If you’re looking for a small business loan with bad credit or no credit, you could face some extra hurdles. Banks tend to prefer borrowers with a good credit score — typically a personal credit score of 670 or higher — leaving business owners wondering how to apply for a business loan if they have bad credit or if their business has no credit history.
Fortunately, there are options for business loans for bad credit. Even if you have a personal credit score below the mid-600s, you may find lenders who offer options to help you start, grow, or expand your small business.
Below, you’ll find a guide to resources that might help you with the process of applying for a small business loan when you have bad credit, as well as different loan options.
What Are Business Loans?
A business loan is a sum of money received by a business owner exclusively for use in their business that is repaid — with interest — over an agreed term.
Personal loans are usually of shorter duration. Business loans offer more capital with, ideally, a lower interest rate. Personal loans usually mean a smaller amount of money with a higher rate of interest.
What Is Considered Bad Credit?
Your personal credit score, a rating derived from your credit history, is an important indicator of your creditworthiness to lenders. Similarly, when your business builds up a credit history, it may receive a credit score that potential lenders can use to assess whether to lend it money.
If your credit rating isn’t high enough or your business hasn’t been in existence long enough to build up a credit history, potential lenders may evaluate you as having bad credit or no credit, and it may be harder for you to get good terms on financing or even any financing at all.
Understanding what lenders may be looking for can help you figure out your best options for getting business loans for bad credit.
Personal Credit vs. Business Credit
A common question when you’re trying to figure out how to apply for a business loan with bad credit is whether a lender will look at your personal credit score or your business’s credit score.
Personal credit is based on your individual credit history, including factors such as your record of borrowing and repayment on items like credit cards and loans. It’s connected to your social security number (SSN) and includes specific details regarding any credit-related inquiry. Your credit score is used to sum up how creditworthy you are considered so that potential lenders can assess how risky loaning money to you might be.
Most personal credit scores range from 300 to 850 (although there are a few different scoring models with slightly different scales). Less than 580 is typically considered a poor score.
Business credit is based on the financial history of a business. Instead of being connected to an individual’s SSN (even the SSN of the owner), it’s generally connected to the business’s Employer Identification Number (EIN).
Business credit scores may be issued by several different companies with different systems. Some (though not all) range from 1 to 100, and higher scores are typically viewed more favorably by lenders than lower ones. The scores are generally determined by factors that can include payment history, business history, credit utilization ratio (how much the business currently owes divided by its credit limit), and type of industry.
Every lender may have its own rules, but in general, on a scale of 1 to 100, a business credit score of 80 or above means that the business is likely to be seen as low risk, while a score of 49 or below may suggest high risk to potential lenders.
While your personal credit score and your business’s credit rating are different, they can both matter when you’re looking for a business loan, particularly if you’re a sole proprietor — the only owner of your business. When banks are evaluating an application for a business loan, they commonly review both personal and business credit scores, if available.
Recommended: LLC Business Loans
Why Your Personal Credit Score May Matter for a Business Loan
Many businesses start out with a sole proprietor — just one person who owns the business. When the business is new and hasn’t had the chance to build up a credit history yet, potential lenders may look at the owner’s personal credit when they’re assessing the business’s creditworthiness. A majority of lenders will consider your FICO® score (the credit score issued by the Fair Isaac Corporation) when evaluating an application for a small business loan.
While FICO has different versions of its credit scores for different purposes, personal FICO credit scores are generally determined using the following factors:
• New credit – 10%
• Credit mix – 10%
• Length of credit history – 15%
• Accounts owed – 30%
• Payment history – 35%
Every personal credit score uses these five categories, but the importance of each can vary depending on the individual. For example, a person with a long credit history will be evaluated differently than someone who is just beginning to establish credit.
Lenders use multiple factors to determine what small business financing options they want to offer you. But even though your credit score is just one factor, lenders may have minimum personal credit score requirements to qualify for loan products. That’s why it can be useful to know what your personal credit score is and whether it’s considered good or bad when you’re applying for a business loan.
Banks and SBA-approved lenders generally require credit scores over 680 to qualify for a small business loan, in addition to credit history. Alternative lenders, like those who offer options like merchant cash advances or factoring services, may accept lower credit scores (below 600), but you may face higher total borrowing costs due to increased interest and factor rates.
Recommended: What Factors Affect Your Credit Score?
Applying for a Business Loan With Bad Credit
Getting a business loan with a lower credit score may require a bit more legwork. There are five steps to applying for a business loan with less than stellar credit.
Checking Your Credit Scores
To find your personal credit score and history, you can request a credit report from any of the major bureaus: Equifax®, Transunion®, or Experian®. The Fair Credit Reporting Act (FCRA) entitles individuals to one free copy of their credit report per year from each of the three bureaus.
When you’re looking into a bad credit business loan and you want to know your business credit rating, however, digging that up may be more challenging than finding your personal credit rating. The following sources may offer comprehensive business credit ratings, but keep in mind that some are paid services: Dun and Bradstreet, Experian, and Equifax.
After you’ve gathered your credit reports and scores, you’ll probably be better prepared to determine how eligible you are for financing by comparing your ratings against potential lenders’ minimum requirements.
Recommended: What Are Business Consolidation Loans?
6 Steps That Can Improve Your Chances of Getting a Business Loan
Working toward a higher credit score can take time, but a strong credit score may better your chances of securing a more competitive interest rate on a small business loan. The following steps can help you improve your chances of getting a small business loan.
1. Check your credit reports and dispute any errors
It’s important to monitor your personal and business credit scores to ensure there aren’t any incorrect entries. An error on your credit report could lower your score, making it more difficult for you to secure the financing your business needs.
Check your personal credit reports with the three major credit bureaus (TransUnion, Experian, and Equifax) and report any potential errors directly to that bureau. You can access a copy of each of these credit reports for free once annually.
You may also want to check your business credit history with Dun and Bradstreet, Experian, and/or Equifax. The sooner you can catch and correct any discrepancies, the sooner you can improve your chances of getting approved for funding.
2. Establish credit with a business credit card or line of credit
One way you can work toward building your business credit score is by using a business credit card to make small daily purchases. To help build credit, it’s important to pay your business credit card bill on time each month and avoid carrying a balance.
If you qualify for it, another option that may help you build business credit is taking out a business line of credit. Like a credit card, a credit line lets you take out available credit to make purchases and then pay in full each month. Some lines of credit are revolving, while some close after they’re paid in full, but both give you access to cash flow to support your business while you’re also laying a positive credit foundation.
And finally, consider keeping your business credit card or line of credit accounts open, even if you aren’t using them. Canceling a business credit card could impact your business credit score.
3. Keep your business expenses separate from personal expenses
There are a number of reasons to keep your business and personal expenses separate. These include building credit, keeping your records accurate, and streamlining your taxes, as well as for the legal implications. Whether you’re just starting your business or trying to build good credit, these steps can help you establish and maintain a separation between your business and personal expenses:
• Open and maintain separate business and personal bank accounts
• Avoid using your business credit card for personal expenses and vice versa
• Register your business with an EIN number
• Hire a bookkeeper to manage accurate accounting for your business
4. Maintain your personal credit score
Can you get a loan with a 500 personal credit score? It may be difficult, which is why it’s important to maintain strong personal credit if it’s at all possible.
Even though your business and personal credit are separate ratings, having a good personal credit score may improve your chances of getting approved for a business loan. When lenders see strong personal credit, it highlights for them that you’re a trustworthy borrower. One way to help build and maintain a good personal credit score is to pay your credit cards and other outstanding debts on time.
5. Take the time to build credit
Trying to figure out how to apply for a small business loan with bad credit and no collateral can be frustrating. Building credit may take a while, but it’s usually worth the effort. That’s because a strong credit history can help you get favorable rates and terms on future loan products.
For starters, you can aim to work with vendors and suppliers who will report your business dealings to the major credit bureaus. Paying your outstanding balances and invoices on time can also potentially help you establish and build better business credit. But keep in mind that not all companies will report on your behalf, and try to choose judiciously.
If you’re able to wait to apply for a loan, delaying your application could be an opportunity to continue paying down other debts and credit cards, or make any other regular payments that show a stable financial history. By taking the time to build a good track record, you can prove your dependability as a borrower and potentially improve your chances of being approved for more favorable loan products in the future.
6. Diversify your credit
Creating a good credit mix is an important step in building good business credit. A mix of credit means that you have varied lines of credit, credit cards, loans, and other products. Once you’ve established good business credit, having a well-rounded credit mix can help you maintain or potentially build your credit score, so long as you’re responsibly making payments on each account.
Another factor to keep in mind is your credit utilization ratio. This is how much available credit you’re using. Maxing out every line of credit may present a negative picture of your business, while using around 25% of your credit typically suggests that you’re a responsible borrower.
Recommended: How to Build Credit Over Time
Preparing Documentation
When you’re planning to apply for bad credit business loans, it may help to gather the following documents:
• Personal and business credit reports
• Business bank and financial statements
• Legal documents related to your business
• Business and personal tax returns
• Personal identifying documents
• Business plan
Some lenders may not require all of these documents, but having them all ready in case they’re needed can be helpful. In fact, some lenders may even require additional documentation. And while you’re gathering this paperwork, it can also be a good opportunity to assess your business’s financial status, too.
Applying for Bad Credit Business Loans
Now that you’ve taken steps to prepare, you’re also equipped with knowledge that can help you make a decision on which loan products and lenders suit your business needs. Consider the following factors when comparing your business loan options:
• When you need funding by
• The documents needed to apply
• Interest rates and terms and fees
• The length of application and approval time
• Required personal and/or business credit ratings
• Whether you have collateral to offer
When you’re applying for a business loan with bad credit, banks and other traditional lenders may be more likely to lend to you if you’re able to back the loan with collateral. If you don’t have any collateral to offer, it may be worth reviewing alternative lenders, who may be more likely to have funding options for companies with less-than-stellar credit.
Recommended: Unsecured Business Line of Credit
Types of Alternative Bad Credit Business Loans
Besides the traditional term loans, there are other financing options available to you, even if you have low credit or no credit.
Secured Business or Personal Credit Cards
When you get a secured credit card, you have to provide a security deposit to open the card. That deposit acts as collateral in the event you default on your payments. This lessens the risk for the credit card company, and therefore improves your chances of getting approved.
If you are looking for a startup business loan with bad credit and no collateral, opening a secured personal or business credit card may be an option to consider. If you make payments on time for a certain period, your creditor may even offer you an unsecured card to help build up your credit rating further.
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Peer-to-Peer (P2P) Lending
Peer-to-peer lending lets borrowers and investors connect directly, eliminating the need for a financial institution to facilitate the loan process. Borrowers who are trying to get unsecured business loans with bad credit or whose business is new may find more financial options to choose from in this category than from other kinds of lenders.
Borrowers and lenders use P2P networks to find each other based on business needs, purpose, and qualifications. Fund transfers and payments go directly through the P2P platform for a simple, manageable process. Because you work with an investor directly, there may be more emphasis placed on your business’s purpose and long-term goals.
Equipment Financing
Equipment financing can help you purchase necessary equipment, machinery, and other items for your business. Equipment financing may be a viable loan option for a business with a low credit score or limited collateral because the equipment itself acts as collateral. In other words, if you default on your payments, the lender can claim the equipment to recoup its losses.
Equipment financing can help you purchase big-ticket items without the financial strain of paying a lot of money all at once. The terms on loans like these may range from a few months to 10 years, and generally vary based on the lifespan of the equipment.
Invoice Factoring
A short-term financing option known as invoice factoring lets you sell your invoices to a factoring company, which assumes responsibility for collecting payments from your customers. Typically, B2B companies or operations with irregular billing cycles rely on this type of financing.
Businesses may use invoice factoring as a quick way to supplement cash flow or when they need a bad credit business loan. Since the factoring company is responsible for collecting payment from your customers, it’s important to partner with a company that’s reputable and uses fair collection practices.
Inventory Financing
Inventory financing helps a business maintain cash flow while it’s purchasing additional inventory, typically in preparation for a seasonal spike. That new inventory serves as collateral, and lenders offer financing based on a percentage of its value. This can be a good option if you don’t have collateral and need funds to stock up on inventory.
Microloan
Microloans are loans offered by nonprofit and peer-to-peer organizations for smaller loan amounts, typically less than $50,000. If you require just a small amount of financing and don’t qualify for a larger loan, a microloan may help you get the funding you need to cover basic startup costs and other business expenses.
Since newer, smaller businesses often seek microloans and haven’t yet established business credit, it’s helpful to have an established personal credit history to help the lender make its financing decisions.
SBA microloans are also available and may have advantages like longer terms and better interest rates, but they require a strong credit rating.
Merchant Cash Advance
A merchant cash advance is not actually a loan, but a way for a small business (“merchant”) to get a cash advance for business expenses in return for a portion of its future credit/debit card sales. Merchant cash advance companies purchase a business’s future sales at a discount and, in return, offer quick financing.
A business owner trying to get an unsecured business loan with bad credit may find that merchant cash advances are an option for quick cash, but they do often come with high interest rates and fees.
Additionally, since merchant cash advances are not technically loans, companies don’t receive the same governmental oversight and regulation as traditional lenders. If you decide to go with this option, research the different merchant cash advance companies carefully to ensure that the one you choose operates in a fair and trustworthy manner.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
Can I get a business loan with no collateral?
Yes, there are some business loan options that don’t require collateral, particularly from online lenders. However, that’s not the case for all small business loans. Some will require collateral to qualify, especially if you don’t have strong credit. There are also other lending options that essentially have collateral built into their structure, including equipment financing and secured credit cards, which you may want to consider if you have no other form of collateral to offer.
Can I get a business loan with bad personal credit?
Yes, there are options for securing business funding, even if you have bad credit. While many lenders look at your personal credit to help determine your eligibility and loan terms, some alternative lenders and online business loans may be available to people who are still building their personal credit. Lenders offering certain other products, like merchant cash advances and invoice factoring, will also consider individuals with bad credit.
Are any banks easier to get a business loan at than others?
Banks differ in their evaluation criteria. However, since interest rates began to rise, U.S. banks have been tightening their criteria. They have typically expected higher credit ratings, longer time in business, and more income generated every month before giving a term loan.
Are all business loans based on credit scores?
Credit score is one thing banks look for. Banks also examine business revenue, cash flow, outstanding debt, unused credit lines, and the length of time in business.
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