Live Your Dream: How to Apply for a Business Loan With Bad Credit

Did you know that 16% of Americans have bad or very poor credit? If you fall into this percentage, we have your back.

As a business owner, having bad credit is a disadvantage, but there are still options out there for you. When applying for a small business loan, lenders will look at your personal and business credit score.

Read on to learn how to apply for a business loan with bad credit.

How to Apply for a Business Loan With Bad Credit

Knowing how to apply for a business loan with bad credit is a lot like applying for a loan in general. With bad credit, you can still get the financial help you need to build your business.

An essential part of getting a loan is knowing your personal credit score. This should be different from your business credit score. Lenders will use both to determine the risk.

Take time before applying for a business loan to try and boost your credit score. After understanding your credit score, you can research your options.

Traditional business loans are based on how many years you’ve been in business, annual revenue, and personal credit scores. Different types of small business financing could be right for you. Through your research, decide which business loans offer the best approval odds.

Outside of a bad credit business loan, other financing options could be right for your business. Be wary of the lender’s reputation when looking into alternative financing options.

Before making any financial agreement, read reviews and talk to service representatives. A proven track record of happy customers is always a good sign.

Why Credit Scores Matter

Odds are, you won’t find the best business loans with a bad credit score. That doesn’t mean all hope is lost.

Your personal credit score matters just as much as the business credit score when attempting to secure a business loan. A FICO credit score takes a few factors into account. Those factors being:

  • Character
  • Capacity
  • Capital
  • Conditions
  • Collateral

These credit characteristics help a lender understand whether or not they can safely lend you money. There are different credit-scoring models that a lender may use to determine this. However, the most used model is the FICO score.

Bad credit typically refers to a score between 300 and 629. A traditional lender rejects loan financing when you have a low FICO score.

The best bad credit business loans are typically those from alternative lenders. These loans revolve around what your business can do in the future.

Improving Your Chances

To improve your chances of getting a business loan with bad credit, some preparation is necessary. By taking a few steps, you can secure better terms for a small business loan even with bad credit.

One way to do this is by providing collateral. Giving money to a small business is risky even if you have good credit. An unexpected downturn in business leads to the inability to repay a loan.

With collateral, you have two options. You can use invoice financing and equipment financing.

Based on the value of your invoices, a lender may approve you for a loan. This is especially true if you have unpaid customer invoices. These are seen as collateral and a company will advance a percentage of the invoice as a loan.

If you need loan money to buy new equipment, you can apply for equipment financing. The equipment you finance with a business loan is the collateral.

If you fail to repay the lender, the equipment will get seized. Your personal assets have protection.

A second way to improve your chances is by using a co-signer. This means another individual takes on some responsibility for the business loan.

It isn’t worth it to choose a co-signer who also has bad credit. Your best bet is to choose someone with a good credit score and stream of income to make loan payments if the primary borrower cannot.

The longest way to improve your chances of getting the best business loan for bad credit is actually by upping your credit score. You can do this with the help of a credit repair company. Check out Pinnacle Credit Repair to see how they can help you.

Alternative Lender Loans

Alternative lenders may offer a variety of bad credit business loans. One option is a short-term small business loan that provides a company with a lump sum that the borrower pays back over time. The payment schedule is specific like a traditional loan.

Alternative lenders may also give a business the option of a short-term line of credit. The borrower can access a specific amount of funds continually. It’s similar to a credit card as you are only charged interest on the balance that is open.

A collateralized loan works like collateral generally does. These loans are often called secured business loans.

For those in desperate need of quick capital, an alternative lender may offer a lump sum loan. This is also known as merchant cash advances. A business owner will receive this money in exchange for future receivables.

Not every business should run to this option even though the process is easy to go through. These loans come with high-interest rates costing businesses a fortune in the long run.

Looking for Bad Credit Small Business Loans?

If your business is struggling in the current economy, a business loan may do you good. Knowing how to apply for a business loan with bad credit takes a little more preparation, but the process is similar to applying for a traditional business loan. By using this guide, you can increase your chances of getting a bad credit business loan and work on repairing your credit for the future.

There’s a lot to learn about business finances. Read our other blog posts to learn more.