business loans bad credit

One major challenge faced by start-ups and first-time business owners is how to secure a business loan for people with bad credit. It is almost impossible without the assistance of a factoring company to show you the ropes. 

Traditional banks have always had stringent credit requirements for small businesses. And, online loans for bad credit isn’t necessarily an easier route to follow, either. A low credit score almost automatically prevents you from being approved for a loan. Fortunately, business lending has evolved and small business owners with bad credit now have more options than ever for securing business loans. Here are five options for bad credit business loans that may be able to meet your funding needs.

Can I obtain new business funding with a bad credit score?

Getting a loan with bad credit is one thing but obtaining new business funding with a poor credit score is a whole different ball game. While it won’t be easy, it is definitely possible.

Banks generally base their decision to lend off the risk of the loaner, so if you don’t have a good credit history, they will be inclined to believe that you could default on your loan repayments in the future. Some of your options include the following:

  • Traditional bank loan: Banks may still be willing to fund your business venture, but you may have higher interest rates than someone with a good credit score. It is also possible that the bank will require more collateral in order to approve your loan.

  • Microloan: A microloan is similar to a bank loan, but it is typically for smaller amounts (say, $50,000) and the money will be supplied by alternative lenders as opposed to a traditional bank. The requirements for a micro loan are less stringent than the requirements for a traditional bank loan.

  • Business cash advance: This option is for startups who are having cash flow problems. In this case, the merchant will forward you the cash (which is usually a maximum of $10,000), which you will repay at a higher interest rate when your cash flow improves or as determined by you lending terms.

  • Home equity: If you have property, then you can secure a bank loan by putting your house down as collateral. This is a high-risk option and it obviously only applies to people who are willing to put their home on the line.
  • Revenue-based loan: This loan can be granted to you within a week and you will get access to a maximum of 10 percent of your company’s revenue. There are, however, quite a few prerequisites to qualify for this type of loan. Your credit score has to be above 550 and your business needs to make more than $100,000 in sales.

Short-Term Loans for Bad Credit

If you’re looking for bad credit business loans that come with a simple, predictable structure, short-term loans might work for you. Short-term loans are almost identical to what traditional banks offer, but there are a few key differences.

Rather than being offered over a multi-year period, these loans have terms lasting anywhere from three to 18 months. Because they come with such short terms, you typically have to make loan repayments more frequently, instead of monthly.

Fortunately, the application process is simple and relatively quick, getting you access to the cash you need sooner. Some banks consider applicants with credit scores under 500 for short-term loans. So, for short-term business loans bad credit may be irrelevant.

Small Business (SBA) Loans with bad credit

With small business loans bad credit does not always bring instant disqualification. You don’t need a perfect credit score to be eligible for a small business loan, which is important because Small Business Administration (SBA) loans come with more desirable interest rates. Most successful applicants have credit scores over 650.

Traditional lenders take part in the SBA loan program because the U.S. government stands behind the borrower to guarantee the small business loan with bad credit. SBA representatives want to work with small companies that have been in business for at least one or two years. Before approving bad credit small business loans, the SBA specialist will study the borrower’s financial statements to ascertain the chances that a loan will be paid off.

The downside of SBA bad credit business loans? If your credit score is lower or your business is struggling or not showing signs of growth, then you may not be eligible for small business loans for bad credit.

Equipment Financing with Bad Credit

If you need to borrow money to buy necessary equipment for your company, you may qualify for bad credit equipment loans. With these types of business loans with bad credit, the value of the equipment is the collateral that guarantees the lender will own something in exchange for the loan. For instance, if you own a trucking business and wish to purchase another truck, a financial institution can loan you the money for that truck with little risk. Even with bad credit secured loans, backed by the equipment as collateral, borrowers have a chance to grow their business. The good news is that, after you pay off the instalments in a collateral loan with bad credit arrangement, you own your equipment. If you’re looking for equipment-specific bad credit business loans, equipment financing could be for you.

Fundraising loans for bad credit

Personal fundraising platforms — or “crowdfunding” — represent a newer option for a business loan for bad credit. Sites like “GoFundMe” or “Kickstarter” can make fundraising both small and large amounts faster and easier. This option is not a bad credit business loan, but rather a platform that does not require payback for donations.

If you have a large network of friends and family members, and if your fundraising page presents a strong and compelling case, you could raise funds for your startup. If you have not had luck closing business loans for poor credit, your credit score is irrelevant to these online sources.

Also, there are several online nonbank lenders on the internet that now offer bad credit business loans. The borrowing amount is typically in the $5,000 to $25,000 range. Be sure and do your homework because these lenders have different requirements on how loans are priced. But generally, for these business loans bad credit may result in a higher interest rate.

The best alternative financing for businesses with bad credit

There are a number of small business loan options and the financing method you choose will depend on your company’s capital needs as well as your business structure. Here are a few options to consider:

  • Asset-based lending: Businesses who opt for an asset-based loan typically have costly machinery, products or business equipment that can be put down as collateral to secure a loan. This type of loan can be set up as a revolving line of credit that you can get access to when you need it. The benefit is that you will only pay interest on the amount of money you have withdrawn from the loan. Another advantage of an asset-based loan is that it will have lower interest rates than other alternative financing options. The money you loan can be used to cover the monthly overheads of your business or it can be used to grow your business.

  • Business credit card: While most people have a personal credit card, they don’t always consider a business credit card to help them with the cash flow problems that their new start-up may be experiencing. The benefit of a business credit card is that you can start building a good credit score while you get access to the cash that your business needs to expand and cover monthly costs.
  • Friends and family: If you are starting a new company and need investors, then approaching your friends, family and old business connections could also be an option. Many times, this isn’t a possibility but if it is, you can try to negotiate favorable repayment terms and interest rates.
  • Factoring invoices: If you are having cash flow problems because your clients take 30, 60 or 90 days to pay you, then you can factor your account receivables. In this case, a factoring company will ‘buy’ your invoices from you and give you a cash advance on the money that your clients owe you. The factoring company will then collect the money from your clients and keep a small portion of the money as their factoring fee. Some of the benefits involved in factoring is that you will have professional collection agents following up on your outstanding accounts and that you will get upfront access to the cash that is owed to you.

Qualify for Invoice Factoring with a bad credit rating

Unlike bad credit bank loans or other options that must be repaid, invoice factoring is not a loan. When you factor your invoices, you receive an advance on work that you have completed so you do not have to wait weeks and months for your customers to pay you. Many business owners prefer invoice factoring to alternative business loans.

When business owners with bad or no credit need a loan, they can qualify for invoice factoring based on their customers’ credit histories, not their own. Compared to some other bad credit options, factoring is a fast solution. Companies can turn their stack of accounts receivable into instant cash after a quick approval process, often within just one day.

In addition to speeding up cash flow, as a source of business funding with bad credit, invoice factoring typically provides clients with other valuable services such as professional collections work, credit checks, and access to helpful online account management tools.

Final Thoughts on Bad Credit Business Loans

As alternative lenders, such as factoring companies, enter the market, small business owners with bad credit have more options than ever to secure financing. You want to be confident in your ultimate choice and your ability to pay back the loan — your business’ success depends on. Take the time to weigh your options, talk with lenders and think about what makes the most sense for you.

If you’re interested in learning more about one of those options, get an free factoring rate quote to kick start the process.

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