How To Get a Business Loan With Bad Credit
Need a small business loan but you have bad credit? Here's 7 Start Up Business Loan Options for Bad Credit
Ready to start up a new business but you don't feel like you have the credit to get a loan? We found 7 ways to get start up business loans with bad credit.
The average American has over $6,000 of credit card debt.
Not to mention almost one-third of Americans have a subpar credit card score.
If you fall into either of those categories and want to start a small business, what can you do?
You may think that because of your subpar scores, you won't be able to get a loan of any sort. But that isn't actually the case.
If you have a stellar idea and don't have the capital, you can still make it work.
In this article, we'll go over what kinds of start-up business loans with bad credit are available to you. Once you lay out all of your options, you'll be ready to take out a loan to get your business off the ground.
What Kind of Credit Score Do I Need to Qualify for Business Loans with Bad Credit?
For some business loans that exist for individuals with poor or limited credit, there are no credit checks. That makes things a little bit easier on your end, especially if you're struggling to make it.
However, it is important to be aware that even though loans exist for businesses with bad credit, you won't automatically qualify.
There are still qualifiers you need to pass in order to get your hands on the capital.
Most business loans for people with bad credit, you'll need a score of at least 550. If your score is lower than that, you'll only be limited to a few types of loans.
Sometimes, if your business is doing extremely well, and you can prove it with invoices and snapshots of your business bank account, that will be taken into account. In those cases, it may “cancel” out your bad credit score on your application.
Bear that in mind when you start looking for loans, as you want to apply for those you have a shot at qualifying for.
1. Short-Term Loans
Short-term loans are probably the most popular way to finance a purchase when you have bad credit. They're also fairly good for someone with bad credit, as they allow you to start to repair your bad credit score. If you take out a short-term loan and pay it all back on time, you'll raise your credit score.
But what exactly is a short-term loan?
Most people with good credit qualify for medium-term or long-term loans. Banks typically offer long-term loans in the forms of car loans and mortgages. These can have terms for several years. In the case of mortgages, sometimes they're up to 30 years or more.
A short-term loan is only a few months, rarely longer than a couple of years. This means you'll have to pay back the cash really quickly. Often times, with these loans, the interest can compound by the day as well, making you pay back a lot more than you took out.
However, as mentioned previously, they can help your credit score and give you that injection of fast cash you need to keep your business going.
2. High-Interest Loans
High-interest loans and credit cards are sometimes the only options for individuals with bad credit. And if you don't have great credit, you might combine a high-interest loan with a short-term loan.
A high-interest loan is one where the interest is a lot more than your standard loan for an individual with good credit. Where someone with good credit might have a relatively low APR, your APR good be 26% or more.
Again, this is a great way to inject money if you need it immediately. It is also a great way to repair your credit score if you know you can pay the money back on time.
3. Collateral Loans: Invoice Financing
Collateral often represents something that can be taken away from you if you don't pay the loan. For instance, often people will use their home or car as collateral for a loan. If you default on it, the company that issued the loan can collect by taking ownership of the item.
With business collateral loans, if you default, they don't take away your home or car. Instead, you can use parts of your business as collateral to ensure that you pay off your loans.
One way to do this is with something known as “invoice financing.” You can only do this if you invoice customers for your services. Think of a plumber or graphic designer who bills their customers once they've done the job.
You can show the lending institution your invoices that haven't yet been collected from customers. These invoices represent the amount of money that will be coming in in the next few weeks.
The lending institution can give you typically up to 85% of the amount as a loan for your business immediately.
If and when the customers finally pay their invoices, you can get the rest of the money they owed for the rest of the loan.
Most often, these collateral loans have relatively low-interest rates, making them a good choice for small business loans. However, they don't really inject a ton of money into your business, unless your customers owe you quite a bit of capital.
4. Collateral Loans: Financing Equipment
An equipment loan is a great way to get your company up and running, even if you have bad credit.
With these loans, you don't offer collateral on what you already own. Instead, you offer that new piece of equipment as collateral. And this can really help you get your new business off the ground.
Say you need a new desktop computer to start up your business, but it costs $3,000 and you don't have great credit.
Fortunately, that's not a huge issue with these types of loans. You can apply to a lending institution for the equipment. If you default on the loan, the item becomes the property of the lending institution.
Otherwise, you simply pay it off over time with interest, just like any other loan.
Once you've paid it off, you own it outright. That way, you won't have to go through the trouble of leasing equipment or borrowing things to get your business off the ground.
5. Merchant Advance Cash Loans
Merchant advance cash loans only work for people who process credit cards in their business. If you don't, this loan won't be a solution for you.
Merchant advance cash loans, or MCAs, are often rather expensive but they can work if you really need the money.
These types of loans take a daily percentage of the credit card amounts that you process. Therefore, you pay back quite a bit if you're doing well. And you don't pay back much if you're not.
Beware: there are lots of fees associated with this type of loan. It's not just paying back the loan that's expensive, but also the fees associated with it.
Most advisors would tell people to only take out one of these types of loans as a last resort because of the expense associated with it. Though, it can work if you have very little other ways to garner income.
6. Short-Term Loans for Startups: PayPal Working Capital
Many times, you'll run into issues when it comes to getting short-term loans if you're a start-up. The lending institution will likely want to see that you're turning over a profit before they deposit money into your account. While that's frustrating, it is a way to ensure that they're not lending money to people who have no way of paying them back.
If you're looking specifically for a loan with bad credit and when your company is fairly young, there are some lending institutions that will cater to you.
If you do business on PayPal, did you know you can qualify for a loan up to $97,000 without a credit check?
Individuals who have been invoicing clients or getting paid through PayPal for at least three months can get a loan through them. You should have turned over at least $15,000 in that time in order to qualify for your loan.
If you've been in business for a longer period of time, as long as you turnover profits of $15,000 per year, you can qualify for a loan.
This type of loan works a little bit like Merchant Credit Advance loans. Instead of repaying the loan once a month, you'll repay the loan through a percentage of your sales being deducted from your PayPal account.
You actually don't accrue interest with this loan either, which makes it a great option for new business owners. Instead, you pay a one-time fee when you take out the loan. The fee is tacked on to the amount of money you owe, so you'll pay that off with your PayPal sales as well.
PayPal's Working Capital program works well for individuals with bad credit who can't predict when they'll be able to pay back their loan. This way, you can pay as you earn, instead of being penalized if you can't afford to pay back a loan one month.
7. Lines of Credit
In some cases, you can get business credit cards that act similarly to personal business cards, even without a great credit score.
With these cards, you'll take out a line of credit in your business' name and you can spend on it the way you might for a personal credit card. You'll owe a set amount each month plus interest on any purchases you made.
If you don't have great credit, the line of credit will most likely be high-interest. This means the APR can be rather high, in some cases up to 30%. That translates to the fact that you'll be paying back the amount of money owed on the card plus an additional 30% or so.
A business line of credit may require that you show your business makes a certain amount of money each year as well. This is to ensure that you'll be able to pay back the lending institution.
High-interest business credit cards aren't the best option for start-ups, but they can be a good way to get your feet wet and start a line of credit. It will help build your credit score, which will allow you to take out bigger loans down the line.
If you're attempting to build credit, taking out one of these credit cards and pay back the amount every time you've made a purchase is a good way to build credit. That way, you'll have a history of paying back the purchases on time, and you'll get to avoid paying the high-interest rate.
A business credit card is also essential for any business, as long as you don't start to use it for every single thing you do. You'll need it in the case of emergencies, as something will almost undoubtedly come up that you need money for immediately.
Getting Loans for Startups with Poor Credit
Startup business loans with bad credit can help you over the hump of starting a new business. They can help you buy equipment and hire individuals, or start using an outsourcing service, to help grow your business.
However, you need to remember that these loans often come with strings attached, or you need to have been in business for a few months in order to qualify.
If you're looking to start a business, perhaps one of the best ways to prepare is by repairing your personal credit.
You can also help get your business where it needs to be by making smart purchasing choices. Go here for some of the best deals for your small business needs.
Looking for loan option? See our top ten suggestions below!
Author: Hudson Piccini
Hudson Cynar, a Harvard University alumna and the owner of three prosperous enterprises, is a distinguished business consultant, author, and writer. Her expertise spans multiple business sectors, with a particular emphasis on storage containers, commercial copiers, payroll services, and medical billing software. Dedicatedly investing thousands of hours into product and service research, Hudson crafts insightful reviews to guide entrepreneurs in making informed decisions for their businesses.