A great credit score can give you a huge advantage when looking for a small business loan. On the flip side, however, a bad credit score can seriously hinder your chances of approval and limit your funding options.
Fortunately, there are things you can do to improve your credit score, but if you need the money right away, you may want to consider less traditional funding methods. Below we've listed the best business loan options for those with bad credit.
1. SBA Microloan
It's become nearly impossible for small businesses owners to get a loan through their local bank, but with bad credit, your chances of approval are pretty much slim to none. Luckily for small business owners, the SBA has made it much easier to get approved for a loan.
While they don't directly do the lending themselves, the SBA is willing to guarantee a portion of your loan, which creates a huge incentive for the bank or financial institution doing the lending, to approve more loans for small business owners. Although loans through the SBA still do require a decent credit, if you're looking for a smaller loan, you may be able to qualify through the SBA's Microloan Program.
Loans that come through the Microloan program can be anywhere from $500 to $50,000. And since the SBA microloans were designed for companies that are just starting out and have low capital requirements, they can be a great financial source for those who have little to no business credit history.
2. Online Lenders
If your credit score is less than perfect and you're unsure of your eligibility for a small business loan, online lenders could be a great resource. You can fill out an online application and, within minutes, find out if you qualify. Not only does that save you the time of going through a lengthy loan application process, but the standards of online lender are more lenient than those of your local bank.
If you find you're still not qualifying for a loan with online lenders due to a bad credit score, Kabbage may be just the lender you are looking for. They don't rely on your credit alone, as they'll allow you to link your online business accounts such as your business checking account, eBay, and more, to help determine your loan eligibility. Other types of lenders, like Fundbox (a unique type of invoice financing), don't even pull your credit score at all.
3. Merchant Cash Advance
If most of your revenue comes from credit or debit card sales, you could be a qualified candidate for a merchant cash advance. Although a merchant cash advance isn't technically considered a loan, you will receive a lump sum of money in exchange of a fixed dollar amount of your company's future credit and debit card sales.
You'll apply through online lenders and, if you've been approved, could receive funding within as little as a day or two. A merchant cash advance requires very little paperwork and is a quick easy way to receive financing with no collateral, even if you have bad credit.
Lenders will provide anywhere from $2,500 to $250,000 of immediate cash flow for your business. As quickly as you receive the money, however, you'll have to begin paying it back. Lenders will being to automatically deduct a fixed percentage from your daily revenue until the loan is paid off; since they're deducting a fixed rate, you end up paying less on slower sales days, and more on the days your sales are higher.
While a merchant cash advance could be a great financial resource for those with bad credit make sure you can afford it. This type of financing typically comes with hefty fees, and since you're making daily payments, it could hurt the cash flow of your business. MCAs are known to be the most expensive loan on the market, so keep this in mind if you have other options.
Always Calculate the APR
Since your credit score is less-than-perfect, you may be eager to take any loan or financing that's offered to you, but be cautious and make sure you know a loans APR before agreeing to anything. APRs for those who have a bad credit score will always be higher than for those that have a better credit history. To calculate a loan's potential cost, you can use a business loan calculator to determine if you could afford the loan you've been offered.
Regardless of your loan choice, if you make your payments on time, after you pay off the loan, you may be able to qualify for a cheaper loan the next time around.
About the Author: Meredith Wood is the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.
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