Is Small Business Financing Impossible with Bad Credit? 3 Options to Consider

It can be frustrating if you run a business and need financing but don’t have good credit. Are you doomed to bootstrap things slowly instead of using an injection of cash to skyrocket your business growth?

Not necessarily.

Having less-than-stellar credit can happen for many reasons. Maybe you haven’t built up enough credit history by having credit cards and using them regularly. Maybe you filed for bankruptcy in the past. Perhaps you have a high debt to credit ratio. Whatever the reason, you may not qualify for a traditional small business loan…but you still have financing options.

1. Bringing on an Investor

Depending on the type of business you have, you might consider taking on an investor or seeking venture capital. Restaurants and tech startups are two examples of businesses that investors regularly look to get involved with, though any kind of business can have an investor.

In exchange for an agreed-upon amount of funding, your investor will then have equity in your business. Be aware that this means the investor may want to be more involved in the decision-making process for your business, so you’ll need to be okay with having other ideas and opinions in the mix. Still, an investor can also bring his experience in your industry — as well as his contacts — to help you grow your business faster than you could on your own.

2. Small Business Loan

While an SBA loan is backed by the Small Business Association and offered through traditional banks, there are also plenty of lenders who offer small business loan options for people with bad credit. The main difference between the two are the requirements to qualify: rather than being assessed on your credit score and other financial factors, with a private lender, you will be qualified based on your ability to pay back the loan.

You may be asked to provide proof of income or what your annual revenues are, as well as how long your business has been in operation. 

Another difference between an SBA loan and other types of small business loans is the interest rate you’ll pay. As you’d expect, some fast financing options will require you to pay a premium for the loan, and depending on the type of loan you get, the payment period may be shorter than it would with a traditional loan.

Still, there are lots of good small business loan options even if you don’t qualify for an SBA loan.

3. Business Credit Card

A third option to consider if you have bad credit is a business credit card. Should you need to buy, for example, a new computer for your business, you might find it easiest to charge the purchase to a card, especially if you can get a good promotional interest rate.

Both general credit card brands (like Visa) and store cards (like Best Buy) offer credit cards with promotional offers from time to time. Pay attention to cards you’re interested in, and apply when the offer is too good to pass up. You might get 0% interest for the first year, get the annual fee waived, or save substantially on your first purchase.

Because interest rates on credit cards can be high, it’s important that you plan to pay off your balance before the interest makes a simple purchase cost a whole lot more. Even if you can’t pay off the entire balance in one payment, make an installment plan just like you would with a business loan.

Meanwhile, Improve Your Credit Score

Whichever financing option you choose, work on your credit score while you pay it back. In the case of taking venture capital, you won’t really be building your credit, so look for other ways to do so.

Start building your credit by making your payments on time. Your payments are reported to credit agencies, so it’s important to pay on time. Also, monitor your credit reports. You’re eligible to get free access to your credit reports, so make sure you check them regularly to ensure accuracy. If there is an incorrect address or wrong information about an account, report it to the credit bureau immediately, as these inaccuracies can negatively impact your credit score.

Open lines of credit with vendors for your business, and always pay your balance in full and on time. Open a few credit cards too, even if you don’t plan to use them. The more available credit you have, measured against how much debt you have, the higher your credit score. Just be judicious about the credit cards you sign up for; some can have annual fees, and there’s no sense in paying one for a card you don’t use.

While it won’t improve your credit score, start saving a portion of your revenues so that you have a nest egg for unforeseen expenses. This keeps you from having to borrow money for emergencies, and you can use financing for expenses that you plan for in advance.

Knowing your options for financing gives you the freedom to explore the one that’s the best fit for your small business.