How to Get a Business Loan With Bad Credit: 12 Steps to Success

Lenders who give loans to business owners with bad credit charge higher interest rates and extra fees that cover the risk of lending to risky borrowers. So, finding an affordable business loan with bad credit is a wise decision. 

This article will explore the steps you can take to find a business loan that fits the needs of your business and improve your chances of getting it.

Key Takeaways

• Several factors affect the approval of a business loan application.
• Several types of business loans are available for bad credit consumers.
• The steps a consumer should follow to get a loan for a business with bad credit
• The resources to get a business loan with bad credit
• Other practical alternatives if the loan application gets denied

12 Steps to Getting a Business Loan With Bad Credit

To get a business loan with bad credit, you may need to take the following steps:

1. Figure out why you need money

Before looking for a business loan, consider why you need the money. When considering a loan application, lenders not only look at the stated reason for the loan, but many financial institutions also want to know how the loan will affect the business's ability to make money or even make more money. 

Think about these questions when figuring out why you need money:

• Will the money make the business run better, make it more competitive, or boost sales or production in some other way?
• Is there a way to buy the thing or keep running the business without money?
• Can you get money without paying interest, like crowdfunding or selling stocks?

2. Check your eligibility

Bad credit isn’t the only thing lenders look at. There are several other factors banks consider when deciding whether or not to approve a loan. The factors are:

• Your credit score - You may get a loan with bad credit but the interest rate will be much higher (APR of 40% or higher).
• High credit utilization - Keep your credit utilization under 30%.
• Length of your credit history - Lenders take into account how long a person has had credit.
• Your payment history - A payment history with missed payments, late payments, or defaulted payments, is a red flag for lenders. It will be difficult to get even the best personal loan offers for your individual needs.
• Your income per year - Many business lenders are willing to lend to businesses that make at least $100,000 a year. 
• Your Debt-to-Income ratio - High debt levels compared to low income can show that the applicant may not afford debt payments.
• Debt in collections and charge-Offs - Unpaid debts in collections or debts written off by the original creditor can hurt your credit score.
• Bankruptcy filing - If you filed for bankruptcy within the last year or two, a few lenders will still give you a loan. But if you've gone bankrupt in the previous three to five years, most lenders won't be interested.
• Types of business Lender - Most lenders don't list all the interest rates, fees, and payment terms on their websites. So you'll need to prequalify or apply and get multiple quotes to compare total costs.
• The duration of your business - If your business runs for less than two years, it is riskier than businesses that have been around longer. For a new business, wait at least six months before you can apply.

3. You might want to add a cosigner

You could also try to get a loan with the help of a cosigner. If you don't repay the loan, the person who cosigned it must do so. To improve the chances of getting the loan, the cosigner should have a better credit score and, if possible, solid personal assets.

4. Talk with a loan officer

If you work with a loan officer, they will probably want to know about your credit rating. Be ready to talk about bad credit so that you look honest and you and your loan officer can figure out how to get around any bad marks. Being willing to talk about your credit is essential because bankruptcy or a tax lien is not the same as having too much credit card debt.

5. Compare options for business loans

Traditional banks, credit unions, and internet lenders offer the best small business loans. If you have bad credit, look for companies whose requirements aren't as strict as those of competitors. Traditional banks and credit unions have higher credit score requirements than some internet lenders. When looking for financing, you might also consider business lenders offering guaranteed loans with less stringent requirements.

6. Get the documents you need

Lenders ask applicants to show proof of their identity, the details of their business, and their general ability to pay back their debts. For business loans, this usually means showing tax reports for the company and the owner going back at least two years and financial records for the business going back at least three years.

 In the same way, companies that want to get invoice factoring may need to show reports for their accounts receivable and accounts payable.

7. Make sure your business plan is clear

A business plan is a formal document that describes the goals of a company and how it plans to reach those goals, both in terms of operations and finances. The business plan should show that the company can pay back a loan. It should also have an executive summary and an introduction to the company. Because of this, people with bad credit need a thorough business plan even more than those with good credit.

The following parts should be in a business plan:

• What the goods and services are and what they do
• Examining the market
• Plan for marketing
• Organizing and running a business
• Statements of finances

The structure of a business plan depends on the type of business, and most plans have more parts than those listed above. The U.S. Small Business Administration (SBA) has online guidelines to help you make a business plan for your company if you don't know how.

8. Fill out the application

Once you have all the paperwork you need to apply for a loan, follow the lender's official application process. Different lenders prefer different application methods. But most financial institutions let people who want to borrow money apply online, over the phone, or in person. You can find out more about the registration process by calling or going to the website of the lender you want to work with.

9. Offer a good cash down payment

Even if a business has bad credit, they have a good chance of getting a business loan if they have enough cash flow. For instance, you can pay a down payment in cash to cover some of the costs of buying business tools. The extra money could help you get the fund you need.

10. Add up assets or collateral

Even with bad credit, you can get a cash advance loan or a short-term loan by putting up unpaid customer bills, future credit or debit card transactions, or other assets as collateral. Instead of your credit background, they care more about how much money you make and whether you can repay the loan.

11. Put your name on a guarantee

If your personal credit history is more solid than your business credit history, you might want to apply for a business loan that puts more weight on your individual credit. When you sign a Personal Guarantee as part of a loan deal, the focus is more on your ability to repay the loan than on the business's ability to do so.

12. Take a loan for less money

Start with a small amount of loan. A lender may approve a bad credit loan with a smaller amount. You can borrow more money once you've paid back the smaller loan.

Types of Business Loans With Bad Credit

It can be hard to get a business loan if you have bad credit, but there are still a few ways to get funds. These are the most popular types of business loans for people with bad credit:

• Term loans - Term loans are given as a lump sum and are paid back over a set amount of time. Most loan terms last from three months to ten years. The most you can borrow is around $50,000, and APRs generally start around 9%.
• Business credit cards - This type of credit line can be used to pay for business costs. The best business credit cards can have APRs as high as 25%, but only on outstanding balances carried over from month to month. The application process is also easier than traditional loans.
• Business lines of credit - this type of financing provides a certain amount within a draw time (maximum of five years). The business can get cash anytime during the draw time. The part of the credit line used only earns interest. The business can use the line of credit as a revolving credit during the draw time. When the draw time is over, the payback period starts.
• Invoice factoring - Invoice factoring occurs when a business sells its unpaid bills to a factoring company in return for a big fund. Invoice factoring usually provides around 85% of the total invoice amount. The factoring company manages the collection process and pays the business a part of the remaining invoice value, after deducting the factoring fee. Invoice factoring is considered a secured loan without a strict criteria.
• Invoice financing - With invoice financing, a business owner can borrow money based on the value of bills that are still unpaid. The loan is paid back after the invoices are paid. Invoice financing is easier to get because it is backed by bills.
• Equipment financing  - Businesses may borrow money when they need funds to buy equipments. Because the loan is backed by collateral, people with bad credit are more likely to be able to get it. The best equipment financing has long loan terms, sometimes up to 25 years, and loan amounts of $1 million or more.
• Microloans - Microloans are small loans initiated from $500. The SBA's microloan program backs loans of up to $50,000. Some nonprofit organizations also provide microloans.
• Merchant cash advances (MCAs) - Business owners get a lump sum fund by offering the lender (merchant services company) a part of their future sales. Most merchant services companies give this type of financing to businesses that lack a good credit history, but make good sales and need urgent cash.

Where to Get a Business Loan With Bad Credit

There are several places you can go to get a small business loan even if you have bad credit:

• Your existing bank - Your bank may look at other mitigating factors, such as a positive cash flow, your history with the bank, and more cash resources and reserves.
• Online lenders - You can get a business loan from lenders that operate solely online. As they don't have high overhead as traditional banks, online lenders may be more ready to work with people with bad credit.
• Microlenders - A microloan usually comes from government or non-profit groups that offer competitive interest rates and lower fees. For instance, the U.S. Small Business Administration's (SBA) microloan program is meant to help small businesses start up and grow.
• CDFIs - Community Development Financial Institutions (CDFIs) are private financial institutions that help low-income, low-wealth, and disadvantaged people and communities access economic prospects. Through the Opportunity Finance Network or a Small Business Development Center, you can find CDFIs that help people in your area.
• Your business cash flow - When you ask for invoice factoring, accounts receivable factoring, or a merchant cash advance, alternatives to conventional small business loans, lenders may not look at your credit score. They'll care more about your cash flow (how much money flows into your business) and maybe even how creditworthy your customers are.

Business Loans With Bad Credit Alternatives

Consider these options if you're having trouble getting a bad credit business loan:

• Peer-to-peer lending - People with bad credit often find it easier to get loans with peer-to-peer lenders.
• Crowdfunding - Many crowdfunding efforts are used to sell a product before it is made. The money raised is then used to make the product.
• Grants for businesses - Many business grant programs help underserved groups, like women, soldiers, and minorities, start their businesses. Grants aren't loans, so no repayment needed. 
• Special purpose credit programs - A small business owner with low-income can get business loans with low-interest rates, low down payments, and low credit scores.

Bad Credit Loan Options To Avoid

There are some bad credit loans you should be careful with and maybe even try to avoid. These things are:

• Guarantor Loans - You need a third-party cosigner with good credit to get a guarantor loan. If the borrower doesn't repay the loan, the guarantor's money could be at risk.
• Car Title Loans - You may use your car as security to get a loan. These loans usually have high-interest rates and short times for paying them back. You could lose your car if you didn't pay the car title loan on time.
• No-Credit-Check Loans - Some lenders will give out loans without checking your credit. These loans' interest rates and fees are often very high.
• Payday Loans - Payday loans are short-term unsecured loans with high-interest rates, usually due on the borrower's next paycheck. Due to this reason borrowers can get stuck in a circle of debt. The best options to get out of the payday loan trap are debt management programs, or the payday loan settlement option.
• Advance-fee loans - Some lenders want fees upfront before giving you a loan. Legitimate lenders usually take fees from the loan amount or include them in the loan terms. Advance fee loans are often linked to scams or other types of fraud.

Bottom Line

Several loan types are available to borrowers with bad credit. Before accepting a loan, make sure to analyze all the factors that can affect your loan approval. You may need to follow specific steps to get the loan. If your application gets rejected, explore other alternatives, keeping their pros and cons in mind. Last but not the least, don’t stop trying to improve your credit score. Best of luck!