Business credit indicates your company's ability to handle its finances and debt. It's a numerical score that summarizes your business’s creditworthiness and purchasing power. The FICO scale is one of the most popular credit scoring systems for organizations and individuals. About 90% of top lenders use this scoring system created by Fair Isaac Corporation (FICO) to gauge borrowers’ credit risk and make informed lending decisions.
The FICO score for business, also known as FICO Small Business Scoring Service (SBSS), ranges from 0 to 100; anything below 74 is considered a poor credit score. Credit bureaus such as Experian, Dun & Bradstreet, and Equifax will assign a credit score generally based on your business’s payment and borrowing history, credit mix, and credit utilization.
Why is business credit so important?
Credit score is critical in determining your business's eligibility for various funding resources. From the lender’s perspective, the lower your credit score, the higher your lending risk. One study found that 53% of Americans get turned down for loans, credit cards, and even asset purchases due to poor credit. And according to a list of statistics compiled by the Small Business Association (SBA), 20% of small business loan applications are denied due to low business credit. Even more disconcerting is that many entrepreneurs don’t know their business credit, where to source credit information, or how to interpret their credit scores.
Besides establishing your eligibility for financing, business credit may also determine the terms and interest rate on the loans your business qualifies for. So, bad business credit can also limit your opportunities for favorable funding.
While it's possible to build and improve your business’s credit score, it can take several months to raise it high enough to earn lenders’ confidence. However, you can still get loans and other forms of financing even with bad credit.
Small business loans for bad credit
Despite credit score’s role in business financing, you can still get funding with bad credit. You just have to keep an open mind about business financing and look for offers or lenders that are not so keen on the borrower’s credit score.
For some funding products, the lending risk is measured or mitigated in other ways besides the credit score. Here are seven such financing options you should look into if you have poor business credit or no credit history at all:
Secured and cosigned loans
A secured business loan is a loan granted against commercial property. With a secured loan, you put your business assets (real estate, equipment, vehicles, etc.) on the line as collateral for funding. The lender can afford to ignore your credit score because they can simply take possession of the pledged assets to recoup their money in case of default.
Ideally, the collateral’s value must be equal to or more than the loan amount. However, some lenders will accept your personal property as supplemental collateral if your business doesn't have enough assets to secure a loan.
Alternatively, you can use a cosigner to guarantee a loan on your behalf. A cosigner is a third party, either an organization or individual, that legally agrees to assume responsibility for the loan if you fail to pay. Different lenders may have varying descriptions of a cosigner. So, check the cosigner requirements with your lender when weighing your options.
These are loans given for the sole purpose of starting a business. Most start-ups have no discernable business credit, so lenders gauge their creditworthiness through other factors that indicate the business's potential for growth. In most cases, you'll need a convincing business plan with a clear growth path, strong financial strategy, and achievable goals to qualify for a start-up loan. Lenders will also look at your niche/industry, line of trade, and the minds behind the venture to work out your start-up’s lending risk.
Debt consolidation is a debt management practice where a business takes out one loan to pay off many smaller debts. The single loan that refinances all other debts is called a consolidation loan. Such loans are designed for businesses and individuals struggling with a huge debt load comprising multiple loans, often from different lenders. Once all the debts are consolidated, settling them becomes much easier and sometimes even cheaper.
A consolidation loan might be your best ticket out of heavy debt if you're struggling with a high debt utilization ratio or an unmanageable credit mix.
Invoice or receivables financing is a method of borrowing money against the payments due from customers (invoices). It's a relatively low-risk funding approach for both the lender and the borrower. The lender has a solid guarantee of payment, so there's no need to qualify the borrower based on creditworthiness.
This type of financing can be structured in many different ways. In most cases, the lender typically buys your unpaid invoices at a discounted price. So, you get paid instantly instead of waiting 30 days for invoices to mature; this frees up the cash held in receivables. For this reason, invoice financing can be a great help with cash flow, especially when operating on a tight budget.
Merchant cash advance
Merchant cash advance (MCA) is a popular alternative lending solution among SMBs with poor credit. It’s a short-term working capital loan where the lender extends cash to the borrower, who must pay it back with interest (given as factor rate) through automatic withdrawals from credit/debit card sales. The agreed repayment amount or percentage is usually deducted from daily or weekly transactions at the point of sale or through scheduled bank withdrawals.
In this case, lenders qualify borrowers based mainly on daily sales volume. So, MCA products best suit retailers handling numerous daily credit/debit card transactions.
Read more about merchant cash advances in this blog post.
Business credit cards
A business credit card works just like a personal credit card. Actually, many entrepreneurs use their personal credit cards for business purposes, which is not wrong. However, commercial cards feature business-friendly terms, rates, and perks. So, you'll miss out on many benefits by substituting business credit cards for personal credit cards.
The card provides a low-cost line of credit ideal for bridging temporary cash flow gaps and much more. It's also relatively easy for small businesses and start-ups to qualify for a commercial credit card. In terms of approval requirements, most lenders will only ask to see your basic financial information.
Equipment or asset financing is another low-risk lending option for all parties involved. Asset financing is a broad term covering various types of credit-based asset purchasing, leases, and loans secured by hard business assets. You can use this mode of financing to acquire or access essential business equipment or get a loan against the value of your existing equipment.
Most lenders ignore the borrower's credit history when it comes to equipment financing. This is because the asset or equipment in question usually serves as the loan's collateral or payment leverage over the borrower.
Here’s a quick guide to equipment financing if you're curious about how it works.
How to find alternative lending for bad credit
To most lenders, especially large banks and financial institutions, people and organizations with poor credit pose a high lending risk. But a low credit score shouldn’t stop you from seeking financing. Bad credit business loans are still out there — you just have to find them.
Shopping around is the best way to find business loans for bad credit and products with borrower-friendly loan terms in general. However, scouring the financial market for favorable deals can be time-consuming and discouraging work. Fortunately, Lendzero makes shopping for funding so much easier and more rewarding.
Lendzero is a robust online lending marketplace that uses automated systems to match SMBs with curated borrower-friendly funding offers from multiple lenders. We list all the financing solutions available to specific businesses in a matter of minutes. We also prequalify your business for each offer and negotiate with lenders on your behalf to get the best possible terms.
If you have a poor business credit score or none at all, this is the place to start your search for business financing. Explore your lending options today with a free Lendzero account. We'd also love to hear from you; do not hesitate to contact us if you have any questions about business lending.