Lack of funding is one of the primary reasons why small businesses fail. If you have bad credit, you can still qualify for financing – you just need to know what your options are and how to prepare the application.
Do you need a business credit score to get a business loan?
If you operate a business and have made any kind of loan payments, you have a business credit score.
Traditionally, banks evaluate your business's credit history before approving you for a loan. Alternative and online lenders, however, have more relaxed qualifications.
If you don't have a business credit score, you can still apply for a loan using your personal credit score.
Keep in mind that a credit score is merely one small aspect of a loan application. There is a multitude of other factors that lenders consider when evaluating a loan application.
The tips below will help improve your odds of securing funding.
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Know what lenders are looking for
Each lender has its own review process; they may place more emphasis on certain factors than other lenders.
However, there are criteria that all lenders use to evaluate your application, and you should be aware of that criteria to improve your chances of being approved for a business loan.
A lender will evaluate the following aspects of your company:
- Debt: Lenders want to see that your debt is under control. It's OK to have debt, but you should show a history of on-time payments and a good debt-to-income ratio.
- Revenue: Lenders want to see that your revenue is high and growing consistently. Your revenue is what you'll use to repay them, and the lender needs to see that you have the ability to do that. If you can also provide evidence of consistent business growth, that will improve your chances as well of being approved for a loan.
- Cash flow: Your business's cash flow needs to be positive and well managed. You can't have low cash flow but spend it well, or high operating cash flow and high total debt. Lenders need to see that you not only have positive cash flow but that you manage it wisely and responsibly.
By having these three factors in place – low debt with a demonstrated history of on-time payments, high revenue with consistent growth, and positive cash flow that is well managed – your chances of being approved for a business loan are significantly increased.
Make sure you meet the minimum borrowing requirements
Every lender has their own minimum qualification requirements. These are the lender's basic requirements. These requirements can include:
- Time in business: Your business must have been operational for anywhere from six months to two years depending on the lender.
- Minimum monthly revenue: Many lenders require a minimum monthly revenue, often $10,000 or more.
- In good standing: Lenders won't work with you if you are behind on payments with another lender, in collections or have a history of nonpayment.
Get your documents in order
Now that you have a better idea of what lenders look for when reviewing your loan application, it's time to gather the necessary documentation.
Every application is different; a lender may request a particular document from you that they may not request from another applicant. It's useful to have all of the below documentation in order, just in case the lender requests it:
- Proof of business ownership
- Personal and business tax returns
- Profit and loss statement
- Business licenses
- Property lease agreement
- Driver's license
- Bank statements
- Debt schedule
Having the above documentation handy can speed the approval process, which is especially useful if you need the funds quickly.
Financing options for those with bad credit
If you have less-than-ideal business and personal credit, there are still some financial options available to you. These options include:
- An unsecured business loan: An unsecured business loan doesn't require traditional collateral to guarantee the loan, but the interest rate is often higher. Unsecured loans can be as high as $2 million, depending on the lender and other factors.
- Business line of credit: Like a credit card, a business line of credit gives you access to a revolving balance of credit. Limits are often lower than those of traditional loans, but the flexibility and convenience are unmatched.
- Term loan: A term loan is a standard loan, a lump sum that is paid back within a specified time frame. These loans are useful for one-and-done purchases, such as a new building, new equipment or additional product for an upcoming busy season.
- Split funding/merchant cash advance: Businesses that generate a steady flow of credit card sales can tap this financing option, which takes a percentage of your business's daily sales to repay the loan.
- Invoice factoring: Invoice factoring is an advance on outstanding invoices. Alternative lenders buy your outstanding invoices at a discount and charge a fee to provide you with a portion of the cash upfront. These loans generally require collateral and can also be conditioned on the lender evaluating your customers who owe your company money and their ability to pay.
- Microloan: Microloans are not a common small business funding tool, but it might be an option available to your business. The U.S. Small Business Administration, for example, has a microloan program that is funded by certain nonprofits and community-oriented organizations. Typically, microloans are only available in unique circumstances.
- Business credit card: While you may not qualify for a loan from a bank or online lender, you can apply for a business credit card. Credit cards have a high interest rate, and if you don't meet the monthly minimum payments, your credit will take a major hit.
Ultimately, it's up to you as to which funding option is best suited for your business and your needs. A lender can explain the pros and cons of each option, helping you make an informed decision (depending on what you may qualify for).
Evaluate your standing with the standard borrowing requirements (cash flow, debt-to-income ratio, revenue) and make sure you have the proper documentation handy. Not only will it maximize your chance of being approved, but it can streamline the funding process. With many lenders, approval is granted 24 to 48 hours.
Matt D'Angelo contributed to this article.