What are Working Capital Loans?
Before delving into working capital loans, let’s take a broader view and discuss what working capital is and why it’s essential to your business. Working capital refers to the money that funds the everyday operations of your business.
Working capital is also referred to as operating capital. It includes the costs of goods or inventory, supplies, materials, and rent. It also includes payroll for staff and other overhead expenses, such as utilities, that keep the business running.
An effective working capital management strategy ensures you have the correct number of employees, balanced purchasing, and a smooth cash flow. However, businesses can change at any time. Perhaps a sudden increase in sales has led to additional inventory purchases and the hiring of new staff. Or maybe you encountered unexpected costs and faced a cash flow gap.
Whatever the reason, many small businesses occasionally find themselves short on working capital. New businesses, in particular, may turn to working capital loans when they lack an established credit history or need immediate cash flow support. Some small business loans help you cover daily expenses when needed. Many lenders offer working capital loans without collateral, particularly for borrowers with good business financials.
Most working capital loans are structured as short-term loans designed to provide quick funding with minimal paperwork. Many of these loans also have more lenient qualification requirements than conventional business loans.
The tradeoff for speed, convenience, and accessibility is that these business loans carry high costs. However, you only have the debt for a brief period. These loans typically provide a lump sum of cash upfront, which is then repaid over the agreed term. Working capital loans are also referred to as cash flow loans.
Understanding Business Loans
Business loans are a vital resource for small businesses, providing the financial support needed to manage daily operations, invest in new opportunities, and maintain steady cash flow. There are several types of business loans available, each designed to address specific business needs. Working capital loans help cover everyday expenses, while equipment loans are used to purchase or upgrade essential machinery and equipment. The Small Business Administration (SBA) offers government-backed loans with favorable terms for qualifying businesses.
Eligibility requirements, interest rates, and repayment terms can vary widely depending on the type of loan and the lender. Business owners with poor credit may struggle to qualify for traditional business loans from banks, as these institutions typically have stringent credit score requirements.
However, alternative lenders and online lenders have emerged as flexible options, offering business loans to small businesses with less-than-perfect credit. These lenders typically have a faster application process and more lenient eligibility requirements, making it easier for business owners to access the working capital they need to keep their businesses running smoothly.
Whether you’re looking to stabilize cash flow, purchase equipment, or fund growth, understanding the different business loan options and their requirements is the first step toward securing the right financing for your small business.
What types of Working Capital Loans are available with Bad Credit?
Working capital loans through United Capital Source offer the following features:
- Maximum funding amount: $1k – $5 million
- Factor rates: Starting at 1% – 6% p/mo
- Term: 3 months – 5 years
- Speed: 1 – 3 Business Days
Small business owners sometimes struggle to qualify for financing due to poor credit scores. Perhaps you started the business with business credit cards or a personal loan, and now your personal credit score is lower than what banks or credit unions would consider for a loan.
A small business owner in this situation would likely turn to an alternative lender. Also known as online lenders or fintech lenders, these digital financial services companies can provide fast funding while circumventing the strict underwriting requirements of conventional loans.
Most online lenders or lending marketplaces utilize a financial technology (fintech) platform to quickly analyze a business’s financials. They take a holistic view of your company, focusing on your sales, cash flow, and ability to generate revenue, rather than your credit score or the length of time you’ve been in business.
Because of this, online lenders can offer funding to business owners with low credit scores. However, your personal credit history will still be an essential factor. While you can get approved, a low credit score often means a higher interest rate. You’ll also likely have daily or weekly payments.
Several small business loan options can provide working capital, including term loans, merchant cash advances, invoice factoring, or a business line of credit. You can get unsecured or secured loans. It is possible to obtain a loan with bad credit by focusing on specialized products, such as equipment loans or invoice factoring, which often have more flexible approval criteria. Invoice factoring enables businesses to sell their unpaid invoices to a third party in exchange for immediate cash, thereby improving their cash flow.
What are the advantages of Low Credit Working Capital Loans?
The primary benefit is that you can get the funding necessary to manage cash flow gaps even with a low credit score. Several types of working capital loans can meet various business needs and challenges.
Working capital loans are available if you’ve been in business for less than one year. Traditional business loans from a bank often require two or three years of business history.
Small business owners get a convenient online application with minimal documentation. You can use the funds for various business purposes. These loans offer quick funding to help you address urgent financial needs. After approval, businesses can receive funding as quickly as the next business day.
What are the disadvantages of Low Credit Working Capital Loans?
The most significant drawback is the cost. Alternative business loans already have higher interest rates, and having a low credit score increases that cost. You might have to pay additional fees.
While many working capital loans don’t require collateral, you might have to put up collateral if you have a low credit score. You might also have to sign a personal guarantee, which could put your personal assets at risk if you miss loan payments. Loan approval for applicants with bad credit often involves stricter requirements and additional documentation, making the process more challenging compared to borrowers with stronger credit. Taking on more debt can strain your business’s finances and limit your future borrowing capacity.
Lenders also want some additional assurances of repayment when you get a bad credit business loan. This often means shorter terms with more frequent payments, typically on a daily or weekly basis. Many online business lenders require automatic payments, usually as an ACH transfer from your business bank account.
Pros & Cons
Pros:
- Access working capital even with a low credit score.
- There are various working capital loan programs available.
- Can get approved with less than one year in business.
- Quick and easy online application with minimal documentation.
- Fast funding times compared to bank loans.
Cons:
- Higher rates & fees than traditional business loans.
- Might require collateral & a personal guarantee for low credit scores.
- Short terms & frequent repayment schedules.
- Usually requires automatic payments.
How can a business with Bad Credit qualify for a Working Capital Loan?
Lenders will review your credit report when you apply for a business loan. A low credit score indicates a high risk for lenders. Either you have missed payments in the past, or your debt-to-income ratio is so high that lenders don’t think you can handle loan repayments.
Lenders will review your financial history and your business’s credit to determine whether they should lend money to your business. Actively building and maintaining your business’s credit can enhance your chances of securing more favorable financing options in the future.
However, certain factors can help mitigate the impact of a low credit score on business loans. Since your cash flow is the primary source of repayment, high monthly revenue streams can help reduce the perceived risk of lending to your company. Including a comprehensive business plan in your application can increase your chances of approval.
You can also consider obtaining a co-signer or pledging additional collateral to mitigate some of the risks for lenders. Providing a down payment can also help offset some of the risk associated with having a bad credit rating.
Lenders also look at your business credit score when underwriting working capital loans. Sometimes, it’s possible that your personal credit score took a hit, but your business has a positive payment history and a high credit score. However, bad credit business loans can also be beneficial if you have a low business credit score or haven’t yet established business credit.
Approved businesses we work with here at UCS typically meet the following requirements:
- Annual revenue: $240k+.
- Credit score: 475+.
- Time in business: 6 months+.
How to apply for a Bad Credit Working Capital Business Loan:
The speed of the approval process depends on the desired product and a business’s financial health. Some products can be approved within 24 hours, while others may take up to one week to be approved.
Here’s how to apply:
Step 1: Choose the Right Working Capital Loan
Bad credit business loans come in many forms. We typically recommend loan options with the most straightforward repayment terms to suit your cash flow. This depends on the length of your cash flow gap and how quickly you can pay off the loan.
Step 2: Gather Your Documents
Depending on the working capital loans available, you may need the following documents and information:
- Voided business check.
- Bank statements (3 Months).
- Credit card processing statements (3 Months).
- Accounts receivable aging report.
- Accounts payable report.
- Driver’s license.
Step 3: Complete Application
Start the application process by contacting us or completing our one-page online application form. Either way, you’ll be asked to enter the information from Step 2 above, along with your desired borrowing amounts.
Step 4: Speak to a Representative
After applying, a representative will contact you to explain the repayment terms & percentage rate of your available small business financing options. This way, you won’t have to worry about surprises or hidden fees during repayment.
Step 5: Receive Approval
The loan application process typically takes a few business days to complete. Once approved, the funds should be deposited into your business bank account within 1-2 business days.
Frequently Asked Questions
Here are the most common questions about low-credit working capital loans.
Is a Working Capital Loan right for my business?
Before applying for a working capital loan, every business owner should conduct a thorough assessment of their business needs. Begin by examining your company’s cash flow, revenue streams, and ongoing expenses closely. Are you facing seasonal slowdowns, planning for expansion, or dealing with unexpected costs that require immediate funding? Understanding these factors will help you determine if a working capital loan is the right fit for your business needs.
A working capital loan can be a valuable tool for bridging cash flow gaps, covering payroll, purchasing inventory, or managing day-to-day operations. However, it’s crucial to ensure that your business can comfortably handle the loan repayments without straining your finances. Consider how the additional debt will impact your cash flow and whether the loan aligns with your long-term business strategy.
By carefully assessing your business’s financial health and plans, you can make an informed decision about whether a working capital loan is the best solution to support your business’s growth and stability.
What are the Repayment Terms for Bad Credit Working Capital Loans?
When applying for business loans with bad credit, it’s essential to understand that the repayment terms may differ significantly from those of traditional loans. Most bad credit business loans come with shorter repayment periods, typically ranging from a few months to a couple of years. Lenders may require frequent payments, such as daily or weekly withdrawals from your business bank account, to reduce their risk.
Interest rates on bad credit business loans are typically higher than those offered by traditional lenders, reflecting the increased risk associated with lower credit scores. In many cases, lenders will also require a personal guarantee or collateral to secure the loan, which means your personal assets could be at risk if your business is unable to make the loan payments. Working capital loans may include a higher APR (annual percentage rate). Other options use a factor rate, which is a flat financing fee.
Some alternative lenders offer flexible repayment terms, such as revenue-based repayment plans, which adjust your payments according to your business’s cash flow. This can be especially helpful for companies with fluctuating income. Before accepting any loan, carefully review the repayment terms, including the interest rate, payment frequency, and any additional fees, to ensure your business can manage the commitment. Understanding these terms will help you choose the right loan and avoid unnecessary financial strain.
Do banks offer Bad Credit Working Capital Business Loans?
Most banks won’t consider lending to a business owner with poor credit. Most traditional loans have high minimum credit score requirements. A few lenders might offer special programs for credit-challenged borrowers, but alternative lenders are the primary source for business loans for those with poor credit.
Online lenders often have more flexible approval criteria compared to traditional banks. Many alternative lenders offer loans to businesses today with credit scores as low as 500. Loan amounts for working capital typically range from $5,000 to $500,000, depending on the lender.
What’s the lowest Credit Score for Working Capital Loans?
Most lenders willing to work with low credit scores still maintain a cutoff range, typically between 450 and 550. However, some funders, mostly merchant cash advance providers, offer no-credit-check business loans. So, in theory, there is no lowest credit score, but you should be aware that no-credit-check funders have astronomical rates and fees. Be very cautious when considering this type of funding.
Is a Working Capital Loan a good idea if I have Bad Credit?
There’s no sugarcoating: bad credit business loans are costly. If you enter into a funding arrangement that your cash flow can’t bear, you risk getting trapped in a cycle of debt that’s difficult to escape.
However, there are times and situations when the high rates and fees of low-credit business loans make sense. For example, if working capital will power your revenue growth and improve your operating margins, you’ll have the cash flow to repay the loan without issues.
Some credit-challenged small business owners view bad credit loans as a form of bridge financing. You take a small amount of working capital on a short-term basis to help support operations. As you pay back the debt and grow your business, your credit score, time in business, and revenue all improve.
Then you can qualify for a lower-cost business loan at a higher borrowing amount. It might even be possible to refinance the debt from the low-credit working capital loan with a lower interest rate.
What are my alternatives to Bad Credit Business Loans?
Working capital loans may not always be the best option when dealing with a low credit score. Sometimes the costs are just too high, and it would create more problems than it solves. However, your business still requires an infusion of working capital. Here are a few potential solutions to try when faced with this issue:
Equity Funding
Equity funding involves bringing in investors or business partners who provide capital in exchange for a percentage of ownership in your business. This method doesn’t require monthly repayments like a loan, but it does mean giving up a share of control and future profits. It’s a common option for startups and businesses seeking long-term growth capital.
Crowdfunding
Crowdfunding allows you to raise money in small amounts from a large group of people, often through online platforms. Friends, followers, fans, and even customers can contribute to your business in exchange for perks, early access to products, or to support your mission. It’s especially effective for creative projects, product launches, and community-driven ventures.
Business Credit Cards
Business credit cards can be a smart short-term financing solution, especially if you haven’t yet established business credit. Many cards offer rewards, cashback, and expense tracking tools that benefit small business owners. Responsible use can also help you build credit for larger financing down the line.
Quickly Boost Your Credit Score
Paying down existing debt and increasing your available credit limit can significantly improve your credit utilization ratio. This ratio plays a significant role in determining your personal credit score, so optimizing it can lead to fast improvements. A higher score can unlock better financing options for your business.
Accounts Receivable Factoring
Accounts receivable factoring allows businesses to sell their unpaid customer invoices to a factoring company in exchange for immediate cash. This helps improve cash flow without waiting for customers to pay. It’s ideal for businesses with slow-paying clients but a consistent volume of invoices to manage.
Build Business Credit
Opening trade lines with net-30 vendors and consistently paying on time can help you establish and grow your business credit profile. Over time, this builds a strong business credit score that lenders and suppliers can rely on. A solid business credit history can also reduce your reliance on personal credit for financing.
Equipment Financing
Equipment financing enables small businesses to purchase or lease essential tools, machinery, or vehicles by using the equipment itself as collateral. This lowers the lender’s risk and can make approval easier, even with less-than-perfect credit. It’s a practical option for businesses that need to upgrade or expand operations.
How can an improved credit score help my business in the future?
An improved credit score can help your business qualify for larger loans or better terms in the future. Having good credit can also speed up the approval process and may reduce borrowing costs, making it easier to access the funding your business needs as it grows.
For example, an improved credit score could help you access SBA loans. These government-backed small business loans are often regarded as the gold standard of small business financing, thanks to their low interest rates and extended repayment terms. Most SBA loan options require a credit score of good to excellent.
Bad Credit Working Capital Loans – Final Thoughts
Getting a working capital loan with a low credit score is possible, but extra risks are involved. Working with a traditional lender may be more difficult due to stricter approval criteria and longer processing times. However, with careful planning and timely payments, you can use these loans to support your business and potentially increase your credit score.
When considering a bad credit working capital loan, ensure you’re only borrowing what you need and plan to use those funds to increase revenue. You also want to use a working capital loan that best suits your business structure.
Contact us if you have further questions about bad credit working capital loans or would like to apply for a small business loan. Our loan executives can help you find the best business funding solution for your needs and qualifications.
