Business owners with low personal credit scores who face cash shortages wonder how to get a business loan with bad credit and no collateral. By identifying the factors lenders consider in the application, evaluating financing options, and submitting an application, borrowers can maximize their chances of getting a bad credit business loan.
Fundbox offers a line of credit based on outstanding invoices up to $100,000. It only requires a soft credit check for the application and the lender can approve candidates with a credit score of 500 or higher. Applicants can get approved in as quick as three minutes with funding available the next day.
Bad Credit Business Loan Options
Personal Credit Score
Merchant cash advance
300 to 499
501 to 599
Business line of credit
Peer-to-peer business loan
600 to 850
The five steps to getting a bad credit business loan are to identify qualification requirements, find the best financing type by score, apply for financing, make adjustments if denied funding, and reapply for financing.
1. Identify Qualification Requirements
Business owners evaluating options for how to get a business loan with bad credit should first seek to understand the factors that lenders consider during the approval process. Besides a personal and/or business credit score, lenders also consider financial metrics, business credibility, and the value of any collateral borrowers can provide for a bad credit business loan.
The overall evaluation of the business’s credit history that lenders rely on includes the history of payments and the number of open trade accounts, as well as personal and business credit scores. Lenders look for on-time payments with no consistent negative patterns. Short-term lenders also sometimes set minimum personal and business credit scores for approval.
Personal Credit Score
Owners applying for business loans should check their scores for free and understand what their credit score means. A credit score below 580 is considered poor. Lenders that set a minimum credit score below 580 often rely more on business revenue and other variables when making approval decisions.
According to Experian, personal credit score ranges include:
- Exceptional: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Very poor: 300 to 579
Business Credit Score
Business owners can use a business credit score to overcome bad personal credit. Like personal credit, a business credit score is based on the transactions of the business and its track record of payments. With business credit scores, rating agencies represent a high numerical score with a low probability of default.
According to Dun & Bradstreet, a business credit score ranges include:
- Good: 80 to 100
- Fair: 50 to 79
- Poor: 0 to 49
Borrowers with low personal credit scores can work with lenders that rely on a deeper evaluation of financial metrics in the underwriting process. Lenders evaluate factors including revenue, profitability, cash flow, and current debt obligations of applicants. The best merchant cash advance providers focus almost exclusively on cash flow, increasing the approval chances for borrowers with poor credit.
The financial metrics considered by lenders in the underwriting process include:
- Revenue: Revenue is often annualized to ensure that a business meets the minimum qualifications for lenders. In addition to this, lenders will also evaluate the number of revenue events in a given period. Top invoice factoring companies rely on revenue analysis when evaluating borrowers.
- Profitability: Business profitability is important to any underwriting process, but it is critical to lenders that extend credit to borrowers with low personal credit scores. This profitability metric gives lenders the peace of mind that a business will make timely payments on its debt.
- Current debt obligations: Additional debt obligations have a direct impact on cash flow and profitability, but they also increase the burden on a business. Businesses may not qualify for a second loan with poor personal credit because lenders want to be first in line for repayment if a business defaults on its obligations.
- Cash flow: Consistent cash flow and money in the bank inform lenders of the financial stability and predictability of a business. The more predictable cash flow is, the more likely a lender is to approve a loan because it can be certain the business will bring in sufficient earnings to cover loan payments.
“A lender’s primary concern is whether your daily operations will generate enough cash to repay the loan so you will be required to provide your business’s historic and projected cash flow statement. If your cash flow is not managed properly, you may not be able to pay your bills on time and that can lead to poor credit and difficulties with getting business loans.”
—Eckhard Ortwein, CEO, Lean Case
Selecting a lender that relies on financial metrics over a personal credit score can help borrowers get approved for bad credit business loans. Fundbox has a low minimum credit score requirement and relies on business revenue to approve borrowers. Business owners can apply and qualify to borrow up to $100,000 as soon as the next business day.
Lenders also evaluate credibility factors, including time in business, industry experience, and a sound business plan. Although not all lenders set these requirements, the ones that do consider applicants that score high on these metrics a lower overall risk.
The factors that lenders consider when evaluating business credibility include:
- Time in business: Lenders like BlueVine require as few as three months in business to qualify for funding. However, demonstrating a successful track record of several years can provide lenders with the peace of mind that a business is stable.
- Industry experience: Lenders are more likely to approve loans to owners with a strong track record in their industry, especially in high-risk categories like restaurants and construction.
- Business plan: Although business plans are typically associated with startup funding, established businesses can use a business plan to help them get a business loan with bad credit. Preparing a business plan that outlines the use of funds and any associated risks demonstrates an expertise and establishes credibility with the lender.
“The underlying business or the business plan should have the capacity to generate enough cash flow to pay back its debt obligations while absorbing unexpected expenses or changing conditions in the economy or industry.”
—Riaz Qamari, Senior Director of National Underwriting for Small Business Banking, Capital One
Although this credibility alone is typically insufficient for funding, it can play a critical role in mitigating the negative impact of a bad credit score for applicants. Lenders like National Funding that have extensive industry experience rely on financing metrics for its business loans. With a minimum credit score of 500, business owners can receive up to $500,000 in funding the next business day.
Most lenders require borrowers to collateralize their loans using property, equipment, or invoices. However, lenders may also require loan applicants to submit personal guarantees and/or blanket Uniform Commercial Code (UCC) filings. Although most online lenders that provide short-term funding won’t require hard collateral, a personal guarantee and blanket UCC filing is usually necessary. Business owners that can provide collateral increase the number of loan options available even if they have poor personal credit.
The loan security that lenders look for in underwriting include:
- Collateral: Borrowers pledge assets as collateral to lenders for a loan. While different assets can act as collateral, equipment, and real estate are the most common forms of collateral.
- Personal guarantee: A personal guarantee gives business owners the option to pursue personal assets in the event of a default. The laws surrounding personal guarantees vary by state. However, the requirement has become ubiquitous among lenders.
- Blanket UCC filing: A blanket UCC filing or UCC lien represents a claim on business assets if a borrower defaults. Lenders often require the first position, giving them the first rights to proceeds from the liquidation up to the remaining balance of the loan.
Business owners interested in financing a physical asset can qualify for funding with less than perfect personal credit by applying with National Funding. Borrowers will need to use the equipment as collateral, but owners can receive up to $150,000 with a personal credit score of 620 or higher. Funding takes up to a week, and applicants can complete the entire process online.
2. Find the Best Financing Type By Score
Business owners have a variety of financing options for their business. Although the minimum credit score requirement shouldn’t be the only criteria for a decision, it is important for getting a business loan with bad credit. Business owners should select a financing type that fits their score and financing needs.
Personal Credit Score Below 500
Business owners with a personal credit score below 500 only have a few options for financing, most of which don’t have a stated minimum score. Three options include merchant cash advances, which are the most expensive, invoice factoring for larger businesses, and invoice financing for businesses with outstanding customer invoices.
Business loans for business owners with personal credit scores below 500 include:
- Merchant cash advance (MCA): This is a loan based on the value of credit card receivables, and it offers next-day funding with no minimum credit score requirement. Funding is typically for up to $500,000, and APRs range from 30% to 150%. National Funding offers an MCA with no personal credit score requirement.
- Invoice factoring: A financing product that allows business owners to sell outstanding business and government invoices at a discounted value. Factoring providers collect payments on behalf of the business from customers and offer up to $25 million in funding at starting weekly rates of 0.25%.
- Invoice financing: Invoice financing is based on outstanding invoices, but the lender does not purchase them directly. The credit score of customers is considered less important, and it’s a great option for funding up to $100,000.
Although borrowers with poor personal credit scores can access these financing options, they are expensive, very short-term, and should be used as a last resort for funding. Business owners that can invest the time to improve their scores or can delay their financing needs to get a better offer from a lender should do so.
Personal Credit Score of 500 to 600
Business owners with personal credit scores ranging from 500 to 600 also have access to some familiar alternative funding options include lines of credit and short-term loans. These are often available from alternative lenders with terms less than a year, average APRs from 10% to 50%, and funding amounts up to $500,000.
Business loans for business owners with 500 to 600 personal credit scores include:
- Business line of credit: A revolving credit line similar to a business credit card that enables small business owners to draw funds on demand. Funding amounts are typically lower than short-term loans and are best used for regular expenses like payroll and utilities.
- Short-term loans: Business loans are familiar to most business owners because they offer a lump-sum advance with steady payments over the course of as long as three years. Business owners use these for financing larger one time purchases like renovations or inventory to spread payments over a longer period.
Short-term business loans and lines of credit are a great option for small business owners. These types of financing are familiar and easy to use for most business purposes. Alternative lenders have also worked to make them more accessible to borrowers. The drawback of easy to qualify, quick funding options like these is that costs can be much higher than traditional financing options.
Personal Credit Score Above 600
Although most lenders don’t consider a personal credit score of 600 or higher to be bad, business owners may still find it too low to qualify for a traditional loan. For these borrowers, there are more specialized financing options to consider like equipment financing, Small Business Administration (SBA) loans, peer-to-peer loans, and even personal loans for business funding.
Business loans for business owners with personal credit scores above 600 include:
- Equipment financing: Purchasing equipment and using it as collateral for a loan reduces some risk that lenders perceive for borrowers with low personal credit scores. Borrowers can only use the loan to purchase equipment, but rates are much lower than other financing options, ranging from 6% to 20%.
- SBA loan: The U.S. Small Business Administration (SBA) guarantees these loans and offers borrowers access to funding up to $5 million. The loan has long repayment terms up to 10 years with monthly payments making it a great source of capital for major projects like a business acquisition. However, it can take up to three months to get funding.
- Peer-to-peer loan: By distributing the risk to multiple investors, peer-to-peer lenders can offer similar rates and terms to traditional banks with lower minimum qualifications. They typically offer term loans, with a 600 or higher personal credit score requirement and funding up to $500,000.
- Personal loan for business: Although they are not the most common option for business funding, they are accessible to smaller businesses with insufficient revenue. Personal loans have repayment terms up to five years, but lenders typically only offer up to $100,000 in funding.
Startup Business Loans
Although there are bad credit business loans available for every range of credit score, most require at least six months in business and significant annual revenue. Entrepreneurs have other financing options available to them, which have lower time in business requirements.
Startup business loans available to entrepreneurs include:
- Friends and family funding: Entrepreneurs can raise money from friends and family who typically won’t check their personal credit score. This funding is for smaller amounts, but entrepreneurs should be wary of the impact that a loan can have on personal relationships.
- Convertible debt: This type of funding is reserved for more established startups that are growing quickly. It’s offered by angel investors and venture capital firms, and it rarely requires any regular payments. However, entrepreneurs should know that lenders can convert this debt into equity, reducing a founder’s ownership in the business.
- Crowdfunding: Business owners can raise funding from the public for equity, debt, or rewards. The major drawback with this funding is that campaigns can take several months to execute and may fail, leaving entrepreneurs without funding.
Business owners should review these funding options and select the financing that they are both likely to qualify for and one that fits their financing needs. Once applicants select a financing type and lender, the next step is completing a business loan application.
3. Apply for Financing
Business owners once had only one option for applying that required sitting down with a bank representative. Business owners can now apply for a loan without leaving their computer, receive approval in hours instead of weeks, and get funded as soon as the next day. Applying for financing involves preparing documents, submitting an application, and evaluating a financing offer.
Prepare Required Documents
Most lenders outline the required documents necessary to complete a loan application. Borrowers can expect to provide personal and business information, tax returns, and business bank statements. Some lenders enable business owners to connect their business bank account or accounting software for simpler evaluation.
Complete Online Application
Submitting an online application is simple, and most applications take less than 30 minutes to complete. Business owners should take care to be transparent and thorough when applying to avoid back and forth to collect additional documents. Some lenders offer business owners phone support to answer questions in the application process.
Evaluate a Financing Offer
Business owners will typically receive an approval decision and financing offer within a few hours of submitting a business loan application. Reviewing a financing offer is an important step because it offers a business owner the final opportunity to discuss questions surrounding the rates, terms, and conditions of financing. Business owners that don’t get approved will need to make some adjustments to their application.
4. Make Adjustments if Denied Funding
Applicants that are denied funding can take several steps to improve their chances of getting approved when they reapply. Borrowers with bad credit can take the time to fix or build their personal credit score or improve their application by reducing the risk for the lender.
Fix or Build Personal Credit
Business owners can improve their personal credit score by reducing their outstanding debt, making on-time payments, and avoiding hard credit inquiries. Fundbox offers applicants an opportunity to apply with a soft credit check, which won’t impact overall credit. Business owners should also audit their credit reports for any inaccuracies and dispute them as soon as they appear.
Business owners can also improve their overall application even with the same lender by taking a few steps to reduce the overall perceived risk of their business. This includes adding business partners or loan co-signers, creating a robust business plan, and requesting less funding. Each of these reduces the perceived risk of the loan for the lender, increasing the odds of approval.
5. Reapply for Financing
Business owners ready to reapply for financing after being rejected can even apply with the same lender. A previous denial doesn’t prevent a business owner from getting funding. In fact, most online lenders consider each application for funding independently and, sometimes, approves businesses that received an initial rejection.
How to Get a Business Loan With Bad Credit Frequently Asked Questions (FAQs)
We put together this guide for business owners covering how to get a business loan with bad credit and no collateral. Every financing and applicant situation is different and will probably give rise to additional questions. We encourage business owners, to review the frequently asked questions, and pose questions in the Fit Small Business forum.
Can I get a business loan with a 500 credit score?
Business owners can qualify for funding with a 500 credit score through a variety of options. Some popular ones include financing based on invoices, commonly called invoice factoring and invoice financing. Other options include merchant cash advances, crowdfunding, and convertible debt.
Can you start a business with bad credit and no money?
Starting a business without money and with bad credit is difficult but possible. There are some funding options that allow entrepreneurs to exchange equity for funding that include crowdfunding, angel investment, and venture capital. These options are the most common, but some business owners rely on loans from friends and family to cover the costs.
What is a good credit score to get a business loan?
A good credit score to get a business loan is at least 640 for most alternative business loans. To qualify for financing from a bank, business owners will need a personal credit score of at least 700 with strong business revenues and an extensive time in business.
Getting a business loan with bad credit can be a difficult task for business owners wondering how to get a business loan with bad credit and no collateral. Business owners can improve their chances of approval by selecting a lender and type of financing that fits their current personal credit score.
Fundbox offers a line of credit up to $100,000 based on outstanding invoices with a 500 minimum personal credit score requirement. This makes it an option for business owners wondering how to get a business loan with bad credit. The line of credit has repayment terms up to 24 weeks, and applicants can receive an approval decision in three minutes.