How to Get a Business Loan with Bad Credit

Securing financing can be challenging for business owners with poor credit. Lenders often rely on credit scores to assess risk, and a lower score may limit access to traditional loan products. However, having bad credit does not mean that all financing options are off the table. For businesses looking to better understand the role credit plays, it’s essential to grasp the basics of business credit and the factors that impact their ability to borrow.

Several loan products are available specifically for businesses facing credit challenges, and lenders like SBG Funding consider a broader range of factors beyond just credit history. Understanding the types of loans available and preparing your application properly can improve your chances of approval.

This article will outline the most accessible loan options for businesses with bad credit, share practical steps to enhance your loan eligibility, and walk through the application process. With the right approach, businesses can still secure the funding they need to grow and thrive, despite past credit setbacks.

Best Loan Options for Businesses with Bad Credit

Accessing financing with poor credit can be challenging, but several loan products are designed to meet the needs of businesses in this situation. Each loan option offers distinct benefits to help manage operations, improve cash flow, or invest in growth.

Short-Term Loans

Short-term loans offer quick access to capital, with repayment terms typically ranging from 3 to 24 months. These loans usually come with higher interest rates, starting around 8% and sometimes exceeding 50%. Repayments are usually structured as daily or weekly installments, which align with the short loan duration.

• Use Case: Addressing immediate cash flow needs or funding time-sensitive projects
• Eligibility: Many lenders require a minimum credit score of 600, at least one year in business, and annual revenue of $100,000 or more. At SBG Funding, we assess not only credit scores but also cash flow trends and performance metrics to tailor loans to your needs.

Merchant Cash Advances (MCA)

Merchant Cash Advances (MCAs) provide upfront funding in exchange for a percentage of future credit card or debit sales. With repayments adjusting based on sales volume, MCAs are particularly helpful for businesses with fluctuating income. However, the cost of an MCA can be significant, with factor rates ranging between 1.1 and 1.5, translating into effective APRs that can exceed 100%.

• Use Case: Ideal for seasonal businesses or those with irregular cash flow
• Eligibility: While most MCA providers focus on recent sales volume and do not require high credit scores, SBG Funding considers your business’s overall potential, providing solutions even for those with lower credit scores.

Invoice Factoring

Invoice factoring allows businesses to convert outstanding invoices into immediate cash by selling them at a discount. The lender advances 70-90% of the invoice’s value upfront, with the remaining balance, minus fees, paid when the customer settles the invoice. This type of financing eases cash flow issues without waiting on customer payments.

• Use Case: Useful for B2B companies managing delayed payments or outstanding receivables
• Eligibility: While approval primarily depends on invoice value, SBG Funding offers flexible factoring solutions, focusing on the strength of your customer accounts.

Business Lines of Credit

A business line of credit provides flexible access to funds as needed, with interest charged only on the amount drawn. Once repaid, the credit line replenishes, making it ideal for covering fluctuating expenses or unexpected opportunities.

• Use Case: Handling unforeseen costs or seizing new business opportunities
• Eligibility: Many lenders require at least one year in business, annual revenue of $100,000, and a credit score of 620 or higher. SBG Funding evaluates cash flow trends and business growth potential, offering credit lines tailored to businesses with varying credit profiles.

How to Improve Your Chances of Approval

Even with poor credit, there are several strategies businesses can use to improve their loan eligibility. While credit scores remain a consideration, lenders evaluate other factors, such as cash flow trends and business potential. Here are practical ways to enhance your approval chances:

Offer Collateral or a Personal Guarantee

Offering collateral gives lenders security, as they can seize assets like equipment or real estate if the loan isn’t repaid. For businesses without sufficient collateral, a personal guarantee is often required, making the business owner personally liable for the debt. This can help secure financing by sharing the lender’s risk and potentially improving loan terms, but it puts personal assets—like savings or property—at stake if the loan defaults. Limited guarantees, where liability is capped, can sometimes reduce personal risk.

Review and Correct Your Credit Reports

Checking both personal and business credit reports for errors is essential before applying for a loan. Monitoring your reports closely is essential, and knowing how to check your business credit score ensures you catch any inaccuracies early. Identifying and addressing mistakes in advance will improve your application and prevent unnecessary obstacles.

Demonstrate Strong Cash Flow

Lenders focus heavily on cash flow, as it reflects the business’s ability to manage debt and maintain operations. Consistent revenue streams—even if seasonal—help demonstrate financial stability. Businesses with fluctuating income should provide detailed records showing how they manage operations during slow periods. Strengthening cash flow and building credit simultaneously is crucial, as outlined in our steps to improve your business credit.

Develop a Comprehensive Business Plan

A well-structured business plan serves as both a roadmap for your operations and a key tool when seeking funding. Whether you are launching a new venture or managing an established business, having a solid plan ensures you stay focused on long-term goals. For entrepreneurs in the early stages, a business plan aligns with other essential preparations, such as market research and defining a unique selling proposition. Following best practices from the start sets a strong foundation for growth, no matter where you are in your business journey.

Build Relationships with Specialized Lenders

Traditional lenders may deny loans based on strict credit requirements, but specialized lenders often assess broader factors, such as recent business performance and cash flow trends. Building relationships with these alternative lenders can provide access to more flexible financing options. Additionally, specialized lenders may offer faster approvals and customized loan products that align with your business needs, which is crucial when navigating financial challenges.

Loan Costs and Repayment Terms

Certain loan products, such as traditional term loans, rely heavily on personal credit scores like FICO. Knowing how FICO scores affect borrowing options allows businesses to set realistic expectations. Alternative products like merchant cash advances may weigh cash flow more heavily, making them suitable for companies with inconsistent credit histories.

Interest Rates and Factor Rates

Interest rates determine how much a lender charges for borrowing. Business loans typically feature either fixed or variable interest rates. Fixed rates remain consistent over the loan’s lifetime, providing predictable payments, while variable rates fluctuate with market trends, such as changes in the prime rate, which can make budgeting more difficult. Short-term loans or loans from online lenders may have higher APRs due to increased risk.

• Interest Rates: Business loan rates typically range from 6% to over 50%, depending on factors such as credit score, loan amount, and lender type. SBA loans and traditional bank loans usually have the lowest rates, while merchant cash advances can carry much higher APRs.
• Factor Rates: Used primarily in MCAs, these range from 1.1 to 1.5 and determine the total repayment amount. For example, with a factor rate of 1.3, borrowing $10,000 means repaying $13,000. However, this structure can translate into APRs of 40% to over 250%, depending on the loan’s term length.

Fees and Additional Costs

Fees can significantly increase the cost of borrowing and should be factored into the overall loan evaluation. Common fees include origination fees charged upfront and penalties for early repayment.

• Origination Fees: These typically range between 1-5% of the loan amount, deducted from the funds disbursed.
• Prepayment Penalties: Some lenders charge a fee if the borrower repays the loan early, potentially limiting flexibility.
• Late Payment Fees: Missing payments can incur additional fees and damage the borrower’s credit profile.

Repayment Schedules and Structures

Different loans feature various repayment schedules, which can impact cash flow management. It’s essential to select a repayment schedule that aligns with your business’s income pattern.

• Daily or Weekly Repayments: Common with short-term loans or MCAs, these schedules help spread out payments but require active management.
• Monthly Repayments: Standard for traditional term loans and lines of credit, these offer more predictable budgeting.
• Revenue-Based Repayments: MCAs and some lines of credit adjust payments based on sales volume, providing flexibility during slow periods.

Loan Term Length and Its Impact on Cost

The loan term determines the total amount paid in interest and the size of individual payments. While shorter loans result in higher monthly payments but lower total interest, longer terms reduce monthly costs but increase the total interest paid over time.

• Shorter Terms: Higher payments with lower total interest costs.
• Longer Terms: Lower monthly payments but higher total interest over the life of the loan.

Choosing the Right Repayment Structure

The right repayment structure depends on your cash flow. Businesses with steady income may prefer monthly repayments for predictable planning, while those with seasonal fluctuations might benefit from revenue-based or flexible schedules.

• For Seasonal Businesses: Revenue-based or flexible repayment terms ensure payments align with fluctuating sales.
• For Steady Cash Flow: Fixed monthly payments provide consistency, making budgeting easier.

Alternative Funding Options for Businesses with Bad Credit

For businesses struggling to secure traditional loans, there are several alternative funding options available. These methods often come with different requirements, allowing businesses to obtain financing without relying heavily on credit scores. Below are some of the most common alternatives:

Business Credit Cards

Business credit cards offer revolving lines of credit, making them a flexible option for managing expenses. They typically provide rewards such as cashback, travel points, or discounts. Some cards come with introductory 0% APR periods, allowing businesses to finance short-term needs without immediate interest. However, the regular APR can range from 17% to 27%, and failing to pay off the balance quickly can result in high-interest debt.

• Use Case: Covering operational expenses or building business credit
• Consideration: Choose cards with manageable fees and assess whether rewards offset potential interest costs.

Grants for Small Businesses

Small business grants are non-repayable funds from government programs, nonprofits, or private organizations, typically targeted at specific industries or demographics. While grants can provide excellent funding without debt, they often have competitive application processes and strict eligibility criteria.

• Use Case: Startups, research projects, or community-based businesses
• Consideration: Research grant opportunities early, as the approval process can take months.

Crowdfunding Platforms

Crowdfunding platforms such as Kickstarter, Indiegogo, and GoFundMe allow businesses to raise funds directly from the public, often in exchange for early access to products or equity. Successful campaigns require significant marketing efforts and must attract a large number of contributors. Additionally, most platforms charge a fee on the total funds raised.

• Use Case: Launching new products or engaging with early adopters
• Consideration: Ensure your campaign is well-prepared, as platform fees and marketing costs can reduce net proceeds.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending platforms, such as LendingClub and Prosper, connect borrowers directly with investors, bypassing traditional banks. P2P loans often have more flexible terms and faster approval times than bank loans. However, these platforms still assess creditworthiness, and interest rates vary based on the borrower’s risk profile.

• Use Case: Quick funding for businesses that don’t meet traditional loan criteria
• Consideration: Compare platforms for the best rates and repayment terms, as fees and conditions can differ significantly.

SBG Funding’s Simplified Application Process

Many lenders require business owners to jump through hoops, making it difficult to secure the financing they need. At SBG Funding, we’ve simplified the process to help businesses access funding quickly and efficiently, with minimal paperwork and approvals in as little as 24 hours.

Our 3-Step Process:

1. Fill out our online application.
2. Sign your application and e-documents.
3. Upload the required documents and receive your funds.

Documents We Typically Need:

• Four months of bank statements
• Driver’s license (ID)
• Voided check

SBG Funding typically approves businesses with a FICO score of 600+, six months in operation, and $250,000 in annual revenue.