Bad credit does not have to limit your company finance alternatives. Some lenders provide negative credit business loans to applicants with credit ratings as low as 500. Lenders use your credit score to determine your creditworthiness; the lower your score, the greater the risk. As a result, business loans for negative credit are more expensive, though shopping around may help you find a good deal.
“Bad credit” is defined as a personal FICO Score of less than 670. When examining a business loan application, lenders may look at both your personal and business credit scores. If your company is new, the lender may place a greater emphasis on your personal credit history when determining eligibility.
Lenders who provide negative credit business loans usually want a credit score of 500 or above. However, if you choose a bad credit business loan, you should expect your lender to charge you a high interest rate. It’s a good idea to rethink your offer so that the recommended interest rate makes the loan feasible.
Unfortunately, there are no no-credit-check business loans available. And, while there are no-credit-check personal loans available, it is typically not a good idea to employ personal loans for commercial purposes.
Obtaining a company loan with negative credit entails locating finance with flexible qualifying standards. Here are the general methods to help you acquire funding once you’ve identified a lender who may accept your credit score.
Check your credit scores.
Before starting the business loan application process, you can check your personal credit score for free. With this information, you’ll better understand which lenders you can approach. For established companies, you should also obtain a copy of your business credit report.
Improve your credit to get better rates.
There are many ways to improve your credit score to help unlock more attractive business loan rates and terms.
- Pay your bills on time: Paying promptly (and early, if possible) will do wonders for your credit score. You don’t need to pay the whole balance if it’s a stretch — just make sure to meet the minimum.
- Reduce debt: Though paying the monthly minimum is good, getting all your debt paid down is better. You don’t have to do it at once — just watch your overall spending, and start putting any extra money toward the debt with the highest interest rate. Slowly, you’ll bring your credit utilization ratio down, improving your score in the process.
- Renegotiate interest rates: Consider contacting your creditors to see if they’d be willing to negotiate the interest rate. You can also consider consolidating business debts for better interest rates.
- Monitor your credit: Occasionally, a credit bureau will make an error on your credit report. You can request a copy of your credit report directly from one of the credit bureaus, or you can subscribe to a credit monitoring service that’ll watch your score for you.
- Watch your business credit: Your business also has business credit, which lenders can access — often without your knowledge. Keep an eye on your business credit report to double-check for any mistakes. You can request a report from business credit bureaus like Dun & Bradstreet.
- Get a business credit card: A business credit card may be easier to obtain than a business loan, as some cards don’t have high credit requirements. You may notice a significant improvement to your personal credit score after making on-time payments.
Whether you decide to get a business loan with bad credit or wait until your credit score improves, make sure to stay on top of your payments and keep your eye on your goals. Successfully managing any business loan, bad credit or not, will show lenders that you can handle debt. In turn, you may have more access to better rates and terms for future financing needs.
Calculate how much you could borrow.
Use a business loan calculator to estimate your borrowing power based on your credit score, revenue and time in business. The size of your payments — which could follow a daily, weekly or monthly schedule — are based on your loan amount, interest rate and any additional fees a lender charges.
Business owners with low credit scores typically receive steep interest rates, so keep this in mind when deciding how much funding to request. Taking on debt that you can’t afford to repay will only hurt your credit score further. Securing longer repayment terms could make your payments more affordable — but be careful not to pay an excessive amount of interest throughout the life of the loan. Short-term loans typically require high payments, but you’ll generally pay less in total interest.
Consider a cosigner.
Adding a cosigner with a high credit score can often improve your odds of receiving a business loan. However, not all lenders allow cosigners. Furthermore, it’s a big responsibility for your cosigner, since they’ll ultimately be responsible for the loan if your business defaults. Make sure to discuss the pros and cons with your business partners and your cosigner to ensure everyone knows what’s involved.
Prepare your application documents.
Even if a lender has a low minimum credit score requirement, it may still dig into financial documents like your business bank account statements and tax returns. Be prepared for a lender to ask for one or more of these documents:
- Business plan
- Business and/or personal bank account statements
- Business and/or personal tax returns
- Business registration and licenses
- Employer identification number (EIN)
- Financial statements, including profit and loss, cash flow and balance sheet
- A listing of business assets and liabilities
Applying with these documents could help offset your poor credit and help you appear trustworthy as a borrower. Plus, organizing your paperwork ahead of time could speed up the application and approval process.
Offer collateral to secure funding.
Offering business assets as collateral could improve your chances of being approved for financing. Because lenders can seize the collateral to recoup losses in the case of default, collateral reduces the risk for the lender and gives the borrower a better shot at approval.
Acceptable forms of collateral may include hard assets like equipment, fixtures, inventory or commercial property. Future earnings, such as accounts receivable and unpaid invoices, may be used as collateral. Watch out for loans that may require you to pledge personal assets (your personal car or home, for example) as collateral to secure financing.
Understand your loan agreement.
Make sure you understand all aspects of your business loan agreement to avoid surprises or penalties down the line. Review these critical components of your loan agreement:
- How much you’ll be borrowing and repaying
- The terms that determine your repayment schedule
- Penalties for early or late payments
- Whether a personal guarantee is required, which would make you personally responsible for the debt
If you’re comfortable with your business loan agreement details, you’re ready to move forward with your bad credit business loan.