Summary: Yes, small business loans with bad credit are possible, but they come with higher interest rates and fewer options. Explore alternatives like online lenders, merchant cash advances, credit unions, or crowdfunding to secure funding.
Getting a small business loan can be a momentous occasion for a growing company. After all, access to funding can make or break the future of a small business.
However, when you have bad credit, that process can become challenging and tumultuous. Your credit may even put the future of your dream in jeopardy. For startups, a lack of adequate funds can prevent you from even taking the first steps.
Is it possible to get a small business loan with bad credit—and if so, how?
In this guide, we’ll discuss how small business owners finance their operations. Plus, we’ll share ways small business owners overcome bad credit to acquire funding and thrive.
Keep reading to learn how to get a small business loan with bad credit and, ultimately, how to fund your dream venture.
Bad Credit and Small Business Loans
It’s possible for even the most responsible people to end up with a bad credit score.
Reasons may include:
- Using a single credit card
- Failing to check your credit report
- Skipping payments to prioritize other expenses
Per MyFico, your credit score is primarily based on your payment history and amounts owed. Unfortunately for some, banks use this metric to determine if you are trustworthy. It’s often the major deciding factor in determining whether a prospective lender is creditworthy.
The average lender requires a credit score between “good” and “excellent.” That typically means a FICO score that is above 579. According to survey data from the Federal Reserve Bank, 43% of businesses with poor credit are denied a loan. 16% of those sought other funding sources but were ultimately denied.
Is It Possible to Get a Small Business Loan with a Lower Credit Score?
In many cases, the answer is yes. However, you’ll have significantly fewer options. Those options will likely come with significantly higher interest rates.
To put that in context, the average SBA loan comes with an APR of 16.50% on the high end. In contrast, those with bad credit might see interest rates around 75.00% APR or higher.
As a general rule, the greater your default risk, the higher the interest rate. Likewise, you can anticipate shorter terms. This helps lenders mitigate risk. However, it may make other financing options more attractive to borrowers.
Small Business Loan Options with Bad Credit
There are several paths to getting a loan for small businesses with low credit scores. We’ll share the four most common ones below.
Online Lenders
Many online lenders have more flexible credit requirements when compared to traditional banks. These online marketplaces often exist to help less established small businesses get a strong start. Some will even work with new businesses with no credit history.
With that said, online lenders often have the highest interest rates, lowest rate limits, and shortest terms. Combined, that can strain a small business’s cash flow. You may face origination fees, late payment penalties, and prepayment penalties.
Also, some online lenders may utilize predatory or even fraudulent practices. If something seems too good to be true, it probably is. Always check for accreditation, licenses, and Better Business Bureau ratings before proceeding with an online lender.
Merchant Cash Advances
A Merchant Cash Advance (MCA) provides a lump sum in exchange for a percentage of a small business’s future sales. They often have minimal, although not nonexistent, credit requirements.
An MCA can provide quick access to funds and often utilize a factor rate instead of traditional interest. Likewise, there is no fixed term with an MCA. The higher your daily sales, the quicker you can repay the loan.
With that said, factor rates mean you’ll likely end up paying more than you would if you’d borrowed traditionally. Likewise, daily deductions can put a strain on a small business’s cash flow. This creates a dependency risk for startups and small businesses that need more and more funds to operate.
Ultimately, MCAs may only be a wise financial solution in emergency or one-time scenarios.
Loans from Credit Unions
Credit union loans often have more favorable terms compared to traditional banks. Their goal is to serve members, not maximize profits. As a result, their rates are often better than those offered by online or alternative lenders. As they’re community-focused, they may prioritize helping a local small business get its start.
With that said, you must meet specific membership eligibility to join a credit union. This can limit access for some small businesses. Credit unions may also offer lower loan amounts compared to banks and other traditional lenders.
Crowdfunding and Peer-to-Peer Lending
If you have a strong business narrative, you may be successful with peer-to-peer lending or crowdfunding. This method allows you to connect directly with individual or group lenders.
Eligibility is typically flexible, and you may not even be asked to provide a credit history or score. Interest rates are often competitive. You can also reduce costs by eliminating intermediaries.
With that said, peer-to-peer lending platforms are less regulated than traditional financial institutions. That can increase risks for both borrowers and lenders.
Likewise, crowdfunding campaigns require a great deal of oversight and effort to administrate. You cannot recoup that time if you fail to meet your funding goals. On some platforms, if you do not meet a stated goal, you do not receive any of the funds. You should seriously consider your odds of campaign success if you choose crowdfunding as a funding source.
Grow Your Business Expertise with Small Business University
Financial knowledge doesn’t come naturally. To improve your credit score and grow your business, you need to commit to learning. Why not attend a free online webinar through Small Business University? We’ll address common questions about small business loans, credit, and finances.
Browse the offerings today and take your business’s finances into your own hands.