I had a friend, Jason. He wanted to start a food truck business. He had great ideas and amazing recipes. But there was a big problem—his credit score was low. He went to the bank, but they said no. He felt stuck.
Does this sound like you? If you need money for your business but have bad credit, don’t worry. You still have options. You just need to know where to look and what to do.
Why Bad Credit Makes It Hard to Get a Business Loan
Lenders worry about risk. If your credit score is low, they see you as a big risk. But some lenders look at more than just your score.
Banks and traditional lenders check your credit history to see how well you manage debt. A low score means you may have missed payments before. This makes lenders nervous. They worry you won’t repay them on time.
Most banks want a credit score of at least 650. Some require even higher. If you have bad credit, you may face these problems:
- Higher Interest Rates: Lenders charge more to offset the risk.
- Shorter Repayment Terms: Instead of 5-10 years, you may get 1-3 years.
- Lower Loan Amounts: You may get approved, but for less money.
- More Requirements: Some lenders ask for collateral or a co-signer.
What Lenders Look for Besides Credit Scores
If your credit is bad, don’t lose hope. Some lenders focus on other things, like:
- Business Income: If your business earns steady money, lenders feel safer.
- Time in Business: Some lenders want at least six months to one year of history.
- Collateral: Assets like property, equipment, or inventory can help.
- Debt-to-Income Ratio: Can you afford another loan payment?
Some lenders also check industry trends. If your business is in a growing market, they may take a chance on you despite bad credit.
How to Get Approved for a Business Loan with Bad Credit
1. Apply with a Co-Signer
A co-signer is someone with good credit who agrees to repay if you don’t. This lowers the risk for lenders and improves your chances.
2. Use Collateral
A secured loan is backed by collateral. This can be business equipment, real estate, or even your personal car. Lenders are more likely to approve secured loans.
3. Find Alternative Lenders
Online lenders, credit unions, and microlenders are more flexible. They may charge higher interest, but they approve more people.
4. Improve Your Business Financials
If possible, wait a few months before applying. Use this time to:
- Increase your business revenue
- Reduce outstanding debt
- Improve cash flow
- Keep better financial records
5. Check Your Credit Report for Errors
Mistakes on credit reports happen often. Get a free report from AnnualCreditReport.com. Dispute any errors you find.
6. Build Business Credit
Having separate business credit helps. Open a business credit card. Pay vendors on time. Register with business credit bureaus like Dun & Bradstreet.
Best Places to Get a Loan with Bad Credit
1. Online Lenders
These lenders work fast. They often approve loans within days. Some of the best online lenders for bad credit include:
- OnDeck: Short-term loans, fast funding.
- BlueVine: Invoice factoring for cash flow.
- Fundbox: Flexible credit lines.
2. Credit Unions
Local credit unions may be more willing to lend to you than big banks. They also offer lower interest rates.
3. Microlenders
Microlenders provide small loans to startups and entrepreneurs. Examples include:
- Kiva: Crowdfunded loans with 0% interest.
- Accion: Loans for small businesses.
- Opportunity Fund: Specializes in helping minority-owned businesses.
4. Merchant Cash Advances (MCAs)
An MCA gives you money upfront. You repay it through daily credit card sales. These loans are easy to get but have high fees. Only use this option if necessary.
Watch Out for Bad Deals
Some lenders take advantage of desperate borrowers. Here’s what to avoid:
1. Predatory Lenders
Some lenders offer fast loans with hidden fees. If the terms seem too good to be true, read the fine print.
2. Payday Business Loans
These are short-term, high-interest loans. You can get the money fast, but you may end up paying much more than you borrowed.
3. Hidden Fees
Some lenders charge application fees, prepayment penalties, and balloon payments. Always ask about extra costs before signing.
Other Ways to Get Funding
If loans won’t work, try these:
1. Crowdfunding
Websites like Kickstarter and GoFundMe let people donate money to your business idea.
2. Grants
Some organizations and government agencies offer free money to small businesses. Check grants.gov for options.
3. Revenue-Based Financing
Instead of fixed monthly payments, you repay a percentage of your sales. This works well for seasonal businesses.
4. Business Credit Cards
Use a business credit card to cover small expenses. Pay it off on time to build your credit.
5. Angel Investors & Venture Capitalists
If you have a strong business plan, investors may fund your business in exchange for a share of ownership.
How to Prepare Before Applying
To improve your chances, follow these steps:
- Write a Strong Business Plan Show how you will use the money and how your business will grow.
- Organize Financial Documents Lenders will ask for tax returns, bank statements, and balance sheets.
- Compare Loan Options Don’t take the first offer you get. Shop around and compare rates and terms.
- Lower Existing Debt Pay off credit cards and other loans before applying.
Final Thoughts
Remember Jason? He found a microlender who gave him a chance. He got the loan, started his food truck, and now owns two trucks and a restaurant.
Bad credit is not the end. You have options. Keep going. Your business dream is still possible.