You need money for your business, but you’re concerned that your poor credit score can impact your ability to secure approval for a business loan.
It’s possible to get a business loan with a bad credit score, but the process might be complicated. Due to your low credit score, banks might turn you away. Or, if you are approved, you might have to pay a higher interest rate than someone with good credit.
Here’s what you need to know about getting a business loan with a bad credit score.
What Types of Business Loans are Best for Borrowers with Poor Credit?
Typically, banks only issue business loans to borrowers with a minimum credit score of at least 640.
Borrowers with credit scores less than this minimum score may secure approval, but they are likely to pay higher-interest rates or only be able to borrow a small amount of money.
If your credit isn’t good enough to be approved for a business loan from a bank, consider applying for a loan through a credit union or non-profit organization.
Credit unions are designed differently than banks and don’t have to worry about satisfying shareholder expectations for their earnings. This means that they can fund riskier loans and charge lower interest rates for these loans.
There are also non-profit organizations designed to help borrowers who conventional lenders have denied. Look for non-profit organizations in your area that offer small business loans.
Loans secured by collateral, like equipment financing loans, usually have less stringent credit requirements. If you default on the loan, the company has the right to repossess your equipment.
Another option is to apply for a business credit card. However, business credit cards usually have strict credit requirements.
There are cards available called secured business credit cards with low credit score requirements, but they require you to deposit to establish a credit line. A secured card can help your business positively impact your credit, but it won’t immediately help your cash needs.
How Can You Apply for a Business Loan with Bad Credit?
To apply for a business loan with bad credit, make sure that you prove your business is a viable business earning money. Most banks want proof that you’ve been in business for at least a year or two.
Bring your personal and business tax returns for the past two years. You should also bring the last few months of your business’s bank statements and financial statements. Your goal is to prove to the lender that you’re a reasonable risk, even with a poor credit score.
If your business is still young, you might have a hard time securing traditional financing. Instead, consider seeking out a lender specializing in lending to new businesses. Your interest rate and payments might be higher, but you might be more likely to be approved for the loan.
Make sure that any loan you qualify for has a reasonable payment for your business’s budget and cash flow.
Ways to Help Your Credit Score
Here are some steps to meet your credit score goals before applying for a business loan. First, try to make all your debt payments on time; this applies to your personal and business debts.
You should work to pay down your balances on your revolving debt products, like your credit cards and lines of credit. Ideally, your utilization should be less than 30 percent of your available credit but even paying down your balances a little bit can help positively impact your credit score.
A credit monitoring service can help you see how paying down your debts and smartly using positively impacts your credit. In addition, many services allow you to model certain behaviors to see how they influence your credit.