Perhaps the most impressive achievement of the modern business financing industry is making business loans available for borrowers with bad credit. In the past, a personal credit score below 700 usually meant you were out of luck in regards to your small business loan options. While a decent credit score might have gotten you approved, you would almost certainly have been stuck with restrictive terms to ensure the bank made their money back quickly.
But thanks to the emergence of alternative business financing, various types of small business loans can now be accessed by borrowers with personal credit scores below 630. Several business financing companies will have no trouble approving you, and not for just one product with a single set of non-negotiable terms. In this guide, we’ll lay out where to find the best bad credit business loans on the market today and what you have to do to get approved.
Which business loans are not accessible with bad credit?
The only product that is still very difficult to access with bad credit is a traditional business term loan. By definition, a business term loan is highly convenient for significant investments: The borrower is given a large lump sum that is paid back over a long period of time. Interest rates are low and the fixed monthly payments are on the smaller side. As you can see, the business financing institution is placing a great deal of trust in the borrower, primarily due to a flawless personal credit score. Yes, a credit score that is anything less than perfect is most likely a deal-breaker for a business term loan. Forget about bad credit. Even “good” credit will not get you a business term loan.
So, you shouldn’t be discouraged by not being eligible for approval. This is the most advantageous type of business loan in existence. Your bad credit simply means you’ll have to settle with a slightly less advantageous option. But, if used correctly, one of these options could be used for the exact same purpose as a business term loan and have a similarly minimal impact on cash flow.
What are the best small business loans for bad credit?
The following types of business loans have different terms and/or repayment structures than a business term loan.
- Short-Term Business Loans: This is essentially a business term loan with much shorter terms, like 3-18 months, and a lower borrowing amount.
- Business Line of Credit: You are given a revolving credit limit that you can borrow from at any time. Payments are only made when you borrow. The “revolving” function denotes that your credit limit replenishes when the total amount you owe for that month is paid back. You can essentially borrow the same amount every month as long as you pay it back the month after. And when you pay off your total balance, you get the same amount back with the same terms and interest rate.
- Merchant Cash Advance (Credit Card Factoring): You receive a lump sum that is paid back via a fixed percentage of daily debit and credit card sales. This is arguably the easiest program to access with bad credit because approval is based on sales projections for the future, as opposed to your history of paying bills on time. The repayment structure also makes a merchant cash advance very easy to pay back. A slow month just means a smaller payment, as opposed to an increased interest rate or a much higher payment required for the next month. Unlike other options, occasional dips in revenue do not endanger the borrower’s ability to pay off the debt.
- Revenue Based Business Loan (Business Cash Advance): Similar to a MCA but your payments are deducted via a fixed percentage of your entire monthly revenue.
- Invoice/Accounts Receivable Factoring: The business financing company purchases your outstanding invoice/receivable for a discount price and pays you right away. This is another particularly accessible program for borrowers with bad credit because eligibility depends on the creditworthiness of your customers, not the borrower. As long as your customer has a track record of paying its bills, you should have no trouble being approved.
Which companies offer these five options?
Here are a few online business financing institutions that offer the previous five programs along with their general requirements:
Kabbage: Kabbage offers just one program, a business line of credit. A minimum personal credit score is not required, but a score of at least 500 is preferred. Borrowers must be in business for at least one year and have an annual revenue of at least $50,000.
BlueVine: 6-month line of credit: 600+ personal credit score, 6+ months in business, $120,000+ annual revenue, 12-month line of credit: 620+ personal credit score, 2+ years in business, $450,000+ annual revenue, Accounts Receivable Factoring: 530+ personal credit score, 3+ months in business, $100,000+ annual revenue.
OnDeck: Ondeck’s business lines of credit require $100,000+ in annual revenue, and a credit score of 600+ (Most borrowers have 660 or higher). No personal bankruptcies in past two years.
Square Capital: Square Capital offers one program as well: the Square Capital “Flex Loan.” It is nearly identical to a merchant cash advance, so a minimum personal credit score is not required. Annual revenue must exceed $100,000, and your transaction history must denote that you can pay off the loan in full within 18 months.
United Capital Source: United Capital Source offers all of the programs listed in the previous section. For all five, borrowers must be in business for at least six months and earn $100,000 in annual revenue. Borrowers with low credit scores (around 500) can be approved for short term business loans, merchant cash advances, business lines of credit, and revenue based business loans.
What are the interest rates for these programs?
Here are the interest rates for the programs listed above:
Kabbage: Business lines of credit from Kabbage carry APRs between 24% and 99%. Monthly payments are a percentage of the amount borrowed plus another fee of between 1% and 10% of the amount borrowed. With the six-month plan, your fee is 10% for the first two months and 1% for the final four. The 12-month plan has higher fees in the first six months but drops to 1% for the final six.
BlueVine: 15% to 78% (LOC) 15% to 68% (Accounts Receivable Factoring)
OnDeck: 11% to 60.8% as of Q1 2018 (LOC)
Square Capital: Square Capital has a one-time fee that averages between 9% and 16% of your loan amount.
United Capital Source: MCA (Factor rates starting at 1.09%, 3 – 18 Months), Business Line Of Credit (Interest of 8% and up, up to 18 months), Invoice/Accounts Receivables Factoring (Interest rates starting at 5.8%, Up to 24 Months), Revenue Based Business Loan (Rates starting at 9%, 3 – 10 years).
What else do business financing companies look at?
Countless applicants have made the mistake of assuming that as long as they meet a company’s general requirements, they will automatically be approved. A big reason these five companies are able to approve so many applications is their prioritization of factors that are not as rare as a flawless credit score. Each company values certain factors more than others. But if you have bad credit, you should make sure you fulfill at least two of the following requirements.
- Cash Flow
This is the primary requirement for applicants with bad credit, no matter which business financing company you have in mind. Most of the companies featured in this guide prefer borrowers to have highly consistent cash flow. They might be hesitant to work with business that experience occasional dips in revenue, even if those dips are attributed to uncontrollable factors. This is primarily because they offer just one or two programs with rigid, non-negotiable terms and repayment structures. Other companies, like United Capital Source, are able to modify terms and repayment structures to accommodate tumultuous cash flow, regardless of whether it is caused by an individual problem or an industry-wide obstacle like seasonality.
Some business financing companies have policies (sometimes not public) that prohibit them from working with certain industries. Common examples include real estate, accountants, or marijuana dispensaries. These companies also tend to be biased towards growing or historically popular industries. Other companies are willing to work with almost every industry, even those that are often stereotyped as “risky” or “low growth.”
Another popular subject of discrimination in the business financing industry is available working capital. For these companies, the combination of bad credit and only a small to moderate amount of cash on hand could spell rejection. This is particularly prevalent in companies that require borrowers to pay back a considerable portion of the loan within a certain time frame.
- Other Debts
Applicants for bad credit business loans are often asked about the culprits for their poor credit history. The business financing company might want to know if you are currently paying back another small business loan, which may render you ineligible. Companies like United Capital Source, on the other hand, usually have no issue approving such applicants, especially if they plan on using the second business loan to help pay off the first. These companies also frequently work with borrowers who have bad credit because they had to use their own money to keep their businesses afloat.
Looking to raise your credit score?
Many business owners with bad credit take out business loans to raise their credit score. But not all of the business funding programs listed above will affect your personal credit score, and not every business financing company reports your payment history to the three major credit bureaus. So, if you are looking to raise your credit score with timely payments, make sure the program and business financing company you have in mind will help you do just that.
Choosing an option that checks both boxes could dramatically improve your credit score with just a few months’ worth of payments. Of course, there are plenty of other ways to raise your credit score. The right business financing company will explain these tactics to you and recommend a business financing program that does not prevent you from advancing towards this goal.