The Best Options to Score a Loan Even if Your Small Business has Bad Credit

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Big banks can be reluctant in lending money, particularly to people and businesses with bad credit. If you need to get a start-up business loan with bad credit or if you think you need additional funding for your business expansion, and your credit score is not that good, then you will have to check out other options that do not involve bank loans.

Generally, a bad credit is anything that goes below 620. Bad credits are a result of debt collections, late payments, unpaid dues, and even foreclosure, repossession and other public records. Your credit score will get a negative impact with the negative information on your credit report. And your business can possibly suffer because of this.

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Good thing there are some other options for loan if you have bad credit. While these aren’t as good as bank financing, these are great options when bank loans are not available. Just keep in mind that they have higher interest rates, which make the cost of borrowing higher than usual.

When applying for these types of loan, you have to get your documents ready. Think about the ways on how you can demonstrate your ability to repay the loan. While this is mostly unnecessary with these loan types, it can help to have a proof of consistent business cash flow or something that you can offer as a collateral. Some options for business loan for bad credit may have a minimum business operation requirement and annual revenue amount.

With the vast number of lending choices to choose from, it can be very difficult to choose what type of loans are best for your situation. Here are 6 great loan options for small businesses with bad credit:

Bad credit loans

If your company has bad credit or you personally have a low credit score, you might have trouble securing a loan to help your business grow. You’re probably worried about building your business, and doubly worried about finding funding. Don’t despair – there are many reliable funders who will provide bad credit business loans.


Shopping for microloans offers a big advantage when you need quick financing despite a bad credit score. These are generally short-term loans with small amounts, typically no higher than $50,000, making them easier to get. There are various microlenders, but you can get one from the US Small Business Administration, if you can prove that you can use the funds for inventory purchases or working capital. You cannot use SBA’s microloans for other expenses such as repayment of existing debts or purchase of real estate. Many non-profit organizations and credit unions offer microloans as well, but like the SBA, they have restrictions on how the released funds can be used. If you qualify, microloans can be considered as one of the lowest-priced options.

The Risks and Rewards of Getting a Microloan

Microloans were facilitated due to the rise of connectivity among people because of the Internet. People who are seeking for things where they can put their savings to good use and at the same time earn are the ones offering these loans, while those who are looking for funds to borrow are at the other end. These transactions are often done online.

The borrower’s credit rating is gathered through an online questionnaire, but there can also be a background and credit check, as well as a check in repayment history for those who have already availed microloans such as this. Microloans have higher interest rates and even if you have high credit score, expect to pay a higher interest rate than traditional loans. Because of the higher interests, lenders have better earnings compared to when they keep their savings at the bank or invest them on other things.

Since microloans are often unsecured or not backed by collateral, the lender has nothing to expect in case the borrower defaults. It is a high-risk lending, hence, the higher interest rates. Because the risk of microlending is undeniably inherent, lenders often offer only a small amount per approved loan, but this doesn’t mean that they do not offer a portfolio of microloans. Any microloan can be funded by multiple financers, each contributing a small amount. This allows them to minimize the risks involved and lenders can make sure that even if a couple of borrowers default, they will still have enough funds to sort things out.

Peer-to-Peer Lending

This is a lending type in which multiple investors utilize an online marketplace to offer a loan. With this type of loan, your application and profile will be reviewed by the investors, who will then decide whether or not they will contribute to the loan. You will only have a single loan and one loan account even if the loan is funded my a number of investors.

With peer-to-peer lending, the application process is much quicker compared to a traditional loan. Moreover, you get access to the funds faster once the loan is approved. This type of loan may require your personal guaranty, but this may put your personal finances to a greater risk in case your business won’t be able to repay the loan. And since it can be obtained even with bad credit, expect a higher interest rate.

Peer-to-peer lending is highly controversial in the world of loans. Many experts see it as very similar to the subprime mortgage lending system that is known to be the cause of the financial crisis in 2008. They say that as these lending “companies” expand their reach, their standards begin to loosen, hence, the higher default rates.

Merchant Cash Advance

A merchant cash advance is a good financing option if you need immediate short-term access to funds. With this type of loan, the lender offers a loan amount that is dependent on the borrower’s anticipated sales. The borrower can repay the loan in two ways. First, you can choose to have the loan repaid using your future card (credit and debit) sales. The second one is to repay the loan with periodic bank account transfers.

When applying for a merchant cash advance, check the interest rates closely and stay away from lenders than have too high interest rates. With this type of loan, there is no benefit in paying them early. But you can have the following advantages:

  • Application process is straightforward. Like with other types of alternative small business loans, the application process for a merchant cash advance is straightforward and can be done online. You fill up necessary online forms and upload supporting documents like business tax returns, credit card processing statements, and bank account statements in a few minutes.
  • Quick funding. Merchant cash advance is popular because it generally offers fast approval and quick access to funds. Applicants can get answers within hours and the funds are available in a matter of days. That is definitely an advantage particularly if the borrower needs the money immediately to cover unexpected expenses like payroll or equipment.
  • It is not required to have a perfect credit. Most business loans will require you to have good credit score on either your personal or business accounts, but with merchant cash advance, credit score is not a main concern. The approval for a merchant cash advance greatly depends on how long you have been operating as a business and the consistency of your business sales. Nevertheless, you must keep in mind that most merchant cash advance providers do not report to credit bureaus, so it won’t help you with your credit score even if your payment is updated.
  • Doesn’t require collateral. Generally, bank loans require you to provide collateral to secure your loan. It is the bank’s security in case you do not repay your debts. Merchant cash advances, on the contrary, are not secured, thus, you do not have to put any of your personal or company assets in order to get a loan.
  • Flexible payment terms. Unlike small business loans with fixed interest rates that require you to pay the same amount of interest each month, merchant cash advances are more flexible since payments depend on the percentage of your total card sales. So, if you have a slow or lean month, you can expect your payments to be lower. Your payments are basically proportionate to what you earn.
  • High cash loan limits. Unlike other types of alternative funding, merchant cash advance has high borrowing limits. While it is possible for a business to get low-amount loans, you can extend the limits up to $2,000,000. This can be even higher than what a traditional bank is willing to offer if you do not have adequate collateral or an excellent credit score.

Invoice Financing

This type of loan allows you to get funds from your unpaid invoices. With invoice financing, the lender buys your unpaid invoices and gives you an advance payment of the amount owed to your company. The process starts by checking the history of your customer payment, which allows the lender to determine if you are capable of repaying your loan through incoming payments. The lender will set the rates.

Depending on your credit and the payment timing of your customers, interest rates may vary. Until the loan is repaid fully, weekly fees can accumulate.

Understanding Invoice Financing

When a business sells products or services to big customers like retailers and wholesalers, transactions are often done on credit. This only means that payment is not immediate and funds can be delayed. The purchasing company only issues an invoice with the total amount due plus the due date. This can be good for business, as you are inviting more clients to buy from you. However, credits also mean that funds are tied up instead of having them for business growth and investments. There can also be emergency expenses like immediate need to purchase equipment, etc. If this happens, businesses can opt to sell their invoices.

Invoice financing is a type of short-term financing based on unpaid invoices.Through invoice financing, the company can sell its accounts receivable, improving its working capital and providing the company with immediate funds, which can be used for its expenses.

Invoice financing is structured in a variety of ways, but mostly, this is through discounting or factoring. In case of factoring, the lender buys the company’s outstanding invoices, paying the company as much as 85% up front of the invoice amount. Once the lender gets full invoice payments, it will give the remaining percentage of the total amount of invoices to the business. The business will then be charged for interest or fees for the factoring service. The customers of the business will be aware of this setup since the lender will be the one collecting payments from them. This may put the business in a bad light.

The business can use invoice discounting as an alternative to factoring. The only difference is with discounting, the business and not the lender, will be the one collecting payments from the customers. This way, the customers will not be aware of the arrangement. In the case of invoice discounting, the business will be given up to 95% of the total invoice amount. Once the invoices are paid by the clients, the business pays the lender, of course, with additional fees or interest.

Ask family and friends for funds

Depending on the amount of money you need, you may borrow the needed funds from your trusted family and friends. While this can be an advantage, since you get to personally know whom you are borrowing from, there can be a huge drawback. Apart from having a lot of loans to repay (if you are borrowing from multiple individuals), you are also risking your relationships in case you are not able to repay them.

When borrowing from family or friends, it is best to have everything in writing. Write down a loan agreement and let them discuss this with a tax professional or lawyer about the impacts of giving you a loan.

Summing Up

With these 6 options of getting a loan with bad credit, you can surely get enough resources to fund your small business. Keep in mind that you have to weigh your options first and consider the pros and cons before choosing one or more of these options. Discussing this with your business partners or lawyers, if there are any, can also help you decide which type of small business funding to use.

Always keep in mind that your business credit scores have a major impact on your ability to get funding. Once you have started to build your credit score, it will be much easier for you to obtain a loan or a business line of credit.