Getting a business loan with bad credit can be difficult, but it isn’t necessarily impossible. Lenders may look beyond your credit score and consider factors such as business revenue, cash flow, time in business, collateral, and your ability to repay the loan.
The key is to choose the right type of financing and prepare your application carefully.
1. Understand Why Your Credit Is Low
Before applying, check your personal and business credit reports for errors or outstanding debts.
For new businesses, lenders often rely heavily on the owner’s personal credit history. The U.S. Small Business Administration notes that poor credit is one of the common reasons small-business loan applications are declined.
If you find inaccurate information, dispute it before applying for additional financing.
2. Consider an SBA Microloan
If you’re in the United States and need a relatively small amount of capital, an SBA Microloan may be worth investigating.
The SBA Microloan program provides loans of up to $50,000, with the average loan around $13,000. Funds can be used for working capital, inventory, supplies, equipment, furniture and fixtures.
Microloans are provided through nonprofit, community-based intermediary lenders, which can make them an alternative to conventional bank financing.
The SBA says intermediary lenders make their own credit decisions and set the terms, so approval isn’t guaranteed simply because the loan is backed by the program.
3. Look at SBA-Backed Financing
An SBA guarantee can make it easier for some small businesses to obtain financing because it reduces some of the lender’s risk.
The SBA’s 7(a) loan program, for example, can finance working capital, equipment, real estate, inventory, business acquisition and other business purposes. The maximum 7(a) loan amount is $5 million.
However, bad credit doesn’t automatically qualify you. SBA lenders still evaluate creditworthiness and whether your business has a reasonable ability to repay the loan.
4. Show Strong Business Cash Flow
If your personal credit score is weak but your business is generating consistent revenue, provide documentation demonstrating that the business can repay the loan.
Depending on the lender, this may include:
- Business bank statements
- Profit-and-loss statements
- Balance sheets
- Tax returns
- Accounts receivable
- Sales records
- Cash-flow projections
Strong financial documentation can give lenders a clearer picture of the business than a credit score alone.
5. Consider a Secured Business Loan
Some lenders may be more willing to lend when the loan is secured by collateral.
Possible collateral can include:
- Equipment
- Vehicles
- Inventory
- Business property
- Other qualifying assets
However, secured financing carries risk: if you default, the lender may have rights to the collateral under the loan agreement.
6. Consider a Business Line of Credit
A business line of credit can provide access to funds as needed instead of giving you one large lump-sum loan.
For example, a business might use a line of credit to cover temporary cash-flow gaps or purchase inventory.
Qualification requirements vary considerably between lenders, so compare the interest rate, fees, credit limit and repayment terms carefully.
7. Prepare a Strong Business Plan
A detailed business plan can be particularly useful when your credit history isn’t strong.
Explain:
- What your company does
- How much money you need
- Exactly how you’ll use the funds
- Current revenue
- Expected revenue
- Operating expenses
- Existing debts
- How the loan will generate enough cash to repay itself
The SBA recommends having a business plan, financial projections, information about the requested amount and intended use of funds before approaching lenders.
8. Compare Several Lenders
Don’t apply blindly to every lender you find online.
Compare:
- Minimum credit requirements
- Interest rates
- Origination fees
- Repayment period
- Collateral requirements
- Personal guarantees
- Prepayment penalties
- Total borrowing cost
For U.S. businesses, the SBA’s Lender Match service can connect businesses with participating lenders. SBA says applicants can compare rates, terms and fees after receiving potential lender matches.
9. Be Careful With “Guaranteed Approval” Loans
Bad-credit borrowers are often targeted by lenders or websites promising guaranteed approval, instant funding or extremely high loan amounts.
Be cautious about any lender that:
- Guarantees approval before reviewing your finances
- Demands large upfront fees
- Won’t clearly disclose the APR or total cost
- Pressures you to sign immediately
- Requests unusual payment methods
- Doesn’t provide a clear loan agreement
A loan that is easy to obtain can become extremely expensive if the interest rate and fees are excessive.
10. Work on Your Credit While You Apply
If you don’t need funding immediately, improving your credit may give you access to better financing later.
Focus on:
- Paying existing debts on time
- Reducing credit utilization
- Correcting errors on credit reports
- Keeping business and personal finances organized
- Establishing business credit
- Maintaining consistent business bank activity
The SBA specifically recommends building and maintaining both personal and business credit because stronger credit can improve access to financing and potentially better terms.
Final Thoughts
Getting a business loan with bad credit usually requires showing lenders that your business can repay the money despite your credit history.
Start by checking your credit reports, gathering financial records, calculating exactly how much you need, and preparing a clear explanation of how the funds will be used. Then compare alternatives such as SBA microloans, SBA-backed financing, secured loans and business lines of credit.
If you’re in the U.S., SBA Microloans can provide up to $50,000, while SBA 7(a) loans can provide substantially larger amounts for qualifying businesses.
The most important thing is to compare the total cost of borrowing, not simply whether a lender is willing to approve the application.
