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Small Business Tips

How to Get Small Business Loans If You Have Bad Credit

Manasa Reddigari

Bad credit is the culprit in many rejected business loan applications. But it doesn't have to stand in the way of launching your business. Check out these tips for obtaining small business loans with bad credit.

What is bad credit?

Creditworthiness is in the eyes of the lender. The basis of this valuation comes from lending criteria such as payment history and credit use rate. According to FICO, a personal credit score of 669 or below on a score range of 300 to 850 is fair or very poor.

Can you get small business loans with bad credit?

It's tough to get a loan through a traditional bank if you have bad credit. Banks think you're at a higher risk of defaulting on your loan payments. Even if you get approved, you're more likely to get unfavorable lending terms like a high interest rate.

Traditional banks aside, there are credit unions and online lenders that may have more lenient credit requirements and are often more accessible to those with bad credit. Your odds of getting small business loans with bad credit increase when you choose a non-traditional business loan over a traditional bank loan.

The caveat is that these bad credit business loans can sometimes come with higher fees. Always read the terms of any loan before committing to it.

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How do you get small business loans with bad credit?

Have bad credit but not enough time to improve it? Consider securing your business loan from a credit union or an online lender such as Fundera, BlueVine or Kabbage. You can choose from one of the following common bad credit business loan options:

  • Short-term loans: These tend to be high-interest loans that are 3 to 18 months in length rather than the 5- to 10-year term loans you might get from a bank.
  • Equipment loans: With equipment loans, the business hardware you plan to buy serves as the collateral that backs the loan.
  • Invoice financing: Another type of collateralized loan, invoice financing enables you to secure a certain percentage of the value of an outstanding invoice as a cash advance. You will get the rest of the invoice amount owed when the customer or client pays you.
  • Lines of credit: This type is a preset amount of credit that a lender will extend to you for business use.
  • Business cash advance: This is money advanced to you based on future credit card sales.

How do you build credit for a new business?

Having a good business credit score can in part make up for a less-than-stellar personal credit score in the eyes of a lender. This way, you can boost your odds of getting a business loan with favorable terms. To build credit for a new business:

  • Get a business credit card. Go with a credit card from a company that will report back on your credit usage to the credit reporting agencies.
  • Pay bills on time. Enable reminders on the website of your credit card company to remind you to pay on time; your credit score can take a hit if you pay late on a repeated basis.
  • Pay off late loan payments. Chip away at late loan payments in small amounts at a time if needed, but don't neglect them. The sooner you pay them off, the sooner you can get back on sound, financial footing.
  • Get a line of credit. You can also establish a line of credit instead of getting a credit card. Having more credit can boost your creditworthiness as long as you keep your credit use rate low.

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