When you have bad credit, it feels like no one will ever lend you money again. Based on current FICO scores, a score ranging from 329 to 669 is considered a poor credit borrower on most applications, so falling in this range it is most likely that only bad credit business loans are available.
Fortunately, there are options for funding your business if you have bad credit. In fact, there are plenty of unsecured business loans that can help you run or expand your business.
You just need to know where to look.
When you have bad credit, not every type of business loan will be open to you. But many are—as long as you’re willing to work with the right lender and know to expect higher interest rates.
Let’s take a look at some of the most common types of business funding for business owners with bad credit.
Loan amounts: $5,000–$1,000,000
Average rates: 12%–45%
Term lengths: 2–36 months
A term loan is what you probably think of as a “regular” loan. You take out a loan for a specific amount of money, receive a lump sum, and pay it back over a specified period of time.
Every payment chips away at the loan balance and covers the interest for that period of time (usually a month).
Both traditional banks and alternative lenders offer term loans, but there are some important differences. The most important is that you’re going to have a tough time getting approved for a traditional loan if you have bad credit.
Alternative lenders are more likely to work with you on creating a loan that fits your needs, even if you have bad credit.
That may mean higher interest rates and lower loan capital. And it usually means taking a short-term loan that you’ll pay back within three years or so.
Still, there’s a big advantage to term loans for borrowers with bad credit: you get a solid chunk of cash to finance your business.
Working Capital Loans
Some term loans are called “working capital loans.” All this means is that the money is meant for the day-to-day operations of your business.
These funds aren’t meant for large purchases, expansions, or other significant investments. They’re meant to help you cover accounts payable, wages, and other smaller items.
And while some lenders have loosened the restrictions on the uses of working capital, some organizations still require borrowers to use these types of loans for specific purposes (usually for paying vendors).
Because a working capital loan is usually short-term, it gives you access to money at a lower cost than a larger loan. And it can help you take advantage of opportunities that you might not have cash on hand for.
Keep in mind that many of the types of loans below can be classified as working capital loans, too.
Business Line of Credit
Credit available: $5,000–$250,000
Average rates: 5%–10%
A business line of credit is like a credit card. You’ll get a credit maximum, say $100,000, and you can borrow money up to that amount whenever you need it. You only pay interest on what you borrow.
So you might borrow $20,000 for new computers. And $5,000 to cover a late invoice. Then, after you’ve paid that back, the full $100,000 is available to help you open a new location.
The advantage of lines of credit is that they’re very flexible. You can use them for just about whatever you want, and once you’re approved, you can get access to that money very quickly.
But you may have difficulty getting a business line of credit if your credit score is bad. In these situations, it’s best to be upfront with your lender and tell them why you have bad credit and what you’re doing about it.
You should also be prepared for higher rates and lower credit limits.
Business Credit Cards
Credit available: variable, depending on credit rating
Average rates: 13–27%
You can also get business credit cards to use in a similar way. They’ll have lower credit limits and higher interest rates than business lines of credit.
But they do have some advantages. You might be able to get approved with a very low credit rating if you work with a company that specifically offers business credit cards for bad credit.
You might be able to open a secured card by putting up collateral. Some secured cards don’t even require a credit check, which is great when you’d rather not get into explaining why your credit rating is low.
And you can use them to collect rewards, which can add up to a significant amount if you’re making big purchases for your business.
Invoice Factoring and Financing
Having cash flow problems? Many small businesses are dependent on their clients paying their invoices on time—but that doesn’t always happen. And that can put you in a tough spot.
Invoice factoring and financing can both help you out. There are important differences between the two, so we’ll tackle them separately.
Average factoring fee: highly variable (rates from less than 1% to over 5%)
You can think of invoice factoring as selling unpaid invoices to another company. They then follow up with customers to get paid.
You’ll pay a factoring fee when you sell the invoices, and then receive the outstanding value. For example, with a 2% factoring fee, you could sell $15,000 of unpaid invoices for $14,700.
(Though there may be other fees as well, depending on your factorer, industry, and history).
When you sell those invoices, you’ll get an advance—usually about 80% of the outstanding invoices. In the example above, you’d get $12,000 right away. Then, after the factoring group collects on the invoices, they’ll send you the rest of your money, minus their fee.
This is great when you need cash as soon as possible and you have outstanding invoices. And it’s often easy to get, even if you have bad credit.
Keep in mind, though, that factoring fees can add up. You can pay 5% or even more in factoring fees, and that can be a significant amount of money. The amount you pay varies based on many factors, including:
- size of the invoices
- number of invoices in the transaction
- credit ratings of customers
- history with the factorer
And it’s not insignificant that someone else will be dealing with your customers. If the factorer has to collect on your invoices, you want to be sure that they’re treating your customers well. So make sure to do your research on the factorer.
Some factoring groups also hold you accountable if a customer doesn’t pay. Which can be a big pain.
This is a rather complicated solution, as there are a lot of factors that go into it, and the number varies quite a bit. It’s worth spending time to figure out exactly what you’re getting and what it costs before committing.
Loan amounts: Depends on your customers and invoices
Average rates: 5–50%
Term lengths: Depends on your business
If you want to retain control over your invoices and not have anyone else dealing with your customers, invoice financing is a good option.
This basically lets you take out a short-term loan with your invoices as collateral.
Like invoice factoring, this can be a rather expensive option, with APRs often starting above 10%. So don’t finance your invoices unless you absolutely have to.
That being said, it’s still a very fast way to get cash, and you don’t have to give someone else access to your customers.
Merchant Cash Advance / Revenue-Based Loan
Loan amounts: $8,000–$250,000
Term lengths: 2–12 months
These two types of funding are different from the ones mentioned above. Instead of repaying the loan on a fixed schedule or all at once, you’ll pay a portion of your revenue.
The loan provider automatically receives a small percentage of all your credit card sales until the loan is paid back.(Or the lender receives a portion of your revenue through ACH, it is basically a Merchant Cash Advance for companies that do not process credit cards)
Seems like a good deal, right? You get cash fast and don’t have to worry about making minimum payment—it’s all taken care of.
Well, that’s true, but these types of loans also have very high interest rates. You might find yourself paying back an extra 30% of the loan or more.
The difference between a merchant cash advance and a revenue based loan is how your payments are calculated. This might make a slight difference in your payment schedule, but you can basically think of them as the same thing.
Loan amounts: $10,000–$500,000
Average rates: 5–10%
Term lengths: 2–10 years
Down payment: 5–20%
Buying equipment for your business can be expensive—it’s not hard to spend tens or hundreds of thousands of dollars on machinery. And not many business owners can put up the cash to do that.
Equipment loans solve the problem by letting you buy equipment without other collateral—the equipment becomes the collateral.
Because it’s a secured loan, borrowers with bad credit have a better chance of getting an equipment loan than a standard term loan . . . but the uses are more limited than some other types of loans.
Another advantage of this type of loan is that you own the equipment once the loan term is over. You don’t need to rent or lease it. And that can provide better long-term value.
However, you’ll probably need to make a down payment on the equipment. And that can be tens of thousands of dollars if you’re purchasing expensive equipment. Those down payments can be quite restrictive for business owners with bad credit.
Loan amounts: Up to $50,000
Average rates: Variable (but often quite low)
Term lengths: Variable
If you qualify for a microloan, you can get anywhere from a few hundred to $50,000 with great interest rates.
Qualifying for a microloan, however, isn’t always easy. Many microloans are for specific groups of people, like female business owners, veterans, minorities, small startups, or businesses in disadvantaged communities.
Some of these loans are also provided by the government, which tends to offer low interest rates.
Because there are many different microloan programs, there’s a wide range of requirements. Some might require that you have great credit. Others might be willing to overlook a bad credit score.
Your best bet is to start researching microloans that might be applicable to your situation and look at their requirements individually.
Loan amounts: Up to $500,000
Average rates: 9–40%
Term lengths: 1–5 years
While you could crowdfund your business venture on a platform like Kickstarter or Indiegogo, there are sites that specifically connect business owners and investors for loans.
And because you’re working with individual investors, there’s a good chance that you’ll be able to convince them of your loan-worthiness even if you don’t have good credit.
Services like Lending Club, Upstart, and Prosper let you seek out these types of loans. Many of these sites technically offer personal loans, which means your liabilities and obligations may be a bit different than if you were to secure a business loan.
That being said, this can be a good way to get cash into your business. It’s not especially fast, and you may face hurdles with bad credit. But if you’re looking for a smaller amount of money, it could work.
Unfortunately, getting a startup loan with bad credit isn’t really an option. If you have bad credit, the best way to fund your startup is via venture capital. Or—more likely—from an existing revenue stream.
Choose the Right Business Loan for You
As you can see, there are plenty of options available to business owners with bad credit.
Some come with notable drawbacks, and you should be prepared to have lower maximums and higher interest rates than someone with good credit.
But as long as you know what to expect, and where to look, you can get a business loan even without a high credit score.
Now that you know what to expect, check out our business loans for business owners with bad credit. We’d love to talk to you about how we can help!