Starting, and even more importantly, sustaining a small business can be a huge challenge. Often, the biggest hurdle is finance. It can be especially challenging to get the funding you need without a good credit score. That’s why some lenders have introduced business loans for bad credit borrowers, in recent years.
But in the world of business loans with bad credit, how do you qualify? Who should you turn to for help, and what can you do to improve your chances of approval? You’ll find the answers to these and other important questions, in this guide to business loans for bad credit.
Understanding Bad Credit in a Business Context
Credit bureaus track your credit history, assign credit scores, and publish these and supporting information in credit reports.
You may access these reports, and we encourage you to do so, to get a firmer grasp on your financial health. However, the main purpose of these reports is to help lenders assess the risk of extending you credit or a loan.
Lenders look only at your score during a soft credit check, before pre-approval of financing, or to determine credit card eligibility. They look at the full report during a hard credit check if you are applying for a loan or credit card. That’s why you can be pre-approved for a loan and yet be declined once you’ve applied.
Unfortunately, hard credit checks can also negatively impact your score. It’s a complex process, but one thing is certain. A lot rests on that score when you want to apply for a loan.
To better understand how business loans for bad credit work, we must understand how a bad credit score can impact eligibility. That requires a brief examination of personal and business credit scores and how they are calculated.
Business Credit Score Vs Personal Credit Score
In the examination of business vs personal credit scores, there are two important things to look at.
1. Crucial Factors
First, here’s what credit bureaus look at to measure your creditworthiness or risk.
For personal credit scores, credit bureaus consider:
- Your payment history on things like credit cards, loans, and mortgages tracks whether you pay your bills on time. This is the most important category in calculating personal credit scores and accounts for 35% of the overall score.
- Your credit utilization(the total amount owed) indicates how much you owe compared to your credit limits. This is the second-most important factor in credit scoring. It adds up to 30% of your overall credit score.
- Credit history tracks how long you have had credit for and includes even your oldest accounts. This contributes 15% toward your credit score.
- The credit mix describes the different “mix” of credit you have, for example, a credit card, auto financing, a personal loan, and a mortgage. This accounts for 10% of your final score.
- Lastly, any new credit accounts are worth a further 10% of the overall credit score.
For a business credit score, the way the score is calculated is similar, but the crucial factors differ slightly. Payment history, credit history and usage, amount of debt, and company size are considered. Even your overall industry risk plays a role in your business credit score.
2. FICO and SBSS Scores
Next, there’s the way they are expressed as numbers on a scale of creditworthiness vs risk. This is called a FICO (from the Fair Isaac Corporation) score. Higher numbers are a sign of more creditworthiness, lower numbers are a sign of more risk.
However, there are two distinct credit score types, and they are numbered differently. The FICO score is usually used for personal credit scores, indicated on a scale of 300 to 850. But the FICO Small Business Scoring Service (SBSS) is used for business credit scores, ranked from 0 to 100.
A personal credit score between 300 and 579 is a poor credit score. It is only a very good score once it climbs past 740. This plays a large role in your eligibility for lines of credit and financing.
Similarly, your SBSS score can play a large role in your eligibility for an SBA loan. In the U.S., the Small Business Administration (SBA) loan program provides small businesses with low-interest loans of up to $5 million.
But why do these numbers matter? Well, borrowers usually need a score of 600 or higher to qualify for a small business loan. However, some lenders may approve a small business loan as low as 500. This would be considered a business loan for bad credit.
Do Personal and Business Credit Scores Affect One Another?
At first glance, the crucial factors in calculating personal credit scores may seem very similar to the factors for business credit scores. However, while your personal score is dictated by your credit behavior alone, the one for your business can be influenced by other people.
Just as individuals have social security numbers, registered businesses, and corporations have employer identification numbers (EINs). The EIN is attached to your business credit report much like your social security number gets attached to a personal credit report.
A poor personal credit history does not mean you’ll have a poor business credit history. And vice versa. Therefore, a poor personal credit score is not necessarily an obstacle to applying for business funding. But it can be.
There’s no standardized minimum credit score requirement for business loans. Eligibility criteria and credit score requirements vary depending on the lender and type of loan. Sometimes the business credit score is more important than the personal credit score, sometimes they’re given equal weight.
However, there are instances when a bad personal credit score is the sole determining factor in procuring a business loan.
When Your Personal Credit Score Matters the Most
Are you an entrepreneur looking for a startup business loan to start your business journey? Because you don’t yet have a business credit score or report, lenders can only consider your personal credit score and report.
However, once you have built up a business credit history, this will change. In the future, your personal credit score may play less of a role in whether or not you are approved for a business loan. Your business credit score will be a larger influence.
Can You Get a Business Loan With Bad Credit?
So, what do you do if you don’t have an impressive business credit history yet, or worse still, you have a bad credit score? Can you get a small business loan to help you with cash flow, like an SBA loan?
If you’re stressed about how to get a business loan with bad credit, we have some good news. Business loans are not only for those with long credit histories and high credit scores. There are business loans for bad credit borrowers, too.
These loans make allowance for the fact that you may have a poor credit score. This does not mean that you don’t need a credit score at all. Low business credit scores are often simply a result of too short a credit history and a lack of credit usage.
Your specific business model is not a factor, either. A small business loan for bad credit merely allows such a small business owner with less credit history and credit usage to access business funding.
Bad Credit Business Loan Options
Several online lenders claim to offer loans to individuals with bad credit. But what about business loans with bad credit? Yes, small business owners with bad credit can still get the business loans they need.
High-Interest Loan From an Alternative Lender
When banks and other financial institutions won’t approve loans, many small business owners resort to alternative lenders. Unfortunately, many of these loans for borrowers with bad credit entail high interest rates. This is how these lenders address the issue of the higher risk your low credit score represents.
With higher interest rates, you’ll be paying back a whole lot more than what you’re borrowing. Be aware that this is not always disclosed in the initial stage when you’re researching loan options. However, lenders must disclose this before you agree to any terms.
Some lenders may also require a personal guarantee or collateral. This means that in the event you cannot repay the loan, you could forfeit some of your personal assets.
SBA (7) Loan
The Small Business Administration offers several types of loans, but their SBA 7(a) loan is the most common. Although issued by participating private lenders, SBA 7(a) loans are also backed by the government.
The SBA loan repayment terms can be as long as 25 years for real estate and 10 years for working capital. Such a long repayment term will make a big dent in your budget, so only apply for such loans if it is absolutely necessary.
To qualify for an SBA 7 (a) loan, you’ll need to meet general requirements that apply to all SBA loans, plus eligibility criteria unique to the 7(a) loan program. We’ll cover this in more detail, a bit later.
You may also have to meet lender-specific requirements. Lenders use different credit scoring models to evaluate your creditworthiness. A minimum annual revenue or minimum FICO and/or SBSS credit score is the most common.
SBA 7 (a) small loans are also available for businesses with smaller funding needs. Unlike bigger working capital and business acquisition loans, these offer up to $350,000 and have shorter-term durations. If you are a small business owner who has very little credit history or a low credit score, this may be the best option.
A Business Line of Credit
A business line of credit gives you the freedom to use available funds only as you need them. This is a highly flexible option, and it is similar to using business credit cards.
You will pay interest only on the credit line funds you have used, and not on the entire credit amount potentially available. A business line of credit is therefore a much more attractive option than a high-interest-bearing loan.
Access to a business line of credit is just one of the services E-Boost Partners can help you with.
How to Get a Business Loan With Bad Credit
Traditional loans are offered through banks and similar financial institutions. However, banks typically don’t offer business loans to borrowers with minimal credit history or bad credit scores. So, how and where can you get a business loan with bad credit?
Where and How to Apply to Alternative Lenders
Bad credit business loans can often be accessed through alternative online lending platforms. A quick search online should produce some lenders to consider. Ensure that they have legitimate websites and ask for proof of registration as lenders if you don’t see any on the site.
Please be aware that using alternative lenders is not a loophole when you have bad credit. Credit scores do still apply. The applications are typically done online and the lending platform may request your permission for a credit check. Even loans for bad credit still require some sort of credit score.
Where and How to Apply for SBA 7 (a) Loans
You can apply for an SBA 7 (a) loan on the official SBA.gov website. To be eligible for 7(a) loan assistance, your business must meet all the following requirements:
- Operates as a business for profit
- Is located in the United States
- Qualifies as a small under business according to SBA size requirements
- Unable to obtain the necessary loan on reasonable terms from non-Federal, non-state, and non-local government sources.
- Is creditworthy and able to repay the loan (exact credit score requirements and other qualifying criteria may differ depending on the SBA lender
Where and How to Apply for a Business Line of Credit
You can apply for a small business line of credit through E-Boost Partners. The application process is quick and easy, either online or over the phone. A loan advisor will help you review your options and reach a decision.
The minimum qualifications are one or more years of consistent sales history and average monthly sales of $15,000. Interest rates are as low as 0,5% and this flexible financing option offers up to $200, 000,000, depending on eligibility criteria.
E-Boost runs a soft credit check on the owner (or majority owner) of any small business that applies. However, it is merely to ascertain eligibility and does not affect credit scores.
Things to Consider When Applying for a Business Loan
Now you know that there are, indeed, business loans for bad credit. But there are a few things you need to consider first, before applying for a bad credit business loan. This will help you maximize your chances for loan approval, in the shortest amount of time.
Consider Your Unique Credit Score
For a better chance of approval, and to avoid disappointment, check your credit scores before applying to ensure you meet the minimum requirements. This is important regardless of who is offering the loan in question.
SBA loans can be used for a variety of purposes, including small business financing and working capital. The popular SBA 7 (a) loans don’t offer more than $5 million, regardless of what the loan is going to be used for.
Most SBA lenders require a personal credit score (FICO score) of 650 or more. Even their small loan amounts also require a minimum SBSS of 155 for loan approval. The loan amount does not waive the need for a minimum credit score of some kind.
If you know what your score is, you can apply for loans that you are more likely to qualify for.
Choose a Loan Based on Business Needs
We know that it’s tempting to grab the first opportunity that comes your way. But don’t just choose the first loan offer you see. There are several possibilities for small business loans for bad credit. Do the research, and choose a loan based on your unique business needs and credit score.
Every business has unique needs, and different types of business loans cater to these needs. Also, some lenders offer higher business loan amounts than others. Determine what your business’s needs are and how much money you need to cover them.
Do you have a once-off expense you need help with to start your business? Or do you need help keeping the business afloat until it starts turning a profit? Equipment financing loans cover expenses related to essential machinery, and working capital loans help with cash flow for those day-to-day running expenses.
If you know what you need the loan for, and how much you need, before applying you will get the right loan the first time. Get it wrong, and you’ll find yourself in need of further loans, which will once again impact your credit score.
Improve Your Chances of Approval
There’s not too much you can do about some of the factors that credit bureaus look at when calculating your credit score. But that doesn’t mean you can’t boost your odds for bad credit business loan success!
So, how do you improve your chances of approval when applying for business loans with a bad credit rating?
- Keep a business bank account, separate from your personal bank account. Business bank accounts typically have fees connected with them. Don’t let any relevant account management fees fall into arrears.
- Pay your business bills on time. This will reflect positively on your payment history information in your credit report. If, for whatever reason, you cannot make payments on time, contact your creditors and make alternative arrangements.
- Don’t apply for loans that you cannot repay. This may seem obvious to many of you, but it’s far too easy to mislead yourself about your loan affordability. Understand the difference between gross and net revenue, and be realistic about your potential revenue during the loan term.
- As explained earlier, it’s a good idea to reduce the risk of too many hard credit checks. These are all recorded and can easily be accessed through a credit report. Too many hard credit checks, even if your applications were unsuccessful, will negatively impact your credit score in the future.
- Build strong relationships with vendors that you think will report your credit usage to the business credit bureaus. If you are unsure whether or not they do this, you can check the Dun & Bradstreet (D&B) website and search whether that vendor has a profile. If they do, they likely report on all their business credit.
- Get the right advice about business loans for bad credit. You can get confidential and accurate advice about your options and how to apply, from a reputable loan broker like E-Boost Partners. Feel free to reach out to us. Contacting us for information will not impact your credit score.
What to Watch Out for as a Borrower With Bad Credit
Sadly, there are many disreputable lenders online, intent on scamming the public. It’s easy to fall prey to their schemes when you’re desperate for a bad credit business loan. Always check a lender’s credentials for safety and peace of mind.
If you think you have been the victim of such a scam, report it to the relevant authorities immediately. Stick to legitimate lending platforms, or SBA lenders, or go through loan brokers like E-Boost who have the expertise you can rely on.
Conclusion
If you’re a new business owner, your business won’t have much payment or credit history. The total debt and debt usage debt may also be very low. You’d be forgiven for thinking that’s in your favor. Unfortunately, it means that crucial factors for business credit scoring are absent.
Besides company size and industry risk, credit bureaus can only consider your personal credit score. If you have a business credit report and score, but they are not favorable, it’s difficult to qualify for that much-needed funding. But not impossible.
There are business loans for bad credit, and E-Boost Partners can help you to access them. Contact us today for more information.
