Obtaining business loans for bad credit is a way to meet short- and long-term business goals. It is important to review the terms and conditions of the financing you choose to ensure it fits your needs and budget.
Some lenders require a minimum credit score, while others focus on the health of your business’ cash flow. Here are some of the most popular business loan options for bad credit:
Traditional Loans
If your business has bad credit, you have a number of options for financing. The key is to compare lenders and understand their eligibility requirements, interest rates and terms. Some lenders may require a certain amount of annual revenue, while others use factors like the length of time in business and current accounts receivable as evidence of a company’s financial health.
Traditional loans from banks typically have the highest lending standards. They may require a high credit score and long application process. However, if your business has strong cash flow and can offer up collateral, it’s possible to qualify for a traditional loan despite bad credit.
If your business doesn’t have a lot of credit history, consider a cosigner. A cosigner can help you qualify for a conventional business loan and take on the liability of making payments if your business fails. It can also speed up the application process. However, not all lenders allow cosigners.
Lines of Credit
A business line of credit works similar to a credit card in that the borrower only pays interest on funds used. A revolving line of credit can provide a steady source of funding and offer flexibility for companies with poor credit scores. Borrowers can secure a line of credit through a variety of traditional and online lenders, although qualifications vary by lender.
Lenders evaluate the creditworthiness of borrowers through a mix of criteria including their personal FICO score and the strength of their company’s cash flow. They also consider the length of time a business has been in operation and its revenue to determine creditworthiness.
Some lenders may require that a borrower pledge collateral, such as commercial property or hard assets like equipment and fixtures. Collateral reduces the risk for the lender and can improve the likelihood of a loan approval. Alternatively, a borrower can opt to secure financing through an alternative source of capital, such as crowdfunding or a private investor.
Asset-Based Loans
This type of financing involves pledging a company’s commercial assets like real estate, machinery, inventory, accounts receivable and personal assets as collateral for a business loan. Generally, the amount of financing available is based on the lender’s loan-to-value (LTV) ratio and collateral appraisal. Marketable securities like bonds, certificates of deposit and publicly traded stocks may also serve as collateral.
Small to mid-sized companies that are stable and have physical assets of value typically seek this type of financing. Additionally, large corporations sometimes take this route when the cost and long lead time of issuing additional shares or bonds in the capital markets is just too high for their cash flow requirements.
Before applying for this type of financing, a business should close out outstanding debt and organize all relevant documentation to expedite the process. Adding a cosigner with a strong credit score can also improve the odds of approval and make it easier to manage repayment.
SBA Loans
Obtaining a business loan with bad credit is not impossible, though your options may be limited. Lenders may consider annual revenue, time in business and cash flow when assessing your eligibility, as well as factors like your personal credit score. Rebuilding your credit through strategies like resolving errors, increasing revenue and negotiating payment terms with suppliers/vendors can improve your chances of qualifying for a business loan with bad credit.
The Small Business Administration offers several government-backed loan programs with lenient requirements, including the 504/CDC Loan Program and CAPLines. These loans require a minimum personal credit score of around 640, but they also offer better interest rates and shorter repayment periods than traditional banks.
Regardless of what type of financing you choose, it’s important to make your payments on time and in full. Consistently making payments on time will strengthen your business’s credit history and help you qualify for better rates and terms when applying for future financing.