How to get a business loan or financing with bad credit?

September 2022

As a business owner, running a business involves high costs. Whether you’re an entrepreneur that needs a laptop or a restaurant owner that needs capital for renovation or equipment, the reality is that you need capital to run a growing business.

You'll need to pay rent each month, purchase inventory or equipment, and let's not forget the payment of any contractors or employees. Unfortunately, for most small and medium-sized businesses acquiring a business loan or financing in the current economic environment is extremely difficult. Especially if you have a “bad credit score.”.

Even though it can be challenging, getting working capital when you have bad credit is not impossible. Fortunately, business financing options are available, even if your credit score is less than perfect.

This article will help you understand what funders consider “bad credit” and how to increase your chances of acquiring the working capital your business needs, even if your credit is less than perfect. Let's begin by defining the basics.

What do business funders consider bad credit?

Anything that would indicate that you pose a high risk to the business funder, such as a bad credit score or no credit history. Business funders look closely at your credit report when determining whether you qualify for credit, such as credit cards or previous business loans. If you recently applied for a business loan, the funder likely used your FICO score as a factor in their underwriting decision.

According to Experian, the average FICO credit score is around 706, which is good. What is considered “bad credit” is also referred to as subprime credit; this tends to be about 580 - 669. With a score below 580, you may have difficulties accessing a bank loan or credit for your business.

Business financing for bad or limited credit profiles

Although poor personal credit can reduce your chances of approval, FICO scores aren’t always the only information funders use. Along with FICO scores, they may also consider the following information:

  • Business credit score: Up next, when evaluating an applicant's creditworthiness, many funders also consider your company's credit score. You can check your credit profile with Dun & Bradstreet (D&B), Experian, or Equifax if your company is old enough to have a credit score (it should be at least a year old).

  • Business revenue: Your company's monthly and annual revenue gives clues about its capacity to repay the business financing on schedule and in full. Small businesses that don't have a lot of financial records might be able to prove this using estimates for the next five years, so you should also consider this.

  • Cash flow: A company's cash flow is the sum of its inflows and outflows of cash and cash equivalents over a specific period. This figure, like revenue, can show how much cash your company has monthly to pay your debts. As a result, it frequently serves as a great predictor of the risk your company poses to funders. Learn more about cash flow and how to calculate it.

  • Length of time in business: Funders favor creditworthy companies but tend to fund more to well-established companies that have been operating for at least a year. So if this is your case, that's a plus!

  • Current debt load: Funders also check on your existing debts. The amount of debt that a business is now carrying reveals how well it manages its finances and its capacity to pay its debts on time each month. A company with a high level of existing debt is less likely to be approved for financing than one with fewer unpaid obligations.

  • Loan purpose: Funders need to know what the money is for and some place restrictions on the uses of business loans. Banks are more inclined to fund, for instance, when the funds will help the company increase sales or provide better goods and services.

Types of small business loans for bad credit

Although obtaining a business loan with negative credit can be challenging, several other funding choices remain. Some of the most typical funding for business owners with poor personal credit are the following:

  • Short-Term Financing: Short-term financing is where your business uses short-term sources, meaning the payback period lasts less than one year. Short-term financing is typically used for a single purchase or a single sum of money. Interested in learning more? Please read our guide on short-term financing.

  • Business lines of credit: A business line of credit can assist business owners in maintaining consistent access to working capital or funds to smooth out changes in business expenses and revenues.

  • Invoice factoring: Invoice factoring is a business financing transaction in which a business sells its invoices (or receivables) to a third-party financial company for less than the total amount due on the invoices. The factoring company then collects payment directly from that business customer.

  • Equipment financing: Financing machinery or equipment for your business often requires funding. This type of funding is typically more readily available to borrowers with poor credit because the underlying collateral serves as security. Long durations, often up to 25 years, and loan sums of $1 million or more are the greatest equipment financing characteristics.

  • Merchant cash advances: A merchant cash advance is typically an easy way for smaller businesses – especially those whose owners don't have a perfect credit history - to access funding quickly. An  MCA is not a loan but an advance on your business's anticipated future revenue. You pay the advance back with an automated withdrawal from your business bank account. The amount is set beforehand with a percentage of your daily bank balance (usually daily or weekly, but terms and qualifications can vary).

Tips to get a small business loan or financing with bad credit

There are ways around a bad credit score that can help make getting a small business loan easier. There are some valuable tips to remember:

  • Have your financial documents and a strong business plan prepared and ready to show funders. They will want proof that you can repay the financing and have a solid understanding of your business.

  • Before you sign anything, be sure you understand the transaction’s conditions. Check everything, from the interest rate and the frequency of payments to the repayment plan.

  • Check all your options for the most excellent offer. Comparing offers is crucial because rates and terms might differ dramatically between funders.

Is getting funding with One Park Financial the solution for you?

When in doubt, One Park Financial is the answer. Accessing working capital to support your daily operations fast has never been easier, even if you don't have a perfect credit score. You can check if you pre-qualify with One Park Financial in just three minutes! All you need to show is that your business has been operational for at least three months, earning at least $7,500 in gross monthly revenue.

Ready to get started? Please fill out our form, and one of our funding experts will work to find the best option for you and your business! 

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.