Best Business Loans for Bad Credit

Best business loans for bad credit

Before we get into what lenders look for when approving borrowers and the terms you should expect, here’s a look at some of the best business loans for people with challenged credit. 

Balboa Capital 

Balboa Capital is willing to look at more than your credit score when underwriting loans. The other considerations include the number of years you’ve owned the business and its annual sales. With loans ranging from $5,000 to $5 million, the lender can meet many small business owners’ needs. Balboa Capital doesn’t require collateral and the company offers a variety of loan types and repayment terms from which to choose. Learn more in our review of Balboa Capital.

Rapid Finance 

Building or rebuilding your credit takes time. If time is not on your side, consider reaching out to Rapid Finance. Although they do not specify a minimum credit score, they say they consider multiple factors when deciding whether to approve a loan. Rapid Finance offers a variety of loan types and funding between $5,000 and $1 million. Loans are typically funded on the same day as their approval. Rapid Finance doesn’t require a lot of paperwork to apply, which makes the process even quicker. Learn more in our review of Rapid Finance.

Noble Funding 

Noble Funding is committed to working with its borrowers long after it approves the loan. Part of that is due to its willingness to work with borrowers with challenged credit. You need a credit score of only 525 for a short-term loan approval. The lender is willing to look at other criteria when approving a loan, and it doesn’t require any collateral or even, in some cases, a personal guarantee. Learn more in our review of Noble Funding. 

SBG Funding 

SBG Funding makes it easy to prove your ability to pay back your business loan. To qualify for one of its loans, you need a credit score of only 500, to be in business for at least six months, and have at least $10,000 in monthly revenue. The lender doesn’t require reams of paperwork, nor does it make you offer up collateral. SBG Funding offers flexible terms between six months and five years, and it provides same-day funding — making it our pick for best flexible terms. Learn more in our review of SBG Funding.

What types of business loans can you get with bad credit?

If your credit history isn’t good enough to obtain a loan from a conventional lender, there are alternative or private lenders you can turn to. The flexibility and speed with which the loans can be approved are useful if you have bad credit, but the terms can also be restrictive and the loans expensive.

Financial solutions to keep your business running

Finding the right financial solutions for your small business is time consuming, especially in these tough times. Business.com looked at dozens of options to come up with the following recommendations.

“The further down you are in the credit funnel, the worse the rates are,” said James Cassel, co-founder and chairman of Cassel Salpeter & Co. “With great credit, it could be 5 percent. With bad credit … it could be the equivalent of 40 percent.”

If your current credit score falls within the fair or poor ranges, these are some of the best business loans available:

• Short-term loans: Short-term loans include traditional term loans and lines of credit. Short-term loans are repaid in three years or less and lines of credit are repaid within one year. If you have good credit, you would ideally leverage short-term loans because of their low cost and easy approval process. Short-term loans can be useful if your company has credit issues, because lenders often prioritize cash flow over credit score. As long as you have enough revenue and reserves to support a short-term loan, a lender will likely approve your application.
• Hard-money loans: Hard-money loans include several types of loans backed by a collateral asset rather than a credit score. Most often, the assets used as collateral are real estate, such as a building or plot of land. A bridge loan, for example, is a hard-money loan often used for redeveloping a property. The loan is secured by the value of the real estate upon completion of the project, allowing the lender to foreclose on the property if you default on the loan.
• Invoice financing: Factoring — or invoice financing — isn’t truly a loan. Rather, you essentially sell your accounts receivable to a factor at a reduced rate (typically 70 percent to 90 percent of the total value). Once the outstanding invoices have been sold, a factor typically begins collecting the payments owed directly from your customers. Invoice factoring can be useful if your business is seasonal or needs growth capital. Using this option to cover operational expenses, however, is a risky maneuver.
• Merchant cash advance (MCA): An MCA is also not technically a loan. Instead, it is a form of funding backed by credit card sales (or sometimes just revenue in general) called credit card receivables financing. Based on your sales volume, a lender will offer a lump-sum payment in exchange for a portion of your credit card sales until you’ve repaid the loan (plus fees). MCAs can be expensive and are considered a financing option of last resort.
• Microloan: According to the Small Business Administration (SBA), microloans could provide your small business with a loan of up to $50,000. The SBA provides the loans to be administered through nonprofit lending organizations. Microloans can be used for inventory, working capital, new furniture, or building fixtures and equipment purchasing or leasing. The average small business takes out approximately $13,000 through a microloan. Each lender has its own criteria for what credit score you need to get approved.
• Business credit cards: Business credit cards provide another option if your company needs to improve its cash flow. You would often be approved for a business credit card even if you have bad credit. Annual percentage rates, however, may be higher with lower credit scores. The good news is that making regular payments will help you improve your credit score.
• Equipment financing: When you enroll in an equipment financing program, you are borrowing funds to purchase or lease equipment needed to run your business. Equipment financing loans provide a payment schedule over a fixed term. Typically, lenders provide fixed interest rates for equipment financing. Credit requirements are less stringent because the lender may be able to repossess any equipment if the loan is not paid off. 

Do your homework before accepting any type of funding. Research the lender thoroughly to ensure they are a reputable brand and not a predatory lender. Review any repayment terms closely before signing and have your attorney and accountant review them, too, if possible. Only accept money that you can realistically pay back in the specified time. Otherwise, further financing could expedite the demise of your business.

How to qualify for a short-term loan with bad credit

Short-term loans are a type of small business loan that closely resembles a conventional term loan in many ways. Short-term loans carry an interest rate and require repayment of both principal and interest within a certain period, just like a bank loan. Because the term is less than a year, however, short-term lenders are more concerned with your company’s cash flow than its credit score.

“Banks ask for all types of collateral and personal credit is very important to the bank,” said Michael Baynes, co-founder and CEO of Clarify Capital. “What’s important to us is cash flow [demonstrated] through six months of bank statements. If we feel [a business’s] bank balance can support our funding over the next four to 12 months, we’re comfortable lending to them regardless of personal credit score.” 

1. Don’t be overleveraged.

Generally, Baynes said, alternative loans require a one-page application, along with a minimum of three months of bank statements. That’s all an alternative lender needs to approve or deny your loan application. But what exactly are alternative lenders looking for?

“The most common reason we reject an application is due to a business being overleveraged,” Baynes said. “If they already have existing debt … and we feel additional payment would overleverage them, we would turn the business down. The other reason an application would be declined is low revenue and low daily bank balances. We need to see $10,000 to $15,000 per month in revenue or deposits. If they struggle with overdrafts or negative days in their bank account, we’re not confident they can make the payments.”

2. For fast funding, maintain your financials.

The approval process for these types of alternative loans tends to be much faster than conventional banks, which could take weeks or months to approve your loan application. If approved, funding for alternative loans can often be delivered within a few days.

To expedite approval, it’s important to maintain good financial documentation. According to Cassel, keeping detailed, accurate books is one of the most important things your business can do.

“Make sure your financial house is in order,” he said. “Every business needs to have monthly financials. They need to be available no later than 10 to 15 days after the end of the month. Some businesses don’t get them until 90 days after the month. Then you’re 90 days further in the hole and it’s too late to correct it.”

Good books not only help you avoid financial trouble, but also give lenders the insight they need to make a decision on whether to extend financing to your organization.

What is the credit spectrum?

Lenders look out upon the vast sea of potential borrowers and see a credit spectrum that ranges from very bad to very good. Depending on your business’s position in the credit spectrum, certain types of funding may be unavailable to you. If your business has great credit, you can usually obtain long-term loans with low interest rates. If your company is less creditworthy, however, you may have to pursue more expensive funding options for high-risk businesses that need a high-risk business loan.

“On the one [end] of the credit spectrum is someone who can walk into a major bank and borrow money on the business’s credit, not a personal guarantee,” Cassel said.

Those borrowers can expect low interest rates ranging from 2 percent to 5 percent on a term loan. Of course, Cassel said, that’s only true for “stellar businesses with great history. On the other side of the rainbow are businesses that can’t get money from any kind of institutional lender.”

Just as there is a broad range your credit score could fall in, there is a spectrum of financial products to consider. Some — such as bank loans or SBA 7(a) loans — are available if you’re a creditworthy borrower. If you have only decent credit, though, you may seek a guaranteed loan.

How can you begin repairing bad credit?

There are advantages to repairing a damaged credit score, even if you qualify for funding. As Baynes said, an improved credit score can avail your business of better terms and rates. Rebuilding credit can be a long and arduous process, but you should do it when your financial situation has stabilized.

1. Keep up with personal payments.

“Obviously, first and foremost is staying current on your personal credit payments,” Baynes said. “These are things like auto loans and credit cards. Maxed-out credit cards drive down your credit score. Missing payments — or just making minimum payments — brings down your credit score tremendously.”

2. Make a detailed plan for credit rehabilitation.

According to Cassel, business credit rehabilitation can be extremely difficult and requires a detailed plan. While maintaining your personal credit score, you also need to keep an eye on your business’s debt service.

“When businesses get into trouble, they should put together a 13-week cash flow [projection] of expected funds in and expected funds out,” he said. “This helps them manage cash and decide what to pay for.”

3. Seek ways to pay off debt.

There are some ways you can seek relief to stabilize your company’s financial situation, such as raising prices. You may be reluctant to raise prices, Cassel said, because you are afraid of losing customers. In many cases, however, there is more room to hike rates than you realize.

You could also ask suppliers to extend payment schedules. If you are a good customer who has kept up with payments in the past, a vendor is likely to work with you. After all, they don’t want to lose you as a customer.

4. Don’t despair.

If you’ve partnered with a certain lender before, they may be willing to lend a bit more to your business if they see you are on the road to financial rehabilitation. This is known as an “airball,” Cassel said.

If things become truly dire, you can usually call in a restructuring firm to reorganize operations.

“Sometimes it is a vicious cycle that is impossible to get out of,” Cassel said. “As things get worse, the cost of borrowing goes up, so you have to figure out how to stabilize the business. Once you stabilize, you can focus on repair.”

Unfortunately, when financial troubles become pervasive enough, you must reckon with the hard truth: The best option, Cassel said, is sometimes to cut your losses and stop the bleeding.

“You’ve got to look at the viability of the business,” he said. “Business owners have to be honest with themselves about long-term viability.”

5. Be realistic about borrowing.

Ultimately, securing financing should be a way to get your business to a better place on the credit spectrum. That way, the next time you need funding, you can successfully pursue a financial product with better rates and more favorable terms. If financing doesn’t support that type of progress, then it could just be digging your business into a deeper hole.

Cassel had this advice for struggling businesses: “Be honest, try to get a loan, and, ultimately, get back to a better lender. Some businesses never do and owners start to feel like they’re working for the bank.”

Financing can be a great tool, but, taken irresponsibly or out of desperation, expensive loans can be the death knell for your business. Always have a plan for any money you borrow and keep an open line of communication with your lenders. If you do, you could be well on the road to credit repair.

Kimberlee Leonard and Jennifer Dublino contributed to the reporting and writing in this article. Source interviews were conducted for a previous version of this article.