How to Get a Business Loan With Bad Credit

A low credit score doesn’t have to shut the door on your business goals. But it can make the path to funding a bit bumpier.

The good news? Many lenders look beyond just credit scores, considering factors like how long you’ve been in business, revenue and whether you have collateral.

From working with online lenders to requesting a smaller loan, there are strategic ways to improve your chances of getting approved for a small-business loan.

Here are some practical ways to improve your chances of getting approved for a small-business loan if your credit score isn’t ideal:

Collateral is any asset you own that you use to secure a loan. Because lenders can take your collateral if you fail to repay a secured loan, these loans often have more lenient credit requirements.

If you can get by with less, you may be able to increase your odds of being approved by simply asking for a smaller loan amount. Our analysis of SS’s small-business loans data shows that the lower the self-reported credit score of approved borrowers, the lower the average funding amount they received.

You may be able to offset a poor credit history by asking a trusted friend or family member with strong credit to co-sign on a business loan. But keep in mind that a co-signer will be on the hook for any loan payments you miss, which can jeopardize your personal relationship if that happens.

This will likely take some time — and you might not be able to wait for funding right now — but it’s still worth working on raising your credit score as it can open the door to better loan offers in the future.

There are several ways that you can improve your credit score. First, make sure you’re on top of your current payments and paying your bills on time. Also, go over your credit report carefully and dispute any errors that you find. You might also consider becoming an authorized user on someone else’s credit card (so long as that person is responsible and has good credit).

While lenders will still consider your personal credit score, building a strong business credit profile may help your approval odds. To get started, you’ll need to apply for an employer identification number with the IRS (if you haven’t already), as well as a DUNS number with Dun & Bradstreet, a business credit bureau. That way, your business activity, such as payments on a loan or credit card, can be tracked and accessed by lenders via your unique DUNS number. Any business activity reported to business credit bureaus is used to inform your business credit score.

After you have those, opening a business credit card can be a smart way to lay the foundation for your business credit history. Business credit cards are sometimes easier to qualify for than loans and can help cover short-term expenses.

Not all lenders work with borrowers who have bad credit. Focus your search on those that do. Online lenders are a good place to start. But watch out for predatory lenders with too-good-to-be-true promises. A reputable business loan broker, like Fundera by SS, can help guide you or you can start with our list of the best bad credit business loans.

While traditional banks might turn you away if you have bad credit, you may still be able to access financing through online lenders and by exploring alternative solutions.

Best for: Entrepreneurs who need fast cash and can manage higher interest rates.

Online lenders are non-bank companies that offer loans that are typically easier to qualify for and fund faster compared with bank loans.

But there’s a catch: Loans from online lenders generally have higher interest rates and shorter repayment terms when compared with traditional business loans.

Online lenders may offer a variety of loan types, including term loans, business lines of credit, merchant cash advances, equipment financing and more.

Best for: Entrepreneurs who need $50,000 or less.

Microloans are small-dollar loans designed for business owners working to build or repair credit, individuals from historically underserved communities and new businesses.

They typically provide up to $50,000 in funding and are offered by nonprofit organizations and lenders who participate in the SBA microloan program.

Best for: Entrepreneurs who need to finance equipment for their business, such as machines, office furniture or semi trucks.

Equipment financing may have more lenient credit score requirements than other types of business loans, since the equipment you buy with the loan serves as the collateral.

Best for: Business-to-business companies with slow-paying customers.

Invoice factoring involves selling your unpaid invoices to a third-party company, known as a factoring company. Because factoring companies collect from your customers instead of you, your personal credit plays a smaller role in the approval process.

Best for: Entrepreneurs with healthy profit margins and few financing options to choose from.

Like invoice factoring, merchant cash advances (MCAs) are not technically loans. Instead they’re an advance of cash you repay using a percentage of future sales, plus fees. Because MCA providers focus more on sales history when considering new borrowers, a bad credit score is less likely to stand in the way of approval.

However, they’re one of the most expensive forms of business financing, so explore other options before considering an MCA.

If the options above don’t fit your needs, here are a few more worth exploring:

• Small-business grants. This is free money awarded to entrepreneurs who put in the time and effort to apply. While the competition is often steep, the potential payoff may be worth the effort.

• Crowdfunding. This involves raising money yourself on online platforms, like Indiegogo or Kickstarter. Depending on the type of crowdfunding you choose, you’ll be on the hook to deliver a product or service, give away a piece of your company or repay the raised funds.

• Friends and family loans. If you have trusting family members or friends willing to lend you cash for your business, consider yourself lucky. While this can be a flexible and cheap way to get funding, it can put your personal relationships at risk. To avoid misunderstandings, we recommend putting everything in writing, including timelines, repayment terms and any interest, so both sides are on the same page from the start.