Best Small Business Loans for Bad Credit

Small business owners seeking loans are often turned away by traditional financial institutions, such as banks, especially when they have poor credit -- defined by FICO as a score between 300 and 629. 

Bad credit is generally indicative of improperly managed finances in the past, and is usually a pretty fair indicator that these poor financial decisions will likely continue in the future.  

It’s crucial to understand that this bad credit score refers to your personal credit, even though this concerns loans for your business.

It's also important to be conscious of the fact that the lower your credit score, the more likely it is that your APR will be higher, which includes your interest rate and all other related fees.

Who Will Offer Small Business Loans for Bad Credit, and How Can I Find Them?

A decade ago, your options for a loan would have been almost non-existent.

However, thanks to the growth of the alternative lending industry, business owners with bad credit have many more options available to them.

These lenders focus more attention on other indicators, such as the operating history and general financial strength of the business.

Look for Online Lenders – and Compare Their Offers

Most financial institutions that offer viable loans for business owners with bad credit are likely to be online lenders.

There are a few reasons for this, starting with the fact that traditional banks have been funding less and less loans for small businesses.

Online lenders tend to have less stringent qualification requirements, shorter application processes, and more types of financing—though this comes at a price, with fees and rates generally more expensive than bank loans.

Know Your Personal Credit Score

If you’ve arrived on this page, it’s likely you think you already know your credit score—but remember, things on that report can change.

To make sure you stay on top of it, use the free annual credit report pull by AnnualCreditReport.com.

We also highly recommend signing up for a credit monitoring service, so you can monitor your score and be alerted to any changes in real-time.

Finally, we cannot stress enough the importance of building up your score.

While it takes some time to get a bump up to the 700+ numbers, even at 650+ you may qualify for a Small Business Administration loan, which tend to have very favorable terms.

And with scores between 550+ and 620+, you may qualify for a medium-term loan.

Which Small Business Loans for Bad Credit Are Available?

This is not to say that every type of loan will be readily available to you.

The loan types you are most likely to have access to are:

Short-term Loans for Bad Credit:

These are excellent alternatives for obtaining a quick, single lump sum which can serve a variety of purposes, from start-up costs, immediate operational costs for seasonal purposes, and emergency repairs or maintenance, to accounts receivables vs. payables.

Consumers should be aware that these types of loans generally have high-interest rates, though the upside is that they are available despite poor credit scores.

Short-term Lines of Credit for Bad Credit:

Business lines of credit offer the sort of flexibility that regular loans don’t.

Lines of credit are structured so that business owners can borrow up to a pre-determined limit, only paying interest on the money actually borrowed.

So long as the credit limit isn’t exceeded, borrowers can draw and repay funds according to their needs.

Limits are usually lower than for term loans, but higher than for credit cards, and lines of credit with low limits usually don’t require collateral.  

Invoice Financing for Bad Credit:

Also called accounts receivable financing, invoice financing helps business owners finance their outstanding invoices.

Companies advance cash using your unpaid invoices as collateral, usually up to 85 percent, with the majority of the remaining 15 percent paid at a future date, minus the factoring fee.

This influx of immediate cash may come with higher fees than more traditional financing solutions, though qualification requirements are generally much easier to meet.

Since the loan is collateralized by your business’ invoices, your time in business, revenue, or profitability are of little importance.

However, the maximum amount you may qualify for will depend on the total amount and the quality of your invoices, as well as your credit report (though some lenders can have more credit relaxed standards).

Equipment Financing for Bad Credit:

These loans have very specific parameters-like the name says, they can only be used to purchase new or used equipment for your business.

What the equipment actually consists of is quite comprehensive, however, including much more than manufacturing machinery or dishwashers—these loans can also be used for computers or even cars.

The amount that can be borrowed will depend on the type of equipment, whether it’s new or used, the financial health of your business, and of course, your credit score.

Credit score is less of a factor with these types of loans, however, as the equipment itself is being put up as collateral, so what you’re purchasing can often prove more important to a lender than whether your credit score is 456.

Business Credit Cards for Bad Credit:

One of the main advantages to a business credit card is that, aside from the sheer convenience, it can also be a tool to build better credit, especially important for business owners whose scores are poor.

For these consumers, options are considerably more limited, but secured credit cards may offer a viable alternative.

Since these cards are collateralized by a cash deposit equal to your credit limit, companies will usually approve higher risk borrowers, since any defaulted payments can be taken from the existing deposit.

Eventually, once you’ve built a good credit history, you can move on to an unsecured card, and retrieve that cash security deposit.

Merchant Cash Advances for Bad Credit:

These aren’t actually loans, but rather an upfront amount of cash on the expectation of future credit and debit card sales, or by remitting fixed debits with fees (called ACH-Automated Clearing House withdrawals) from your business’ bank account on a daily or weekly basis.

The latter has become by far the most common form of merchant cash advances, substituting credit and debit card sales model.

Merchant cash advances should be a solution of last resort, as they usually carry exorbitant fees in the triple digits.

They can become essentially unpayable, forcing business owners to refinance into another loan, or file for bankruptcy.

What Do Lenders Consider When Approving Small Business Loan for Bad Credit

Collateralized Loans Are a Good Bet

Many lenders who offer options for small business owners with poor credit will offer better terms if the loans are backed by collateral from the business, such as invoices, or equipment.

Annual Revenue Is Important

Even if your personal credit score is low, this can be offset if your business has high annual revenues.

The more your business is pulling in a year, the likelier it is that you’ll be able to meet your obligations and repay your loans in a timely fashion.

Another bonus, aside from the general well-being of your business, is that annual revenues help determine your possible loan amount (usually between 8-12 percent).

How Profitable is Your Business?

Your business’ profitability isn’t directly responsible for loan approvals or denials, but when you have poor credit, it can really help build the case for you.

Are You Already in Debt?

If you’re paying back existing business loans, lenders will be more cautious, since your original lender has likely already put a UCC lien, giving it a legal claim on all of your assets, should you default.

If the second loan is being used to refinance the first one, and your business is otherwise generally healthy, some lenders may not mind taking second place, but it is something to be aware of.

If you do decide that your best financing option is a loan, we've compiled a list of lenders that can help.

All of these lenders are likely to accept those with poor credit provided they meet other stipulations.

Also, make sure to check out our Overall 10 Best Small Business Loans of 2019.

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