Can I Get a Business Loan With Bad Credit?

Securing loans for business with bad credit can be challenging but not impossible. If you’ve ever asked yourself, “Can I get a business loan with bad credit?” the answer is yes—with the right approach. Individuals must understand the intricacies of credit scores, how banks evaluate loan applications, and the available financing options that can enhance their chances of obtaining the necessary funds for their business.

What is Credit Score?

A credit score or rating is a numerical representation of an individual’s creditworthiness, reflecting their ability to repay debts responsibly. Typically ranging from 300 to 850, this score is derived from one’s credit history, encompassing factors like payment history, outstanding debts, length of credit history, types of credit used, and recent credit inquiries. Lenders use credit scores to assess the risk of extending credit or loans to applicants.

There are various ranges of scores:

• 800 to 850 — Excellent: Considered to be low-risk borrowers and may have an easier time securing a loan.
• 740 to 799 — Very Good: Have demonstrated a history of positive credit behavior.
• 670 to 739 — Good: Generally viewed as acceptable or lower-risk borrowers.
• 580 to 669 — Fair: Considered “subprime” borrowers and may have trouble qualifying for new credit.
• 300 to 579—Poor: This group will have difficulty being approved for new credit and need to improve their credit scores.

Bad credit scores may result from late payments, high debt levels, bankruptcies, or limited credit histories. It can also hinder one’s ability to secure loans or result in higher interest rates and less favorable terms. Many business owners in this situation wonder, “Can I get a business loan with bad credit?” The good news is that options are available if you take the right steps.

How are Credit Scores Calculated?

Credit scores are determined by credit reporting agencies based on various factors, including:

• Credit History: Duration you’ve been using credit. Longer credit histories typically lead to higher scores.
• Payment History: Number of late payments, bankruptcy filings, and debt collections. Timely payments boost scores, while late or missed payments can significantly lower them.
• Usage: Percentage of available credit remaining. High balances relative to credit limits can negatively impact scores.
• Credit Mix: There should be a diversity of credit accounts. Mortgages, credit cards, and installment loans can all positively influence scores.
• New Credit: Multiple recent credit inquiries or new accounts can be seen as risky, potentially lowering scores.

How Banks Evaluate Loan Applications

Banks and traditional lenders assess loan applications based on several key criteria, often referred to as the “Five Cs of Credit”:

Character

This pertains to the borrower’s reputation and track record. Lenders examine personal and business credit histories, looking for patterns of responsible financial behavior. They may also consider your industry experience and business management skills.

Capacity

This is your ability to repay the loan. Lenders evaluate your business’ cash flow, debt-to-income (DTI) ratio, and profitability to ensure you can meet the loan obligations. The higher DTI, the greater risk for the lender.

Capital

Lenders consider the amount of money you’ve invested in your business. A substantial personal investment indicates the commitment and reduces the lender’s risk.

Collateral

Assets that can secure the loan, such as real estate, equipment, or inventory, assure lenders that they can recover their funds if you default. Collateral is another potential source of repayment for the lender—the greater the value of the collateral, the lower the risk.

Conditions

External factors like industry trends, economic conditions, and the purpose of the loan influence the lender’s decision. The lender assesses how these conditions might impact your ability to repay.

What is a Bad Credit Business Loan?

This type of loan is designed for business owners with low personal or business credit scores. While they may have lower score requirements and more relaxed eligibility requisites, they often come with higher interest rates and more stringent terms to offset the lender’s increased risk. 

Despite these challenges, bad credit business loans can provide essential capital for businesses unable to qualify for traditional financing. For entrepreneurs wondering about getting a business loan with bad credit, these loans offer an alternative way to access funding.

How to Get a Business Loan with Bad Credit?

How can you get a business loan with bad credit? Follow these tips to help improve your chances of having your application approved.

1. Present a strong case across the Five Cs of Credit.

Make your application more likely to be approved by banks and lenders by considering the following:

• Character: Showcase Additional Strengths — You’ll have a better chance of securing a loan if you offer a high-demand service or possess a highly specialized degree.
• Capital: Invest in Your Business — The more capital you contribute, the more likely banks will support your project.
• Capacity: Present a Clear and Detailed Repayment Plan — Ensure you have supporting documents, such as contracts and purchase orders highlighting your ability to repay the principal and interest. These will boost your credibility with lenders.
• Collateral: Offer Assets to Secure the Loan — Your financing application is more likely to be approved if you have valuable assets to offer as collateral. It can also help you secure more favorable loan terms.
• Conditions: Be Well-Informed — Research various financing options and their terms to make well-informed decisions based on your needs and circumstances.

Individuals must be strategic about their credit scores to paint a favorable image. It can be challenging but not impossible, and getting a business loan with bad credit is achievable with the right approach.

2. Be transparent

Don’t hesitate to inform banks and lending institutions what led to your bad credit score—lying or trying to hide the facts won’t help your case. Doing so helps them look more favorably at your application, especially if you had a good credit score in the past. After all, there are reasons why a credit score is low, and you just have to let them see what’s behind the number.

3. Update your business plan

Give lenders peace of mind by having a realistic and stable business plan outlining your long-term business growth strategy. If you’re not writing your business plan for the first time, you should update the one you already have. Common areas to focus on include:

• Executive Summary: Shows the key details about your business model, product/service value, and expected revenue growth.
• Market Reach: this includes customers’ current demographics and data, allowing you to conduct focus groups or interviews to obtain feedback and improve your offerings
• Objectives: Discuss the most important business goals and the performance measures you use to achieve them.

4. Choose the right type of bad credit business loan

Various options are available at your fingertips. Before you choose one, you must determine:

• Why you need the loan and what it’s for
• Which loans give the best interest rates
• What collateral can help secure the loan
• How long of a repayment do you need

Secure a Loan for Your Business

While bad credit scores can make securing a business loan challenging, understanding how lenders evaluate applications, improving your chances, and exploring alternative financing options can help you obtain the necessary funds. Implementing strategies to improve your credit and presenting a strong case to lenders can help you overcome financial obstacles and steer your business toward success.

Visit our website here for more information on or call us at 1-800-508-1729 to speak with one of our business credit experts.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.