For years, your small biz may have been booming, but maybe now you don’t have the money to make payroll. What’s more, your credit isn’t in great shape to secure a loan.
While you may think you’ll have to close your business for good, there may be a solution: a small business loan specifically for those with bad credit.
In this guide, we’ll cover all you need to know about how to get a small business loan with bad credit.
Step 1: Assess Your Situation
You’ll need to assess your situation regardless of whether you sell antique furniture or tax advice.
That’s because every struggling small business needs to take a deep breath, pour a cup of coffee, and pore over its finances. The last thing any small business wants is to take out a high-interest loan if there are other financing options available.
When assessing your situation, consider the following:
- Your credit score – Many lenders look for at least a 530 credit score before they’ll loan you money. That said, the higher your credit score, the better—just like sprinkles on a donut. However, if your credit score is lower than 530, you might still be able to qualify for an SBA loan (Small Business Administration). You’ll just have to work a bit harder to get one.
- Your finances – Although credit agencies factor in your debt-to-income ratio when deducing your credit score, lending agencies will likely want to have this information on hand. Make the loan application process easier by gathering this information as soon as possible. You should especially note your cash flow, outstanding debt, and yearly revenue.
- Your purpose – Some lending agencies will loan you money for any reason as long as you meet their conditions. However, many others may ask you what the money will be used for. Banks tend to be more willing to authorize loans if they know their money will be able to increase your revenue. If you plan on using loan money simply to keep your doors open, you might have a more difficult time finding business financing.
Once you know your specific financial situation, you’ll be better equipped to seek the business financing you need. You might even discover that you don’t need a small business loan at all.
For example, if your situation isn’t as dire as you initially believed, you may be able to raise the necessary funds through crowdsourcing or charity events.
You might also be able to take advantage of the financial freedom afforded by sale-leaseback solutions. A sale-leaseback solution like Sell & Stay, offered by EasyKnock, allows you to sell your home to convert your home equity into cash, which you can then use to pay off business expenses. You would then lease back your home for as long as you need while paying monthly rent.
Is it hard to get a small business loan with bad credit?
Before moving on, let’s explore the elephant in the room: the difficulty of getting a bad credit business loan.
As stated above, if your credit score is lower than 530 (sometimes lower than 600), your chance of successfully obtaining funds decreases. That said, some lending agencies will be more willing to take other factors into account if you have the rest of your financial ducks in a row.
We’ll cover some of these “ducks” in more detail later on, but it helps to have the following as soon as you know you’ll need a loan:
- A business plan
- Possible collateral
- A cosigner
- Knowledge of your options
- A financial advisor
Can you get a small business loan with no credit check?
A traditional lender will review your credit report to see your credit history and see if you’ve paid off debts on time. However, if you don’t meet the requirements, it is possible to get a business loan without a credit check. These types of loans typically will come with high interest rates and fees, so be sure to do your research on which type of no-credit-check loan is best for you.
Step 2: Explore the 4 Types of Small Business Loans for Bad Credit
Once you’ve analyzed your financial situation, you’re ready to explore the four most popular loan options for small businesses with poor credit:
- Short-term loans
- Short-term credit
- Merchant cash advances
Let’s look at each one in more depth.
Short-term loans are ideal for small businesses that need cash fast, and that can quickly pay back the loan.
That’s because short-term loans have repayment periods ranging anywhere from 6-24 months.
What’s more, applying for short-term loans is typically easier than applying for long-term loans. This easier application process can be a serious boon to businesses who need just a small loan to get by.
That said, these types of loans have a few disadvantages, including:
- Daily or weekly repayments
- High interest rates
- The potential to enter a “debt cycle”
An example of a short-term loan would be a business credit card. A business credit card will likely have a high APR, but it is a viable option for the small business owner with a bad credit score. Another option would be a business line of credit, which tend to have higher credit limits than business credit cards. A business line of credit is essentially just like a personal credit line, but for your small business.
Similar to short-term loans, short-term credit quickly gives you access to the funds you need.
However, short-term credit differs from short-term loans in that the former is a “revolving account” while the latter is an “installment account.”
In other words, short-term credit allows you to continually borrow against your credit line rather than pay back a predetermined sum in installments.
Short-term credit is typically advantageous for businesses that need smaller amounts of capital to pay for immediate projects. If you have variable or recurring expenses, a credit line may be more beneficial than a short-term loan.
Microloans are smaller loans intended for businesses whose products and services, as well as employment opportunities, benefit their communities—especially underserved communities.
As a result, the federal government guarantees these loans. Additionally, before a business can receive a microloan, the funds must first pass through a nonprofit intermediary. This nonprofit is in charge of making sure the business understands the conditions of the loan and how to handle repayment.
Microloans can benefit small businesses because they involve reduced loan restrictions. As such, most businesses that meet the loan’s conditions can qualify for this type of credit.
However, not every business can meet these conditions to receive business funding. To receive a microloan, businesses typically have to:
- Align their loan’s purpose with the nonprofit’s interest
- Engage in regular business counseling
- Need a small(er) amount of capital
Merchant cash advances
While not technically loans, merchant cash advances operate under similar principles: a company forwards you a predetermined amount of money with the expectation that you’ll repay the “loan” with interest.
Where merchant cash advances differ from standard loans is their method of repayment.
Instead of repaying the loan amount in installments, you repay the company through a percentage of your credit and debit card sales.
While merchant cash advances can help businesses that need money quickly, their high-interest rates and potential to create debt cycles mean they’re often the last resort for cash-strapped businesses.
Step 3: Create a Business Plan and Apply
Although knowledge is power, you’ll need more than knowledge to power your way through a bad financial situation. You’ll also need a business plan focused on repayment.
Business plans show potential lenders that you’ve carefully thought out your financial situation and how you’ll repay the loan.
Show lenders that you’re capable of repaying the loan by including the following in your business plan:
- How you’ll use the loan
- How you’ll repay the loan
- How the loan will specifically generate revenue
- Why the loan type is the right choice for you
Although not all lenders require a business plan as part of your application, providing one shows that you’re more than a business owner who has fallen on bad times—you’re a capable, smart community leader who can overcome adversity.
Tips for Getting Approved for a Small Business Loan with Bad Credit
By following the above steps, you’ll be on the right track to getting a small business loan with a poor credit score. However, you can do even more to increase your chances of qualifying for a loan.
Here are a few tips to help you succeed in obtaining the money you need:
- Increase your business credit score – Increasing your business credit score even marginally can dramatically improve your chances of qualifying for a loan. You can even use short-term loans as stepping stones to qualify for larger loans. For instance, if you’re able to repay the loan within a short time, taking out a short-term loan to improve your credit report score can pay dividends down the road.
- Don’t be afraid to break with tradition – While traditional lending agencies can help you get the money you need, the wait times and lending restrictions imposed by traditional lenders often exceed alternative lenders and online lenders. Do your due diligence by researching all types of lenders. Who knows, you might discover the ideal lender is only a click away.
- Enlist the help of a financial advisor – Sometimes, financial situations can be stickier than honey buns. The good news is that financial advisors can help steer you in the right direction. If you’re overwhelmed by the loan application process, ask a trusted financial advisor for help.
During trying times such as the COVID-19 pandemic which impacted so many small business owners, you may also consider a personal hardship loan for bad credit. If you’re a senior or a retiree, loans for seniors with bad credit exist, too.