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Updated: March 27th, 2020
Business is challenging: Only about ten percent of businesses survive their first five years in operation. Small and medium businesses also account for 99.7% of U.S. employers. Initially, many businesses need growth capital to thrive, but funding is often available only to those with credit and financial backgrounds that meet stringent requirements.
Business owners who need business funding with bad credit scores still have several options available to secure the funding they need, though. Financial services are becoming increasingly available through both alternative lenders and through government-subsidized funds.
If your credit is a little lower than banks are comfortable with, fear not. The following solutions for getting a small business loan with bad credit may be available to you as well.
When it comes to the financial technology, or fintech, sector, it’s tough to discuss business models without talking about alternative lending. Financing options are available for everything from a garage startup to well-established businesses with prior funding rounds. Alternative lenders can specialize in term loans, which can be repaid over up to five years while potentially offering hundreds of thousands of dollars when it matters most.
Other non-traditional lending options to get small business loans with bad credit include crowdsourced funding. This is a little harder to secure in some ways, primarily due to the ‘sweat equity’ which goes into marketing and uncertainty of funding. Microfinancing is another option for business bunding with bad credit, providing funding in smaller amounts and with much shorter repayment terms.
Small Business Administration loans come from large funds designed to stimulate business within the U.S. These loans often come with rigorous requirements, though they may not show quite as prominently in credit score and financial background requirements. SBA loans are often easier to secure through lending packagers — some loans in this realm only require a credit score of 640 — but often cost a little extra over the repayment term.
SBA loans provide growth and initial capital to businesses within the U.S. and allow them to purchase equipment, hire and train staff, and meet many other initial business needs. These funds generally do have spending limitations and guidance about what the funds can be used for. As a safer option for those that need business funding with bad credit, SBA loans generally have easier repayment terms and interest rates than some high-risk funding options.
Merchant cash advances (MCAs) are generally available in a short period of time, which makes them perfect for when cash needs to materialize quickly. However, they generally come at a high cost, sometimes exceeding 200% of the principal in APR. MCAs can include refinancing accounts receivable (AR), also known as invoice factoring.
Some limited microfinancing options and personal payday loans may be available if a business is running bootstrapped, dependent on the founder or early investors’ personal funds. MCAs often cover small business loans – bad credit or not – for an added fee.
Repayment terms for MCAs can eat through accounts receivable funds and wreck a business’ finances if not used responsibly and in the right context. Because incoming funds present the ability to both pay debts and provide breathing room, signing them away is not generally a healthy choice for the business.
Term loans and business lines of credit can provide business funding. Owners looking to secure small business loans with bad credit are generally able to secure business growth funding through both of these options, though with smaller amounts of money and steeper interest rates. Some lenders opt not to punish early repayment.
By repaying term loans and business credit lines early, business owners can generally reduce their interest exposure, resulting in a cheaper exchange and an excellent way to build a strong financial track record. Many business lines of credit require only a 550, if they have a credit score requirement at all.
Regardless of the reason for financial need within your business, there will be an option for business funding, even with bad credit. However, it will not always be available for super-low interest rates and optimal repayment terms. Some more predatory lenders will charge high interest rates on small sums of money, accruing interest in very short intervals. This practice is fairly common among payday and invoice factor lenders.
Before seeking to secure financing, make sure you follow our five tips for increasing your chances of success. Financing terms will differ between lenders, so research carefully and put in the work to find the best options for your business. More money is not always better, especially if you’re seeking business funding but have bad credit. So, be sure to lay out your financial requirements and allocated spending amounts to ensure you do not over-borrow.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.