assets with high value, while others may accept equipment, inventory, or accounts receivable.

Valuation of collateral: Lenders will typically conduct a valuation of the collateral to determine its worth and ensure that it is sufficient to secure the loan. The value of the collateral may be less than the loan amount, and lenders may only lend up to a certain percentage of the collateral's value.

Risks of using collateral: Using collateral to secure a business line of credit carries some risks. If you default on the loan, the lender can seize the collateral, which could result in the loss of your business assets. Additionally, if the value of the collateral decreases, you may need to provide additional collateral to maintain the loan.

Alternatives to collateral: If you are uncomfortable using collateral to secure a business line of credit, there are alternatives available. Some lenders may offer unsecured lines of credit or other financing options that do not require collateral. However, these options may come with higher interest rates and fees.

Using collateral to secure a business line of credit with bad credit can be a way to increase your chances of being approved for financing. However, it's important to carefully weigh the risks and benefits of this approach and to work with a reputable lender who can guide you through the process.

Final Words:

Getting a business line of credit with bad credit can be challenging, but it's not impossible. By understanding your credit score, building your business credit, and exploring your options, you can find the financing you need to grow your business. Remember to carefully review the terms and fees of any offer you receive, and work with a reputable lender who can help you make informed decisions about your financing.