Can I get business financing with poor business credit?

Business credit represents your creditworthiness or lending risk. It essentially summarizes your business's payment history, credit usage, and credit mix. The FICO scale, the most popular credit scoring system, rates business credit numerically from 300 to 850. Anything above 670 is considered good to exceptional credit, while scores below 580 are considered poor.

Having strong business credit wins you favor with lenders, funders, and investors when it comes to business financing. On the other hand, poor credit marks you as an untrustworthy, high-risk borrower. In fact, bad credit is one of the biggest obstacles SMBs and start-ups face in securing funding.

However, bad credit is not a financing death sentence. While it’s a critical lending factor, a low credit score doesn't mean you can't access business financing at all. In this article, you’ll learn how to get business financing even with bad or no business credit.

The problem with poor business credit when getting loans

Business credit is one of the first things most lenders examine when gauging a borrower’s eligibility for financing. The credit score speaks volumes of a business’s financial muscle and ability to service debts. So, it weighs heavily on the lender’s final decision.

Unfortunately, you can’t just build strong business credit overnight. For one, credit bureaus can take up to two years to gather enough of your business's financial data to assign a meaningful credit score. Plus, any effort to improve the score will also take time to make a notable impact. That being the case, waiting to build strong business credit before seeking financing may not be an option when cash-strapped. You’ll just have to take your chances with lenders.

But what does getting a business loan with bad credit look like? Well, we’re not going to sugarcoat it; it’s not that pretty. Most loans for bad credit are costly and rigidly structured to get around the lending risk. Low credit business loans usually have the following features and requirements:

  • Exorbitant fees: Bad credit loans usually come with additional charges, including origination, late payment, personal check, payment processing, and returned payment fees.
  • High interest rates: On top of excessive fees, lenders won’t cut you any slack on the interest rate if you have bad credit. Some bad credit loans have three-figure APRs — many times higher than typical rates.
  • Collateral requirements: You may have to put up high-value collateral to get approved for a low credit business loan. Exactly how much collateral will depend on the amount, credit score, and other risk factors.
  • Automatic withdrawals: The lender may insist on setting up automatic bank withdrawals for the repayments. These could be daily, weekly, or monthly.
  • Heavy scrutiny: Your business may be subject to thorough and sometimes intrusive examination as part of the pre-qualifying assessment.
  • Strict limits: The lender may cap the loan amount and repayment period, with no flexibility whatsoever, based solely on your credit score.

Tips for favorable financing with bad business credit

Typical loans for bad credit can be expensive and limiting. But there are other ways to get business-friendly funding with bad credit. If your credit score reads below 580, follow these tips to secure favorable business financing:

Look into alternative financing options for bad credit

It’s difficult to get traditional business loans with bad credit. And even if you get approved, the loan will probably have too many strings attached. Fortunately, you might be able to access other less stringent financing solutions, such as:

  • Short-term loans and lines of credit
  • Merchant cash advances
  • Business credit cards
  • Invoice financing and factoring
  • Microloans
  • Equity investments
  • Equipment financing
  • Crowdfunding
  • Grants
  • P2P funding

Eligibility for these types of financing is not entirely dependent on business credit. That’s because they involve other repayment guarantees such as automatic bank withdrawals, equity stakes, account receivables, and collateral. These are excellent alternatives to conventional loans for borrowers with questionable credit.

What to expect

Most loans for bad credit are costly and rigidly structured to get around the lending risk. Low credit business loans usually have higher rates, shorter terms, and higher fees.

Choose your lender wisely

Lenders come in all shapes and sizes. Some are more accommodating of businesses with bad credit, while others immediately turn their noses at any borrower with a spotty credit record. For instance, it’s a huge gamble for SMBs and start-ups to secure funding from large banks even at the best of times. So, you can imagine the futility of trying to get the same funding with bad credit.

On the other end of the spectrum are alternative lenders who don’t care for credit rating at all. The trick is finding these lenient lenders. And, more importantly, ensuring they're not out to prey on vulnerable borrowers with overpriced and unreasonably structured funding products.

PayPal is a good example of a legit alternative lender offering reasonable financing to businesses with low credit. The PayPal Working Capital loan requires no personal or business credit checks. You can borrow up to $200,000 solely against your PayPal account’s history. And it’s not just PayPal. Many other alternative lenders and FinTech companies are willing to fund SMBs with poor credit through fair and affordable means.

Play to your other strengths

If business credit is not your strongest selling point, you can always sway lenders using your other business or fiscal strengths. In some cases, business credit is not even the best representation of an enterprise’s financial status or lending risk. For example, if you’re new to business or none of your accounts report transactions to the bureaus, your credit score won’t have much to say about your financial power. Progressive lenders will actually overlook business credit in lieu of other lending risk factors.

Some of the other strengths that can make a case for your business include:

  • A solid business plan with realistic and achievable financial goals
  • Low debt load relative to the business’s revenue (debt-to-income ratio)
  • Evidence of a rich and well-balanced cash flow
  • Worthwhile personal guarantees to diffuse the lending risk and increase collateral value
  • A high personal credit score to supplement the lacking business credit

Find a co-signer

A co-signer, also known as a guarantor, is someone who agrees to repay a loan should the borrower default or fail to honor the repayment terms. The co-signer must have good personal credit and may be required to pledge their personal property or other assets as collateral for the loan.

Getting a co-signer puts your business in a better borrowing position — better odds for approval, higher limits, friendlier terms, and lower rates. A co-signer essentially reassures the lender that their debt will be paid in full even if you fail to do so yourself. You just have to find someone you can trust and who fits the lender's co-signer description.

Final word

Can you get financing with bad business credit? The simple answer is "YES." But you should consider your options and lenders carefully when looking for bad credit funding. It also helps to prepare powerful bargaining chips to fill in for business credit.

The most important thing to do is research the lenders thoroughly before taking any financing. Your choice of lender can make all the difference between approval and rejection. The lender also calls the funding terms, rates, and fees when loaning businesses with bad credit.

Luckily, Lendzero can help you find reasonable lenders for bad credit. Lendzero is an online application that matches borrowers with lenders. The system automatically pre-qualifies your business for various products and offers from multiple lenders. It then generates a list of pre-negotiated funding options just for you. This whole process only takes a few clicks. It’s a fast, convenient, hassle-free way to find legit financing no matter your business credit or financial situation. Sign up today and try it yourself.

Related Articles
Funding Choices