Types of bad credit business loans

Bad credit business loans can provide your business with much-needed financing to grow your business, even with a fair or bad credit score. The right bad credit business loan can also help you build credit and improve your credit score.

But you’ll need to research your options since you’re limited in the types of business loans available than to a strong-credit borrower. Bad credit business loans may also offer lower loan amounts than a standard loan, and interest rates may be higher due to your poor credit score. Learn how different types of bad credit business loans work and narrow down your options to choose the best one for your business.

Types of high-risk business loans

Compare the types of bad credit business loans to decide which one works best for your business.

Term loans

Term loans provide a lump sum of cash that is repaid with interest over a fixed term. They’re often used to fund significant purchases or long-term investments in your business.

Online lenders tend to be more willing to work with business owners with less-than-ideal credit. Some have minimum credit score requirements of just 500. However, these lenders may limit the repayment terms to short terms of two years or less, requiring you to pay back the loan quickly.

Secured loans vs. unsecured loans

Business loans can be secured or unsecured, but lenders may be more willing to approve a bad credit borrower for a secured loan. Secured loans require you to put up an asset as collateral to back the loan.

Doing so can make a lender feel more confident in lending to a risky borrower because the lender can seize the collateral if you default on the loan. Providing collateral may also lead to lower interest rates and more favorable repayment terms.

Unsecured business loans, on the other hand, do not require providing collateral to obtain the loan. However, because they are unsecured, you’ll need a better credit score to get approval for this type of loan.

Although you won’t need collateral, your lender may request that you sign a personal guarantee, making you personally responsible for the loan if the business defaults.

Lines of credit

A business line of credit offers access to revolving funds that can be drawn from as needed, repaid, and then used again. You only pay interest on the amount withdrawn. The repayment term often starts as soon as you withdraw funds and typically lasts from six to 24 months, though some lines of credit go longer.

Lenders tend to have more lenient eligibility requirements for business lines of credit compared to other business loans. For example, Bank of America offers a cash-secured line of credit for startups with at least $50,000 in annual revenue. Other online lenders require a credit score of 600 and annual revenue between $30,000 and $100,000.

SBA loans

SBA loans are small business loans backed by the U.S. Small Business Administration. These loans can cover a variety of small business needs, including working capital, inventory or real estate. SBA loans are known for offering low interest rates and long repayment terms, making them worth the work to apply and lengthy timeline for approval.

However, lenders often require strict criteria to be eligible, such as requiring fair credit or higher. SBA microloans offer the best chance of approval for bad credit borrowers. Approved microlenders often lower their eligibility requirements, accepting no credit or poor credit scores such as a 500 credit score. You can receive funding up to $50,000 with interest rates ranging from 8.00 percent to 13.00 percent.

In rare cases, you can find SBA 7(a) loans that will accept bad credit borrowers. For example, Fundible representatives stated small business owners only need a credit score of 500 when applying for an SBA loan. Creditfy also accepts borrowers with a minimum 600 credit score for SBA loans.

Microloans

Microloans are loans offered in small business loan amounts, such as $500 to $150,000. These loans are often provided and managed by local non-profit community development organizations and backed by the Small Business Administration (SBA). Some online lenders and banks also offer microloan programs designed for bad credit borrowers.

The requirements to qualify for a microloan are often far more flexible than traditional loans. Many microloan lenders accept bad credit scores as low as 500, making them a good fit for businesses just starting and any that may need help to qualify for traditional financing. The repayment terms for these loans typically range from six months to as long as seven years.

Equipment financing

Equipment financing is a type of business loan designed specifically for purchasing equipment. The equipment acts as collateral, so you don’t have to find additional assets to put up as security. And since the equipment helps back the loan, some lenders are more open to working with business owners with poor credit.

Like term loans, these loans can be found at banks and online lenders and are typically repaid in fixed monthly installments. Repayment terms are generally anywhere from one to five years.

Invoice financing or factoring

Invoice financing involves using your unpaid invoices as collateral for a short-term cash advance. A lender will advance you up to 85 percent to 90 percent of the amount owed on an invoice. Once your client pays the invoice, you repay the lender the advanced money plus fees. Typically, the fees a lender charges are a percentage of the invoice amount.

Invoice financing can be a more accessible business loan for business owners with bad credit since the lender considers the customers’ creditworthiness instead of your business’s. But the cost to borrow money this way can be steeper than other types of lending.

With invoice factoring, you sell your invoices to an invoice factoring company. In exchange, the factoring company will advance you as much as 85 percent to 90 percent of the value of those invoices. The factoring company then collects the invoices from your clients. Once the invoice is paid, the lender sends you the remaining amount minus fees.

Merchant cash advance

A merchant cash advance (MCA) is a form of bad credit borrowing typically offered by online lenders. MCAs provide an advance against your business’s future debit and credit card sales. To recoup the money, the lender will take a percentage of your daily or weekly debit and credit card sales, including its lending fees, until the cash advance has been repaid in full.

It’s possible to qualify for merchant cash advances with bad credit, such as a credit score of 500, or even lower. While MCAs are accessible, the fees associated with this type of borrowing are typically much higher than traditional loans. The steep fees, short repayment timelines and the fact that you’re selling a portion of your future sales can create a cycle of debt that is hard to escape.

Alternatives to bad credit business loans

Business loans for high-risk borrowers may not be the best fit for you if you want to avoid high interest rates or don’t have the money to pay back the loan. Here are a few other options to consider.

• Small business grants. Business grants typically do not need to be repaid, and you probably won’t need to show your credit score to be eligible. But you’ll have to participate in what is typically a highly competitive application process. You can narrow down the competition by looking for grants for your industry or minority group, such as women or veterans.
• Business credit cards. Some credit card companies provide secured and unsecured credit cards specifically for business owners with poor credit. Some companies may consider applicants with a personal credit score as low as 300. When used responsibly, opening a credit card can help build or rebuild your credit score and establish a relationship with a lender. Some credit cards for bad credit even offer benefits such as cash back and free employee cards.
• Personal loans. Many lenders, including banks, credit unions and online lenders, offer personal loans for bad credit borrowers, which may or may not require collateral. However, some personal loans may have usage restrictions, so it’s important to verify a personal loan can be used for business purposes.
• Crowdfunding. Crowdfunding involves raising money by asking many individuals to make small donations or investments into your business. You can either take donations that you don’t have to repay or give investors rewards such as the product you sell or equity in your business. Raising money this way does not require providing your credit score. Instead, money will come from people who have a specific interest in your business or project.

Bottom line

Bad credit business loans help many business owners get access to the funding they need. They come in many forms with some like merchant cash advances offering high approval rates, while others secure the loan with collateral to improve your chances of approval.

But you’ll need to be mindful of the interest rates and fees that high-risk business loans charge. In some cases, fees can be exorbitant and leave you overpaying for funding. Do your due diligence and shop around for the best possible deal.

Frequently asked questions about high-risk business loans

• Can I get a business loan with a 500 credit score?

  Yes, some online lenders offer loans for applicants with credit scores as low as 500, though your options are limited. These may have to be secured loans that are backed by a valuable asset, which is used as collateral.

• What types of business loans are best for bad credit?

  If you have bad credit, there are a few different types of business loans to consider. First, you can choose a term loan from an online lender that you’ll repay over a fixed term, such as six to 24 months. Term loans for bad credit borrowers typically have short terms. Equipment financing is another option, as these loans are backed by the equipment being purchased. Invoice factoring and financing are also good options because lenders are more concerned with the creditworthiness of the businesses that owe you money.

• Is it risky to get a business loan?

  Getting a business loan can be risky since it relies on your ability to repay the loan, potentially over a long period of time. But you can reduce your risk by having stable revenue and only borrowing only as much as you need, which can keep your payments low.