Small businesses may require outside capital to offset shortfalls, buy equipment, or grow. With strong credit, many lenders will give reasonable business loans, but with negative credit, it may be difficult and costly. The 2022 Small Business Credit Survey found that 60% of low-credit-risk enterprises were completely funded, compared to 19% of high-credit-risk businesses. In this article, we will discuss how to go about applying for a poor credit business loan.

Bad-credit small company owners have higher interest rates and may incur extra costs to cover the risk of lending to them.

Credit score

Credit scores are one of the first things lenders consider when approving loan applications. Loans are difficult to acquire with bad credit. Banks and credit unions may not lend you enough money.

Online lenders offer softer qualifying restrictions. If your credit score is in the 500s, you may acquire a loan, but at a higher interest rate.

Poor credit may result in APRs of 40% or greater, according to typical lending rates.

View your credit report when considering a poor credit business loan

Personal and company credit reports are used by lenders to determine loan eligibility. Some typical causes that lower your credit score and business loan chances are:

• Recent bankruptcies
• Delinquencies above $1,000 and unpaid tax liens
• If any of them are erroneous on your report, notify the credit bureau.

For delinquencies and tax liens, pay them off before qualifying for a company loan. Some internet lenders may deal with you, but they offer exorbitant rates and fees and little alternatives.

After bankruptcy, you may be waiting. Few lenders would lend to you if you filed bankruptcy within a year or two. Business loans are seldom approved if you’ve declared bankruptcy in the last three to five years.

Type of business financing for a poor credit business loan

Some company loans are simpler to get with negative credit. Each has pros and cons. Read the loan agreement to estimate the cost of each loan choice.

1. Term loans

Traditional term loans give you a flat amount and require ongoing payments at a set interest rate. Repayment durations might be 3–10 years or longer.

Bad credit makes term loan approval difficult. Credit-worthy company owners are preferred by banks and credit unions. Online lenders may provide the greatest small business loans poor credit, but often charge hefty rates. The debt costs more the longer you keep it.

2. Credit lines

A company line of credit lets you borrow money when you need it. Only the remaining amount is charged interest on repeated withdrawals.

Business lines of credit offer higher rates than term loans and may include maintenance and draw fees. If you have terrible credit, your lender may need six to 18-month payback intervals.

3. Equipment financing

Equipment loans may be simpler to get for one reason. Equipment purchased with the loan is collateral. If you default, the lender may sell the equipment to recuperate its losses, lowering risk.

Although qualifying is simpler, you’ll pay higher borrowing rates than people with good credit. Contact Fundshop if you need assistance getting loans for construction business or other types loans approved.

4. Invoice financing and invoice factoring

Short-term expenditures may be covered via invoice factoring and financing. Invoice finance lets you borrow against client invoices. Factoring involves selling invoices to a corporation.  Both lenders charge for the service.

Because invoices back the loans, the lender prioritizes credit and payment history. This makes them simpler to qualify for than other borrowing. These company funding options are more expensive than term loans or lines of credit.

5. Merchant Cash Advances

Short-term borrowing like merchant cash advances (MCAs) may pay urgent needs. You get a flat payment plus fees from a lender against future debit and credit card transactions. You return the loan daily or weekly depending on sales. 

MCAs are easier to get with weak credit since lenders care about cash flow. Their biggest drawback is that they cost much more than ordinary loans.

Merchant cash advances charge 1.10–1.50 factor rates. A $30,000 advance at 1.10 would cost $33,000, while one at 1.50 would cost $45,000. Fees and limited payback terms are other factors. Sometimes you have three to 18 months to pay off your loan.