Is It Possible to Get Business Startup Loans Without Credit?

Securing Business Startup Loans with Poor Credit: Strategies and Options

Getting funding for a small business is usually challenging, and it becomes more difficult if your personal or business credit score needs to be better to fit in the category. Traditional lenders hesitate to take a risk for granting a loan against bad credit.

Usually, a typical lender requires a good to excellent credit score and a strong track record for approving a business loan.

Is it possible to get a loan for a bad credit business? 

Well! This is where bad credit business loans take part. 

As the name suggests, a bad credit business loan is made for those businesses whose credit score is quite challenging and stands in less than ideal category.

What is a bad credit business loan? 

A bad credit business loan is a type of loan granted to those business owners who don't have a good track record of credit history. Their credit score usually ranges from bad to fair category.

As these loans are offered against bad credit scores, the lender often takes a significant risk by landing. Therefore, these loans come with higher interest rates and extra fees.

For a bad credit business loan, you should also provide collateral as an assurance to show that you can repay the loan without any default.

  • Bad credit business loans are available even if your credit score isn't good because most lenders rely on more than just the credit score. They believe in how well your business is doing financially.

  • Some lenders also look for a minimum credit score of 500, at least six months of business history and an annual business revenue of at least $30,000.

  • But if your credit score doesn't cut the corner, it will come with higher fees and interest rates.

How does a bad credit business loan work? 

A bad credit business loan is the same as a small business loan, which provides funding that has to be paid back over time, and it comes with interest. These loans either offer a lump sum amount or a line of credit that you can use as per your need. Many banks and credit unions provide a bad credit business loan, but online lenders hold a prime position in the category.
Community development financial institutions are also a good option for such loans as they focus on providing financial services to underserved communities to promote economic growth.

  • The time to receive funding for bad credit business loans does vary as it depends on the lender and their requirement. It could take 24 to 72 hours after approval.

  • Interest rates for bad credit business loans are high, which may sometimes reach to 35% or even more. Some lenders use interest rates, and some even charge extra fees.

  • Some lenders that offer small business loans for bad credit may use factor rates instead of interest.

  •  It is advisable to offer collateral that assures the lender that you will repay the loan timely to secure the best possible interest rates for bad credit business loans.

Pros and cons of bad credit business loans

Before considering a bad credit business loan, it is good to evaluate the pros and cons.

Pros of bad credit business loans: 

  1. Lenient Eligibility Requirements: These loans have lenient eligibility requirements as they provide loans for those business owners with less-than-ideal credit scores. Therefore, they are more accessible than traditional business loans.

  2. Quick access to funds: Depending on the lender and the requirements, the business owner can receive funds within 24 to 72 hours after approval. It becomes crucial when the business wants to meet immediate financial needs.

  3. Enhancing credit: It is an excellent way to improve credit score for a new business with limited or no credit history. By taking a bad credit loan, you can help establish a new credit profile and improve your credit by regularly repaying the interest if your lender reports your payment to credit bureaus.

Cons of bad credit business loans:

  1. High-interest rates: The bad credit business loan comes with a higher interest rate as the lender compensates for the added risk through these rates.

  2. Collateral at risk: Some bad credit business loans require collateral, and if you fail to pay the loan on time, you may lose your assets.

  3. Lower loan limit: Bad credit business loans usually only provide a little money, often less than $100,000. This lower loan limit can put you in a straightjacket as it restricts your ability to fund your business if you need a more significant amount. 

What is U.S. SBA (U.S. Small Business Administration )

Small Business Administration was founded in 1953. It is a government agency. It aims to support and stimulate the economy by assisting small businesses. It provides resources to small businesses like access to funding, support entrepreneurship, assistance with government contracts, and advocacy services.

The SBA also offers startup business loans. 

The SBA microloan is the only financial package in SBA designed especially for startups. The loan amount is used only for working capital, purchasing equipment, inventory, furniture and fixtures.

  • Maximum borrowing amount: $50,000.

  • Terms: Up to 6 years.

  • Interest: 8%-14%.

How do you get a business loan with bad credit?

Since it is quite challenging to get a business loan with poor credit, it is advisable to follow a few steps before applying:

  1. Dot the i's and cross the t's: Before you ask for a loan, it's a good idea to check how your personal and business credit looks. This will help you see where you stand and understand how the lender will look at your loan request.

  2. Enhance your score: Improve your credit score before applying. Review your credit score for any inaccuracies and dispute them. Pay down your debts to lower credit utilization and make timely payments. Turn the table if you don't have a credit history, open a credit account, and establish a positive payment history.

  3. Prepare your plan: Before granting a loan, lenders conduct a deep investigation of your business, which includes reviewing your business, financial documents, bank statements, licenses, and legal documents. A strong business plan and collateral can improve your chances of loan approval.

  4. A confidant is important:  Assign a person who promises to repay the loan if you can't pay on time. But not all lenders allow co-signers. If you find a lender allowing a co-signer, bring him into the game. Having a co-signer with a good credit score will help you with the loan approval. Your co-signer could be a business partner or someone you can trust.

  5. Reach lenders: Different lenders offers different loan amounts, repayment terms, and interest rate. Some may even charge extra fees. Compare all lenders and their offers. But be prepared to give a pound of flesh (high-interest rates).

  6. Submit your application: Submit your application to your preferred lender and understand further requirements in advance.

Where to get a bad credit business loan?

Finding a lender who can provide funds against a bad business credit score is quite challenging. 

Here are some of the best places to see bad credit business loan

  1. Traditional banks and credit unions: They often put you in the hot seat as it is harder to qualify with these institutions if your credit score could be better. Suppose you have a stable cash flow and an exciting relationship with local banks or credit unions. In that case, you might find a local lender who will willingly help you lend the loan based on your business history and revenue.

  2. Online Lenders: Online lenders are known for their flexibility and are specialized in serving borrowers with bad credit. They typically offer faster funding than traditional banks, and their credit requirement is less than conventional banks.

  3. CDFI: The community development Financial Institutions are private institutions that assist underserved communities. They provide funding to businesses to strengthen the local economy.

  4. Invoice Factoring Companies: Factoring companies are those companies that offer cash against outstanding invoices. However, you only receive 80 to 90% of your invoice amount. Still, they provide quick money without any other requirements of traditional loans.

What to do if you are denied a bad credit loan? 

Securing a business loan with a bad credit score is like biting the bullet. Your business loan application may even be denied due to a bad credit history. But you can counter the situation by cutting your business expenses and asking for a smaller loan. 

  • You can find a business partner with a good credit history who can help you get the loan.

  • You can even find alternate ways to get funding, like private investors or crowdfunding campaigns, which can bring more benefits to your business.

Final words

Securing a business loan with a less-than-ideal credit is very difficult. Put extra effort into ensuring the best business loan that might not be too good for you. Because of your not-so-great credit score, the loan will cost you more with higher interest rates, and you might get less money than you hoped. It's a good idea to check out different options and think about what works best for you. Shop around to find the right fit.

Frequently Asked Questions

What credit score do I need to get a business loan?

The credit requirement to get a business loan varies from lender to lender. Still, typically, you need at least a 500 score to get a bad credit business loan.

What is the minimum credit score required for an SBA loan?

The minimum loan credit requirement varies from lender to lender, but if you want access to more options, you will need at least 690. 
With a poor and fair credit, you can qualify for an SBA microloan.

Does a business loan affect your credit score?

A business loan does not affect your credit score until you guarantee a business loan. It will affect your credit when you launch a small or new business and you are the sole owner of the business.

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02 Nov, 2023

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