Small Business Loans - Poor Credit
Using a small business loan for poor credit can boost your company in its initial stages. With this type of financial assistance, you will be able to carry out the needed procedures and projects that may help launch your business into prosperity.
Securing a small business loan with bad credit is not an easy task and it requires patience and diligence. You should conduct thorough research and apply for several funding sources until you find the right one.
If you’re struggling to find a small business loan- even with poor credit, we’re here to help. Instead of throwing in the towel and giving up on your dreams, learn about alternative options such as loans for low credit scores or hard money. You may still be able to get approved thanks to these options!
- Min APR
- Min Credit Score
- Amount
OnDeck
- 11.89%
- 600
- $5,000 to $250,000
PayPal
- -
- 550
- $5,000 to $500,000
Lendio
- 8% to 24% interest
- 560
- $1,000 to $500,000
- APR range
- Fees
- Terms
- Amounth
- Unemployment protection
Bank 1
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 2
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 3
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Table of Contents
What does it Mean to Have a Poor Credit Score?
A FICO score between 500 to 600, or less, is considered Poor.
If you have a poor credit score it simply means your credit history has some blemishes on it. It might be that you’ve had some late payments, collection accounts, charge-offs, etc., even if you’ve since paid them all off or settled them to the satisfaction of the creditor.
The point is that your payment record is less than perfect and that will lead to having lower than average credit scores. There are many reasons why someone could end up with a bad FICO score- however, a poor credit score is usually the result of taking on too much debt and not being able to pay it off.
A less than stellar credit history can prohibit you from getting approved for a loan. If you have an average credit score, there are many providers who will offer a small business loan with poor credit as long as you show that you’ve been responsible.
If you have a poor credit score, don’t give up hope. The key to getting approved for a small business loan is to get pre-qualified or pre-approved before applying with lenders or banks.
Without knowing how much money you can borrow and what your interest rate will be, it’s impossible to know if the offer is reasonable.
The key to getting approved for a small business loan is to get pre-qualified or pre-approved
Obstacles of Getting a Small Business Loan with a Poor Credit Score
The reason it’s hard to get small business loans with bad credit is that banks and other traditional lenders want to mitigate risk as much as possible. If you have a low credit score, then there’s always the chance that you won’t pay back the loan or that you will default on your loan payments.
If you can prove that you make enough money to support the loan, then you have a better chance of being approved.
It’s a lot harder to get a small business loan with poor credit especially if you have a low FICO score. However, it can be done as long as you have some collateral or assets that can be used as security for the loan.
For example, if your only asset is your house then you could see about getting a home equity line of credit to pay for your business.
Home equity lines of credit typically have a low-interest rate and can be a great way to raise funds quickly if you’ve been turned down by a traditional bank or lender. Secured loans are another good option because the loan is secured by assets such as your car, stocks, or house.
In addition, most online lenders will not approve borrowers whose FICO score is lower than 550. However, they will look at your overall financial situation- which includes your income and assets.
They may consider offering a small business loan with poor credit as long as you show proof of stable employment and a good source of income.
Requirements to Qualify
When trying to get a business loan with bad credit, there are certain requirements you will need to meet in order to be considered. Unlike an online personal loan lender who just looks at your FICO score, banks and other lenders typically look at the following when approving small business loans:
When trying to get a business loan with bad credit, there are certain requirements you will need to meet in order to be considered. Unlike an online personal loan lender who just looks at your FICO score, banks and other lenders typically look at the following when approving small business loans:
1. Personal Information
Typically, you’ll need to provide proof of your identity, where you live, and how long you’ve lived there. You will also need to show proof of employment or income- not just in the form of pay stubs but in some cases, they’ll ask for a year’s worth of tax returns.
2. Business Information
This section is similar to personal information in regards to providing proof of where your business is located and what type of business it is. You’ll also need to disclose any financial information related to the business such as assets or liabilities.
3. Credit Information
Typically, you will be required to provide the lender with a copy of your credit report in order for them to determine whether you’re a good fit for the loan.
It may take some time for you to be approved, but if you have a strong business plan and can show how you will repay the loan on time with interest, then there’s a good chance that people won’t pay attention to your credit score or history so long as it is not too terrible.
If you need money fast and don’t have time to wait, then you may want to consider applying with a company that specializes in online personal loans.
While rates are higher when compared to traditional lenders, the terms of repayment are usually much shorter- ranging anywhere from 1-5 years instead of 10+ years. In addition, an online lender will typically approve people who have less than perfect credit.
Loans for Small businesses with less than 1 Year
With many online lenders, you can typically qualify for a business loan as long as your company has been in operation for less than 1 year. Traditional lenders may require you to be open and running for 2-3 years before giving you a loan.
However, if your business is brand new, then it’s likely that the money will need to be used for one of the following purposes instead:
- Business Growth (Hiring Employees, Expanding)
- Working Capital or Operating Expenses
- Debt Consolidation or Paying off high-interest debt
- Startup Costs (equipment, marketing materials, etc.)
- Buying out other stakeholders
- Buying out owner’s equity (your share of the company will decrease, but they won’t be able to take it with them)
- Infrastructure (building/renting a location)
If you do not know what type of business you want to start or don’t have an idea on how you will use the money, then you should consider applying for a general loan. This type of loan is typically reserved for people who have an established income and are able to show that the money will be put into good use.
If you’re looking for business loans with bad credit, then it’s important that you have all of your information prepared beforehand. If there are any errors or omissions in your application, then it may be rejected and you will be unable to apply for such a loan in the future.
Bottom line: While you may have a poor credit score, if your business is new and has been open less than a year, then you might just be eligible for a traditional loan from a bank. The key here lies in being able to prove your revenue stream from your business. If the business is profitable within the first few months of operation, then there’s a good chance that you’ll be approved for a traditional loan.
What rate to expect
Typically, small business loans with poor credit are extremely expensive to service. While some banks might offer you a loan at rates between 6-10%, many online lenders will charge on average of 14%-24% depending on your credit score.
That’s right- it’s even worse than borrowing from a payday lender! However, if you need money fast, then you can expect to pay quite a lot for the fast approval- typically around $25 on every hundred dollars borrowed.
For borrowers with poor or bad credit, expect interest rates that are at least one percentage point higher than for other customers. Payday lenders tend to charge the highest rates, which can range up to hundreds of percent, depending on state laws.
For small business loans, expect to pay prime plus 5–10 points or more, depending on the lender and how risky they view you as a borrower. There may also be upfront fees involved when you take out a loan for your business that can add to the cost of borrowing money.
If you need money fast, then you can expect to pay quite a lot for the fast approval- typically around $25 on every hundred dollars borrowed.
Pros and Cons
Pros:
● Less money down: Since your interest rates are high, you will likely need less money down in order to secure the approval. This makes it convenient for new businesses owners who may not have much savings- especially when they can’t get approved for a traditional loan due to their poor credit history.
● Flexible repayment: Unlike a personal loan where you typically need to repay the loan within 1-3 years, small business loans with poor credit can be much more flexible. Oftentimes, you may not even need to repay the full amount right away. You may want to consider asking for 3 months of interest-only payments where you make no principal repayment at all.
● Little/ No collateral required: Since your credit score is very low, you may not be able to provide any collateral. In cases like these, it is common for the lender to require less money down and let you use other assets such as your car or home equity as collateral instead.
● Fast approval: Online lenders can approve a loan in a matter of hours. This makes it convenient for new businesses owners who need money fast in order to keep their business afloat.
Cons:
● Expensive loan terms: As mentioned earlier, taking a loan with poor credit is extremely expensive. With rates between 6-10%, you’re looking at paying back anywhere from 30% to 60% of the original amount that you were lent out depending on how much you are borrowing.
● Length of repayment terms can be short, especially with online personal loans which range anywhere from 1 year to 5 years. Traditional small business loans with poor credit scores range from 5-10 years.
Alternatives to Business Loans
There are many alternatives you can try when trying to secure funding for your small business. Here are some options which may be more suitable for your situation.
● Personal loan providers: Many online personal lenders such as Lending Club and Prosper offer unsecured loans with rates that can range from 6-24% depending on your credit. The repayment period can range from 1-5 years and you won’t need to provide collateral in order to secure the approval.
● Savings: It is always a good idea to save as much as possible before starting your business. You never know when an emergency will strike and if you don’t have any savings, then there is a chance that you may have to shut down your business in order to find another job in order to make ends meet.
● Friends and Family: If you are able to secure funding from friends or family, it would be best if you were able to repay the loan with interest since lenders are usually expecting high returns on their capital when lending out money.
● Peer-to-peer lending: Sites such as Lending Club and Prosper are another alternative that is similar to receiving a personal loan except that instead of borrowing money from a bank or traditional lender, you borrow the money directly from the people searching for loans. There are many benefits compared to taking out a small business loan with poor credit since there are no credit checks involved, the rates are much lower and you don’t have to provide collateral.
● Grants: Grants are another alternative since they don’t require repayment, unlike loans that do. The downside is that it can be difficult to secure a grant especially if your business doesn’t have any social value or not solving a major challenge in society.
● Crowdfunding: Another alternative is to use a platform such as Kickstarter or Indiegogo in order to secure funding. People who fund your project will receive a reward for taking a risk on a small business since there is no guarantee that you will be able to develop and produce the product which you are trying to sell.
Frequently Asked Questions (FAQ)
Yes, there are a lot of lenders willing to fund your business. However, you may part with higher interest rates.
Yes. Most online lenders will come in handy here.
This varies from one lender to another. Typically, a score above 680 is admirable.
The best type of small business loans with poor credit tend to be peer-to-peer lending sites since there are no credit checks involved, interest rates are lower compared to other types of credit and you don’t need to provide collateral.
You can fill out an application online or through one of the lenders listed above.
