Bad credit can make it harder to qualify for a small-business loan, but it doesn’t automatically shut you out, especially if your business is strong in other areas.
Data from NerdWallet’s latest business loan study found that 24% of approved applicants on our online loan marketplace reported credit scores of 659 or below. Among those approved borrowers, most reported at least $500,000 in annual revenue and five years or more in business.
At the end of the day, lenders just want to know that your business can repay the loan, says Karla De Leon, chief lending officer for Working Solutions and Main Street Launch, two California-based community development financial institutions (CDFIs). “Credit is [only] one piece of the puzzle,” she says.
From working with community and online lenders to requesting a smaller loan, there are strategic ways to improve your chances of getting approved for a small-business loan.
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What is bad credit and why does it matter?
NerdWallet defines bad credit as a personal credit score below 630.
Lenders often look at your personal credit score as a way to gauge how likely you are to repay borrowed funds. A bad score signals higher risk, which can make approval harder to come by.
How to boost your odds of getting a business loan with bad credit
Here are some practical ways to improve your chances of getting a small-business loan if your credit score isn’t ideal:
Choose the right lender
Not all lenders work with borrowers who have bad credit. Focus your search on those that do.
Community-based lenders are a good place to start. Community lenders, such as a local bank or a CDFI, may take a broader view of your credit score, says Geri Aglipay, senior fellow at Small Business Majority, a nonprofit organization that supports small businesses through education and advocacy efforts. For instance, community lenders may look at why your score fell in the first place and take into account your credit history and reputation.
Aglipay also recommends exploring microlenders and other nonprofit lenders, which may offer financing to borrowers with weaker credit.
Online lenders are another good place to turn to if you have bad credit. Just watch out for predatory lenders with too-good-to-be-true promises. A reputable business loan broker, like NerdWallet Small Business, can help guide you or you can start with our list of the best bad credit business loans.
Explain what caused your bad credit score
If your credit problems stem from a specific setback, be prepared to explain what happened and what you’ve done to address it, De Leon says. Lenders may want to understand whether the issue was temporary or if it’s likely to happen again.
For example, lenders may be more lenient if your poor credit score was due to a one-off medical emergency versus a history of unpaid credit cards. “Most CDFIs don't count medical collections as anything negative,” De Leon says.
Show that your business has strong cash flow
A low credit score may be easier to overcome if you can demonstrate your business has strong cash flow.
“Most lenders would say cash flow is the most important thing. If we see the ability to repay because the business is doing well, that probably is the thing that weighs most heavily,” De Leon says.
Be prepared to provide bank statements, financial statements and information about your existing debt.
Offer collateral
Collateral is any asset you own that you use to secure a loan. Because lenders can take your collateral if you fail to repay a secured loan, these loans often have more lenient credit requirements.
Ask for less money
If you can get by with less, you may be able to increase your odds of being approved by simply asking for a smaller loan amount. Our analysis of NerdWallet’s small-business loans data shows that the lower the self-reported credit score of approved borrowers, the lower the average funding amount they received.
Consider a co-signer
You may be able to offset a poor credit history by asking a trusted friend or family member with strong credit to co-sign on a business loan. But keep in mind that a co-signer will be on the hook for any loan payments you miss, which can jeopardize your personal relationship if that happens.
Seek support from a business advisor
Consider getting help from a business advisor. Aglipay recommends reaching out to your local Small Business Development Center (SBDC).
SBDC advisors offer free training and one-on-one consulting and can help you strengthen your business plan, review your financials and get your application in good shape. They can also walk you through the loan process and point you toward lenders that may be a good fit.
Build your credit for future applications
This will likely take some time — and you might not be able to wait for funding right now — but it’s still worth working on your credit health as it can open the door to better loan offers in the future.
There are several ways that you can build your credit:
- Stay on top of your current payments and pay your bills on time.
- Go over your credit report carefully and dispute any errors that you find.
- Consider becoming an authorized user on someone else’s credit card (so long as that person is responsible and has good credit).
Work on your business credit, too
While lenders will still consider your personal credit score, building a strong business credit profile may help your approval odds.
To get started, you’ll need to apply for an employer identification number with the IRS (if you haven’t already), as well as a DUNS number with Dun & Bradstreet, a business credit bureau. That way, your business activity, such as payments on a loan or credit card, can be tracked and accessed by lenders via your unique DUNS number. Any business activity reported to business credit bureaus is used to inform your business credit score.
After you have those, opening a business credit card can be a smart way to lay the foundation for your business credit history. Business credit cards are sometimes easier to qualify for than loans and can help cover short-term expenses.
Financing options for bad credit borrowers
While traditional banks might turn you away if you have bad credit, you may still be able to access financing through online lenders and by exploring alternative solutions.
Microloans
Best for: Entrepreneurs who need $50,000 or less.
Microloans are small-dollar loans designed for business owners working to build credit, individuals from historically underserved communities and new businesses.
They typically provide up to $50,000 in funding and are offered by nonprofit organizations and lenders that participate in the SBA microloan program.
» Check out the best microlenders
Online loans
Best for: Entrepreneurs who need fast cash and can manage higher interest rates.
Online lenders are non-bank companies that offer loans that are easier to qualify for and fund faster compared with bank loans.
But there’s a catch: Loans from online lenders have higher interest rates and shorter repayment terms when compared with traditional business loans.
Online lenders may offer a variety of loan types, including term loans, business lines of credit, merchant cash advances, equipment financing and more.
» See the best online business lenders
Equipment loans
Best for: Entrepreneurs who need to finance equipment for their business, such as machines, office furniture or semi trucks.
Equipment financing may have more lenient credit score requirements than other types of business loans, since the equipment you buy with the loan serves as the collateral.
» List of top equipment financing options
Invoice factoring
Best for: Business-to-business companies with slow-paying customers.
Invoice factoring involves selling your unpaid invoices to a third-party company, known as a factoring company. Because factoring companies collect from your customers instead of you, your personal credit plays a smaller role in the approval process.
» Check out our list of best factoring companies
Merchant cash advances
Best for: Entrepreneurs who have exhausted lower-cost options and have healthy profit margins.
Merchant cash advances (MCAs) are not technically loans. Instead, they’re an advance of cash you repay using a percentage of future sales, plus fees. Because MCA providers focus more on sales history when considering new borrowers, a bad credit score is less likely to stand in the way of approval.
But accessibility comes at a price. MCAs can carry triple-digit APRs and demand frequent payments, which can seriously strain cash flow. That’s why we recommend exploring other options before considering an MCA — and only if you’re confident you’ll be able to pay back the advance.
Consider other alternatives
If the options above don’t fit your needs, here are a few more worth exploring:
- Small-business grants. This is free money awarded to entrepreneurs who put in the time and effort to apply. While you can expect stiff competition, the potential payoff may be worth the effort.
- Crowdfunding. This involves raising money yourself on online platforms, like Indiegogo or Kickstarter. Depending on the type of crowdfunding you choose, you’ll be on the hook to deliver a product or service, give away a piece of your company or repay the raised funds.
- Friends and family loans. If you have trusting family members or friends willing to lend you cash for your business, consider yourself lucky. While this can be a flexible and cheap way to get funding, it can put your personal relationships at risk. To avoid misunderstandings, we recommend putting everything in writing, including timelines, repayment terms and any interest, so both sides are on the same page from the start.
» MORE: Business loan requirements
