At one time or another, most businesses run into a situation where they need more funding than they have. Some business owners will consider applying for a loan to obtain additional capital. Unfortunately, you may not have the sterling credit required to receive a loan from a bank with favorable terms and low interest rates. Where else can you turn if your business doesn’t qualify for a bank loan?
An entire industry of alternative lenders aims to fill the gaps where banks are unwilling or unable to lend. This is especially useful if you have a poor business credit score. However, accepting money from alternative lenders requires you to be savvy or you could dig yourself deep into debt.
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Best business loans for bad credit
Before we get into what lenders look for when approving borrowers and the terms you should expect, here’s a look at some of the best business loans for those with challenged credit.
Balboa Capital is willing to look at more than your credit score when underwriting loans. These other considerations include the number of years you’ve owned the business and its annual sales. With loans ranging from $5,000 to $250,000, this lender can meet many small business owners’ needs. Balboa Capital doesn’t require collateral and the company offers a variety of loan types and repayment terms from which to choose. Learn more in our review of Balboa Capital.
Building or rebuilding your credit takes time and, if time is not on your side, consider reaching out to Rapid Finance. Although they do not specify a minimum credit score, they say that they consider multiple factors when deciding whether to approve a loan. Rapid Finance offers a variety of loan types and funding between $5,000 and $1 million. Loans are typically funded on the same day of their approval. Rapid Finance doesn’t require a lot of paperwork to apply, which makes the process even quicker. Learn more in our review of Rapid Finance.
Noble Funding is committed to working with its borrowers long after it approves the loan. Part of that is due to its willingness to work with borrowers with challenged credit. You only need a credit score of 500 for a short-term loan approval. This lender is willing to look at other criteria when approving a loan. It doesn’t require any collateral or even, in some cases, a personal guarantee. Learn more in our review of Noble Funding.
SBG Funding makes it easy to prove your ability to pay back your business loan. To qualify for one of its loans, you only need a credit score of 500, to be in business for at least six months and have at least $10,000 in monthly revenue. This lender doesn’t require reams of paperwork, nor does it make you offer up collateral. SBG Funding offers flexible terms between six months and five years and provides same-day funding ― making it our best pick for flexible terms. Learn more in our review of SBG Funding.
If your credit history isn’t good enough to obtain a loan from a conventional lender, there are alternative or private lenders you can turn to. While the flexibility and speed with which these loans can be approved are useful if you have bad credit, the terms can also be restrictive and the loans expensive.
“The further down you are in the credit funnel, the worse the rates are,” James Cassel, co-founder and chairman of Cassel Salpeter & Co., told us. “With great credit, it could be 5%; with bad credit … it could be the equivalent of 40%.”
Should your current credit score fall within the fair or poor ranges, these are some of the most common loans available:
Before accepting any type of funding, do your homework. Research the lender thoroughly to ensure they are a reputable brand and not a predatory lender. Review any repayment terms closely before signing and have your attorney and accountant review them too, if possible. Only accept money that you can realistically pay back in the specified time. Otherwise, further financing could expedite the demise of your business.
Several loan types are available to borrowers with bad credit. Before accepting a loan, make sure you can afford to pay it back. The last thing you want is to default on the loan so that the lender can come after your collateral.
Short-term loans are a type of small business loan that closely resembles a conventional term loan in many ways. Short-term loans carry an interest rate and require repayment of both principal and interest within a certain period, just like a bank loan. However, because the term is less than a year, short-term lenders are more concerned with your company’s cash flow than its credit score.
“Banks ask for all types of collateral and personal credit is very important to the bank,” said Michael Baynes, co-founder and CEO of Clarify Capital. “What’s important to us is cash flow [demonstrated] through six months of bank statements. If we feel [a business’s] bank balance can support our funding over the next four to 12 months, we’re comfortable lending to them, regardless of personal credit score.”
Generally, Baynes said alternative loans require a one-page application, along with a minimum of three months of bank statements. That’s all an alternative lender needs to approve or deny your loan application. But what exactly are alternative lenders looking for?
“The most common reason we reject an application is due to a business being overleveraged,” Baynes said. “If they already have existing debt … and we feel additional payment would overleverage them, we would turn the business down. The other reason an application would be declined would be low revenue and low daily bank balances. We need to see $10,000 to $15,000 per month in revenue or deposits. If they struggle with overdrafts or negative days in their bank account, we’re not confident they can make the payments.”
The approval process for these types of alternative loans tends to be much faster than conventional banks, which could take weeks or months to approve your loan application. If approved, funding for alternative loans can often be delivered within a few days at most.
To expedite approval, it’s important to maintain good financial documentation. According to Cassel, keeping detailed, accurate books is one of the most important things your business can do.
“Make sure your financial house is in order,” he said. “Every business needs to have monthly financials. They need to be available no later than 10 to 15 days after the end of the month. Some businesses don’t get them until 90 days after the month. Then, you’re 90 days further in the hole and it’s too late to correct it.”
Good books not only help you avoid financial trouble but also give lenders the insight they need to make a decision on whether to extend financing to your organization.
To streamline the process of obtaining a small business loan, make sure all your paperwork is accessible. That includes bank statements, sales and profit statements for your business and monthly financials.
When your business requires funding, your first stop may be the bank or some other conventional lender like a credit union. These financial institutions offer a variety of financial products, including term loans and SBA 7(a) loans.
What does it take to qualify for a loan from a conventional lender? Typically, these financial institutions look at several things:
Before applying for a loan, review your credit reports from TransUnion, Equifax and Experian to spot any errors that could negatively impact your score. If you find any, contact the companies to get it fixed.
As part of your loan application, you likely have to provide several months’ worth of bank statements so lenders can understand your business’s cash flow. However, few elements are as important to a conventional lender as a business’s credit score and the personal credit score of the owner.
Lenders look out upon the vast sea of potential borrowers and see a credit spectrum that ranges from very bad to very good. Depending on your business’s position in the credit spectrum, certain types of funding might be unavailable to you. If your business has great credit, you can usually obtain long-term loans with low interest rates. However, if your company is less creditworthy, you might have to pursue more expensive funding options for high-risk businesses.
“On the one [end] of the credit spectrum is someone who can walk into a major bank and borrow money on the business’s credit, not a personal guarantee,” said Cassel.
Those borrowers can expect low interest rates ranging from 2% to 5% on a term loan. Of course, Cassel said, that’s only true for “stellar businesses with great history. On the other side of the rainbow are businesses that can’t get money from any kind of institutional lender.”
Credit score range
Just as there is a broad range your credit score could fall under, there is a spectrum of financial products to consider. Some ― like bank loans or SBA 7(a) loans ― are available if you’re a creditworthy borrower, but if you have only decent credit, you might seek a guaranteed loan.
Business loans can cover any costs necessary to run your company efficiently. You can take out loans to pay for building space, equipment, inventory, building upgrades and more. Lenders will likely ask to review your business plan as part of the application process. Compare multiple business lending options and financial institutions before submitting an application for a loan.
Here are a few items to look out for before choosing a lender for a small business loan.
Various types of lenders fund small business loans. Traditional lenders are banks and credit unions that provide standard loan options. Usually, this route is preferable if you have good credit since the terms and annual percentage rates are more favorable than those of alternative lenders. A traditional lender will have strict criteria that determine whether you’ll be approved for a loan and how much money you receive.
Alternative lenders have grown in popularity and can be a good option if you have poor credit or a nonexistent credit history. Two examples of alternative lenders are business credit card providers and microloans. Another alternative lending option is private loans or marketplace lending platforms. Depending on the terms, an alternative funding source may work for your company.
As part of reviewing your loan application, lenders want to know about your experience. If you have been running an established business for more than five years, your lending potential is greater. Lenders also consider your industry experience. For instance, Farm Services Agency farm loans from the United States Department of Agriculture are given to farmers who have a proven background in owning or running a farm.
Reviewing the loan terms is critical to gain a financial advantage in your industry. Even if you have bad credit, you don’t want to fall into debt without any hope of earning a profit. The lender should be able to provide the amount of money you need and release funds quickly. Loan rates should be favorable, with payments falling within your budget. First, review any loan restrictions that the lender may have in place. Next, determine if the lender will ask for any form of collateral before approving you for the business loan.
There are advantages to repairing a damaged credit score, even if you qualify for funding. As Baynes said, an improved credit score can avail your business of better terms and rates. While rebuilding credit can be a long and arduous process, you should do it when your financial situation has stabilized.
“Obviously, first and foremost is staying current on your personal credit payments,” Baynes said. “These are things like auto loans and credit cards. Maxed-out credit cards drive down your credit score. Missing payments, or just making minimum payments, brings down your credit score tremendously.”
According to Cassel, business credit rehabilitation can be extremely difficult and requires a detailed plan. While maintaining your personal credit score, you also need to keep an eye on your business’s debt service.
“When businesses get into trouble, they should put together a 13-week cash flow [projection] of expected funds in and expected funds out,” he said. “This helps them manage cash and decide what to pay for.”
There are some ways you can seek relief to stabilize your company’s financial situation, such as raising prices. You may be reluctant to raise prices, Cassel said, because you are afraid of losing customers. In many cases, however, there is more room to hike rates than you realize.
You could also ask suppliers to extend payment schedules. If you are a good customer who has kept up with payments in the past, a vendor is likely to work with you. After all, they don’t want to lose you as a customer.
If you’ve partnered with a certain lender before, they might be willing to lend a bit more to your business if they see you are on the road to financial rehabilitation. This is known as an “airball,” Cassel said.
If things become truly dire, you can usually call in a restructuring firm to reorganize operations.
“Sometimes, it is a vicious cycle that is impossible to get out of,” Cassel added. “As things get worse, the cost of borrowing goes up, so you have to figure out how to stabilize the business. Once you stabilize, you can focus on repair.”
Unfortunately, when financial troubles become pervasive enough, you must reckon with the hard truth: The best option, Cassel said, is sometimes to cut your losses and stop the bleeding.
“You’ve got to look at the viability of the business,” he said. “Business owners have to be honest with themselves about long-term viability.”
Ultimately, securing financing should be a way to get your business to a better place on the credit spectrum. That way, the next time you need funding, you can successfully pursue a financial product with better rates and more favorable terms. If financing doesn’t support that type of progress, then it could just be digging your business into a deeper hole.
Cassel had this advice for struggling businesses: “Be honest, try to get a loan and, ultimately, get back to a better lender. Some businesses never do and owners start to feel like they’re working for the bank.”
Financing can be a great tool but, taken irresponsibly or out of desperation, expensive loans can be the death knell for your business. Always have a plan for any money you borrow and keep an open line of communication with your lenders. If you do, you could be well on the road to credit repair.
Jennifer Dublino contributed to this article. Some source interviews were conducted for a previous version of this article.