Business Loans For Startups With Bad Credit in 2022

Is there such a thing as guaranteed approval for bad business credit?

The short answer is no. There is no guarantee, but that’s not the complete answer. Loan applications and bad credit are like oil and vinegar—they don’t mix together well. 

If you’re searching for small business loans but don’t have the minimum credit scores required at a traditional bank, trying to find a lender who will let you borrow money with bad credit can be a frustrating process.

If you have bad credit and you’re searching for financing, statements like “guaranteed approval” and “no credit check loans” can be very appealing. Could a guaranteed business loan be the answer to all of your problems?

Not so fast. You should exercise extreme caution before you apply for any financing options that sound too good to be true.

The Guaranteed Approval Myth

Here’s the truth. When it comes to financing, there’s no such thing as guaranteed approval for bad credit.

Before you start to feel panicked, poor personal or business credit scores don’t mean it will be impossible to qualify for financing for your business. However, any promise of guaranteed approval should put you on guard.

At best, guaranteed approval promises may be a sign that you’re dealing with a predatory lender. At worst, the advertising you’re seeing might be a scam.

Can You Get a Startup Business Loan if Your Personal Credit is Bad?

Now that we’ve got those warnings out of the way, let me just say: it is absolutely possible to find working capital loans and other financing options if your startup has bad credit.

What Credit Score is Needed to Get a Startup Business Loan?

While traditional lenders typically require high credit scores of 640 or more, there are other types of loans that have less stringent requirements.

You can find startup business loans that require scores of 500-600. Some look at other qualifications to determine your annual percentage rate, including annual revenues. Some don’t even have the two-year requirement for how long you must have been in business that banks do.

What Score is Considered Bad Credit?

If you’ve never really paid attention to your credit scores, you might not even be aware that you have bad credit. 

Each credit bureau (both business and personal) has its own credit scoring system and range for what it deems Excellent, Good, and Poor. For example, the FICO Score from Experian ranges from 300 to 850. Anything 579 or lower is considered Poor.

Do You Need Collateral to Get a Startup Business Loan?

A lot of small business loans, regardless of your credit, require collateral. If you run a new business or don’t have great credit, you can almost be certain that any lender will require you to have collateral.

What can serve as collateral for a business loan? Things like equipment and real estate are a few examples.

Types of Business Loans for Startups with Bad Credit

Although guaranteed approval for bad credit isn’t a real thing, there are lenders that specialize in working with small business owners with bad personal credit scores or weak business credit history. Whether your personal credit is in bad shape or your business credit rating leaves a bit to be desired, there may still be viable options available to borrow money for your business so you can free up cash flow.

Before we break down some of the options available, keep in mind that bad credit financing represents a higher risk to the lender. As such, these financing options often feature higher interest rates and less attractive terms than you might expect with traditional business financing. The same is true for a small business startup loan. Lenders like to see a track record, or history, making a startup loan problematic for a loan underwriter. Here are three financing options you might want to consider if you need to borrow money with bad credit scores.

1. Small Business Credit Cards

Credit cards are often one of the easiest types of financing to qualify for, even with credit challenges. Since you’ll typically have to sign a personal guarantee to open an account, business credit cards for bad credit can be a good financing option if your business has poor credit but your personal credit is in good shape.

If you have credit problems on both the personal and the business front, your options as a borrower may be more limited. However, even in this situation, you might still be able to qualify for a secured business credit card.

A secured credit card requires a security deposit but typically features more lenient approval requirements in exchange. Provided you manage the account well, a secured business credit card could help you build better business credit for the future, making it possible to apply for more traditional business funding down the road.

While the rate on a secured business card may be higher, the good news is you can avoid credit card interest altogether as long as you pay your balance in full each month by the statement due date. This is a credit-building strategy you can use with all business credit cards.

2. Online Business Lenders

With poor credit, your chances of walking into traditional banks or credit unions and convincing someone to approve your loan application are pretty slim. A short-term loan from an alternative lender online who might be willing to work with your situation if you have less-than-perfect credit may be much easier to get than traditional loans. 

A small business line of credit or loan from an online lender could be a much more realistic option—and has become the first-choice financing option for many businesses today.

In spite of a poor credit rating, your business may have other things going for it that would make lenders willing to take a chance on loaning your company money. If your business has other strengths, like steady accounts receivable or stable monthly revenue, your odds of qualifying for funding from an online lender may improve.

You can find several online lenders that offer alternative business loans, such as:

Keep in mind, subprime loan options from online lenders may come at a cost—including higher APRs, costly fees, shorter (or more frequent) payback timetables, collateral, and personal guarantees. Plus, even if the lender’s credit requirements are more lenient, you’ll still likely need to prove your ability to repay the loan.

3. Invoice Factoring

Invoice factoring or invoice financing is another option available to businesses that have a weaker credit profile. Factors are more interested in the credit strength of your customers than your profile, so they will often work with businesses that have a less-than-stellar credit history. There are many online factoring companies that make it easier and more accessible to factor invoices than it was in the past.

Factoring isn’t really a loan. In a nutshell, you are selling your unpaid invoices to a third party (a factor) at a discount. The factor will pay you a percentage (usually around 85%) of the agreed-upon amount today and will pay the balance, minus a percentage, once your customer has paid the invoice.

There are some factors that will allow you to continue to collect from your customers, but you should expect that the factor will insist on handling that. This might not be a small business loan in the traditional sense, but it is a way to leverage the value of your accounts receivable today rather than waiting for your customers to pay their invoices. This is a very popular way to finance business in the manufacturing and textile industry.

4. Merchant Cash Advance

Another option to consider is a merchant cash advance. Rather than a loan, this is an advance on future sales, and looks at your revenues, not your credit scores, to qualify you. RapidFinance and Credibly both offer MCAs.

5. Microloans

New businesses can also consider microloans. While the Small Business Administration offers them, you may not qualify for SBA microloans. However, you also have options like Kiva that might be easier to qualify for.

6. Equipment Financing

Another of your funding options is equipment financing, which can be helpful if you need to purchase equipment like computers, vehicles, or machinery for your business. Because the equipment you’re buying acts as your collateral, you may be able to get great rates even with bad credit.

Other Options for Startups with Bad Credit

Here are a few other options to consider for finding the small business financing you need.

Crowdfunding

If you can’t qualify for traditional or alternative, or first-time bank loans or you’re unwilling to pay the higher financing costs associated with such loans, crowdfunding might offer you a non-traditional way to access the business capital you need.

There are two primary types of crowdfunding options for businesses:

Equity crowdfunding requires you to hand over a percentage of your company to investors in exchange for capital. Reward crowdfunding involves reaching out to your customer base (or prospective customer base) directly and convincing them to make small investments in your business. In exchange, you will typically give these customers a reward, such as the opportunity to be one of the first to receive your company’s new product or service once it launches.

Online platforms like Kickstarter and Indiegogo can help you to launch and manage a crowdfunding campaign for your business. 

On the plus side, crowdfunding isn’t a loan you have to pay back. With reward crowdfunding, you can almost look at the process as a presale of a service or product that you would likely have tried to market and sell to your customer base anyway.

On the negative side, crowdfunding doesn’t always work and it’s far from a guaranteed source of financing. Many business owners who launch crowdfunding campaigns fail to meet their funding goals. With some crowdfunding platforms, if you don’t reach your funding goal you may forfeit the money that did come in for your campaign.

But when crowdfunding does work, it can be a big financial win for your business.

Personal Loans

Another option to consider if it’s your business credit that isn’t great (and your personal credit scores are solid) is a personal loan. You can take out a personal loan and use it for your business, though know that you won’t build business credit this way.

Small Business Grants

Another way to get capital that doesn’t have to be paid back is with small business grants. While these can be tough to get (they often have lots of competition), you may be able to get $1,000 to $50,000 you can put toward growing your business.

How to Choose the Right Financing Option for Your Startup

So many options…so little time. How can you narrow down your options to the financing that’s the best fit?

Start by knowing what you qualify for. If your business is less than two years old, you automatically are disqualified from traditional bank loans and SBA loans. 

How’s your credit? That will also determine what you’re eligible for.

Do a little research to see what sort of rates you could get, then decide if that interest rate is worth paying. What do you plan to use the loan for? How quickly can it see a return on investment?

What Does it Take to Qualify for a Startup Business Loan?

Whereas SBA loans and bank loans often look for a minimum credit score—whether that’s a FICO score or another score from one of the credit bureaus—startup business loans consider other criteria.

It’s a good idea to read the eligibility requirements, terms, conditions, and any other fine print before you fill out funding applications for your business. Make sure you understand the interest rate, the repayment term, whether or not they are going to want collateral, or if this will otherwise be a secured loan. This is a good rule of thumb no matter what the condition of your credit may be.

Each loan program is different in what it considers to determine creditworthiness, but lenders that cater to businesses that have low credit scores often look beyond credit score requirements to things like annual revenue, personal finances, and personal assets.

With bad credit business loans, as with any business loans, you may be asked to provide a business plan that demonstrates how you plan to grow your business using the loan amount you’ve requested.

How to Get a Startup Business Loan with Bad Credit

Review the application process before applying for small business financing so you have everything you need and can streamline the process.

You’ll be asked questions about your business, including:

  • How long it’s been in operation
  • Its location
  • Its industry
  • Annual revenues

You may also be asked for personal information like your Social Security number and contact information. You’ll also need to provide your business bank account details so funds can be deposited into your account once your application is approved.

What to Consider When Applying for a Startup Business Loan with Bad Credit

Borrowing money when you have bad credit is a highly-individualized decision. Because the cost of financing when you don’t qualify for low-interest loans can be exorbitant. Only you can determine whether that high cost is worthwhile.

If, for example, you need money now but know you can repay it in six months, a high-interest loan may not be a big deal, since you can pay it off before you’ve accrued too much in interest. 

If the cost of financing is more than you can stomach, consider building your credit and applying for a loan later when your scores are improved.

How to Build Business Credit to Get a Startup Business Loan

There’s no question that a good credit score – both business and personal – can help you to qualify for better business financing options. Good credit not only opens doors when it comes to financing, but it can also help you to secure loans and credit cards at a lower cost.

Looking to build your business credit? If your business credit isn’t where it needs to be, here’s a helpful guide you can use to improve your business credit in five steps.

Remember, it’s also wise to keep a close eye on both your personal and business credit reports and scores. You can monitor your business and personal credit in one spot by setting up a free account with Nav.

Good business credit is a crucial key to help you unlock better financing options for your business to get the working capital you need. Lenders will care about the condition of your credit, so you should care about it as well.

This article was originally written on May 16, 2019 and updated on February 4, 2022.

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