Bad Credit Business Loans: These Are Your 5 Best Options

For businesses with revolving working capital needs, some business lines of credit may be available to those with poor credit

This Post: Bad Credit Business Loans: These Are Your 5 Best Options

To replace or purchase new equipment or commercial vehicles

For immediate expenses or to cover a gap in cash flow

We’ll help you find the best secured and unsecured business loans for bad credit.

Thanks to the fast-expanding online lending industry, there are financing options for small business owners who have what credit bureaus define as “poor” credit scores.

While no lender will provide guaranteed approvals of loans for poor credit, many lenders are willing to work with subprime applicants. Additionally, you could get approved for a bad credit business loan with terms that won’t leave you strapped for cash.

In fact, roughly 90% of the reasons given by firms that didn’t think they’d be approved for financing were credit-specific, according to the Federal Reserve Banks’ Small Business Credit Survey . They included the following:

We’ve been conditioned to believe a low credit score is a deal-breaker when applying for small business loans and that bad credit lenders don’t exist.

Wondering how to get a small business loan with bad credit? It’s not as challenging as you might think.

Anyone applying for small business loans with a “poor” credit score is often rejected for various financing options.

Consumers with “fair” credit may experience difficulty getting approved and incur higher interest rates and other costs.

“Good” credit gives you a solid chance of being approved, but you might not have the luxury of weighing different options.

With a credit score falling in this range, you’re more likely to be approved for a loan and may even have multiple options to compare.

While lenders may deny an applicant for other reasons, those with “excellent” credit are rarely turned down.

Credit scoring company Fair Isaac Corporation , more commonly referred to as FICO, categorizes applicants into 5 tiers based on credit score:

Lenders will judge how much risk they assume if they extend a loan agreement. Based on that risk, lenders determine the maximum funding amount they’ll offer you as well as your interest rate and repayment terms.

Credit reporting agencies calculate and interpret your score based on your financial data and borrower behavior. Your credit score then falls under a tier ranging from poor to excellent.

Lenders usually consider a score below 580 a “bad” credit score for business loan applicants. How do they determine this?

If you apply for a small business loan with bad credit and no collateral, you may find that your poor score keeps you from being approved for any funding at all. Indeed, insufficient collateral was another reason why 41% of discouraged business owners did not apply for financing, according to the Federal Reserve Banks’ report.

Although many factors contribute to your business’s fundability, your business credit score has one of the most significant impacts. While it can be possible — however unlikely — to find lenders offering high-principal, long-term business loans for bad credit, a low score will usually restrict the options.

5 Best ‘Bad Credit’ Business Loans

If your score isn’t where you’d like it to be, that’s OK. There are still bad credit business loans and other financing options available for you.

Bad credit applicants with lower credit scores might find these financing options suitable.

1. Short-Term Loans

As the name suggests, short-term loans are a condensed version of term loans (and they’re one of the best ways to get a loan with bad credit).

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If approved, the lender will give you a sum of money. You’ll pay off the principal, plus interest, according to a predetermined payment schedule over a set repayment term.

You’ll pay off short-term loans much more quickly than a conventional term loan. Generally, short-term loans reach maturity in 18 months or fewer, depending on the principal amount and your fundability.

The Case for Short-Term Loans

You can use these loans for nearly any business purpose, making them a flexible option without a long-term commitment, bad credit aside.

Alternative lenders offer short-term loans for businesses with bad credit because they have a lower risk profile. Simply put, there is less time for something to go wrong that could cause you to default on the loan — and less money to lose even if you do.

Because of the higher risk, there are some caveats with short-term loans. For instance, rather than monthly payments, you might have to pay weekly or even daily.

Also, as with all business loans for poor credit borrowers, approval is not guaranteed. If you’re denied a short-term business loan because of your poor score, there are other business funding with bad credit options available.

2. Accounts Receivable Financing

Accounts receivable financing is an alternative funding product that converts outstanding invoices into immediate cash for your small business. It’s a great option for receiving the working capital you need when waiting for customer payments.

Accounts receivable financing companies typically pay as follows: 

• You receive a business cash advance, which may be up to 90% of the total invoices you’d like to finance. 

• You’ll be responsible for fees that accrue each week a balance remains. However, the remaining amount withheld from you will be paid out when the invoices are fully paid off. 

If you work with clients with excellent credit scores, accounts receivable financing lenders can look past your credit challenges and get the funding you need. 

The invoices secure the advance, making this form of financing self-collateralizing. So, if you’re wondering how to get a business loan with bad credit and no collateral other than your invoices, this may be the right option for you.

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3. Equipment Financing

If your business needs to replace or add new equipment or machinery, you might consider lenders offering equipment loans for bad credit. These loans are typically secured through the equipment you’re purchasing. If you default, lenders can recoup their losses by seizing and selling the equipment.

In some cases, you could secure up to 100% of the equipment’s value, though lenders often require up to a 20% down payment.

Even with bad credit, equipment leasing and buying opportunities may still be available because of the built-in collateral.

4. Merchant Cash Advance

If you’re looking to get approved for a loan with bad credit, a merchant cash advance (MCA) is another alternative financing option to consider. An MCA isn’t a loan but an advance on your future sales. Depending on the specifics of your MCA agreement, a lender will draw a percentage of your daily credit card sales as payment or withdraw funds directly from your business bank account. 

With this short-term bad credit business finance option, the creditworthiness of your business, while considered, is less of an approval factor. Instead, lending providers are more interested in seeing solid sales.

A merchant cash advance is one of the best bad credit business finance options for borrowers turned down elsewhere.

5. Business Line of Credit

A business line of credit is the most flexible funding solution, and it’s a top option when you’re in search of the best small business loans for bad credit. 

Borrowers are approved for a maximum amount from which they can draw funds as needed. Interest accrues only against the capital you’ve taken out. 

You typically repay the money weekly or monthly until your line of credit reaches maturity. When you’ve repaid the initial amount, you’re often free to take out more. Although some options require collateral to secure them, it’s possible to obtain an unsecured line of credit with a bad credit score. Fast Capital 360’s lending partners, for example, will accept as low as a 560 credit score. 

Business lines of credit can be used for daily working capital needs and larger projects.

Small Business Tip:

While business lines of credit are a great way to secure business funding with bad credit, they don’t always help you build your score. The same goes for other alternative funding options, such as merchant cash advances and some short-term loans. That’s because some alternative lenders don’t report to credit bureaus. 

If you want to build your credit, consider applying for a business credit card. On the flip side, when a new funding offer isn’t reported to the credit bureaus, that means it’s not showing on your credit profile as additional debt.