Small business owner with bad credit getting a business loan

Guide to Getting Financed With Bad Credit

10+ min read • Jan 13, 2020 • Andrew Mosteller

There’s good news for businesses that have, for one reason or another, seen their credit tank. First, the bad news. Credit is an important barometer used by lenders, investors, and potential partners to screen your business. When your credit is in the toilet, your opportunities decrease. 

You’ll find it difficult to secure certain small business loans that have credit requirements, to sway investors who have high credit standards, and to obtain most financial products offered by traditional lenders. 

Luckily, bad credit is not the end of the world for businesses in need of financing. It may be limiting, but thanks to the growth of financial technologies, there are more opportunities than ever for businesses that need some extra funds to grow. 

This guide aims to help you understand your business credit, give you the tips and information you need to secure financing with poor credit, and help you on the path to credit growth so you can access more desirable financial products in the future.

Checking Your Business Credit Score

It’s likely your business already has a credit score. In fact, it may already have several. There are 3 major credit reporting bureaus—Experian, Equifax, and Dun & Bradstreet—that gather information on businesses and use it to calculate credit scores. Anyone can access the credit score of your business through one of these bureaus, including you, so if you want to know what lenders and investors see when they check out your credit score, look no further. 

Dun & Bradstreet is the biggest player in the business credit space. They allocate copious resources to provide an up-to-date picture of your business credit. Just because D&B is the largest, you shouldn’t rule out Experian Business and Equifax Business. Lenders and investors may check your business score from multiple sources. 

Dun & Bradstreet uses the Paydex score to determine your creditworthiness. To see if you already have a DUNS number, you’ll want to check their website.

In addition, you’ll want to check your score on both Experian and Equifax for the best overall picture of how the market views the creditworthiness of your business. You may have a better score than you think, so it’s worth taking a look.

Also, minor clerical errors can negatively impact your score, so it’s worth finding and fixing any errors in your credit reports.

Understanding Your Business Credit Score

A business credit score is similar to a personal credit score. Credit reporting agencies use various methods to calculate creditworthiness. Factors often include:

  • Longevity: The amount of time you have been in business can contribute to raising your score. You can’t speed up time, of course. You just need to be in business longer and wait for this factor to affect your score.
  • Revenues: If your business is bringing in annual revenue, that can have a positive effect on your score.
  • Assets: Having physical business assets, such as property, is likely to raise your credit score.
  • Outstanding Debts: The loans and credit cards you currently have can also impact your score. If you are using credit responsibly and paying it off on time, this will have a positive impact and will make you more likely to get approved for a loan if you apply.
  • Personal and Business Loan History and Credit History: If you have personal and business credit or have taken out loans in the past and have been consistent about paying them off promptly, this can also make you more attractive to lenders.
  • Public Records: UCC filings and other reports, including any liens and judgments against you, can affect your score.
  • Industry Risk: Lenders will view riskier industries like bars and restaurants differently based on historical data of how similar businesses have performed in the past.

Your business credit score comes down to a single number, ranging from 0 to 100. Most small business lending companies require a minimum business credit score of 75. 

Any lender, before they give you a loan, wants to make sure you can repay the loan. Your credit score is considered a reflection of your willingness to pay. Granted, there are situations where a small business owner might have a less-than-perfect credit score because of circumstances out of his or her control, but be aware that most lenders will look at your credit score as a measure of your willingness to meet your obligations.

You’ll want to avoid places with strict credit requirements if your credit isn’t good. In the next few sections, you’ll learn about the lenders who are unlikely to fund your business if your credit is poor and the lenders who look beyond credit score in determining whether to partner with your business.

Places to Avoid if You Have Bad Business Credit

The simple approach is to ask potential financial partners if they have strict credit requirements. If they do, ask them specifically what those requirements are. Then, if your business is below the minimum requirements, it’s time to look somewhere else.

Traditional lenders commonly have strict credit requirements. Small business loans and term loans from traditional lenders usually require a business to have a fairly high credit score even to consider the application. That’s important to know because most applications for traditional loans take around 29 hours to complete

You wouldn’t want to find yourself at the summit of a 29-hour mountain of paperwork only to find out you were disqualified before the climb even started. That’s why we’re here to tell you to avoid these kinds of financial products. Yes, the interest rates are tempting, but they’re out of your league if your credit is poor. 

Also, traditional loan applications have an 80% denial rate because the regulated structure of the modern banking system values large, stable investments over smaller, riskier investments like most small business proposals. So, even if your credit is pretty good, the fact that you’re a small business means you’re fighting a lopsided battle.

It’s important to note that banks’ inability to finance small business loans is largely a result of increased banking legislation after the 2008 recession. It’s legally a lot harder for banks to help out small businesses. But a new league of financial institutions dedicated to helping small businesses access capital has grown in the place of banks. 

One of these institutions is the lending marketplace.

Lending Marketplaces

If you don’t know what a lending marketplace is, you’re in luck—it’s what we do here at Lendio. There are 3 things you should know about lending marketplaces right off the bat:

  • The application process is faster than lightning
  • The loans are designed around the needs of small businesses—including those with poor credit
  • The number of options available to your business is staggering

Rather than forcing you to spend hours of your day filling out mindless paperwork, lending marketplaces offer a fast application process that uses a single online application to match your business with financing options from a variety of lenders.

At Lendio, for example, our application takes only 15 minutes to complete. You’d only be able to listen to “Stairway to Heaven” twice in that amount of time, and you’d be building yourself a stairway to financial success in the process. 

Most lending marketplaces boast between a 60–70% approval rate for applicants. The application process is 116 times shorter for a 70% chance of getting approved. It’s a no-brainer.

Also, it’s common to start receiving approvals for loans within the first 24 hours of applying, getting you the cash you need when you’re in a bind.

Almost 80% of small business owners who secured funding through online lending reported satisfaction with both the simpler application process and the shorter wait for a credit decision. Compare that to just half of traditional bank borrowers who report satisfaction. 

In addition to providing an all-around more pleasant experience, marketplace lenders usually offer a plethora of loan types, each tailor-fitted to satisfy specific business needs. 

Oh, and here’s the kicker—many lending marketplaces, especially those built specifically around the needs of small businesses (like Lendio), are aware and accommodating toward businesses with poor credit scores.

Chances are pretty good that you qualify for at least one financial product provided by our team of 75+ lenders. See your options today.

Common Low-Credit Marketplace Offerings

As we said, lending marketplaces have a lot of financial options. One of the essential marketplace offerings for businesses with low credit scores that need an opportunity to get financing and build credit is the business credit card.

Business Credit Card

You’re not required to put up collateral before getting a business credit card, so businesses without a lot of assets can easily access one. Additionally, credit score requirements and other business factors are very flexible.

Of course, you’ll get better rates if your credit score is good, but businesses with poor credit can still acquire a business credit card. As long as you pay off those balances faithfully, your credit will improve, and you’ll never have to pay a cent of interest.

Credit cards are useful to small businesses for a number of reasons in addition to their credit requirement flexibility. 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.

Some business credit cards offer an introductory 0% APR. This perk usually only lasts for 12 months, but it’s a great benefit for a year’s worth of expenditures. Once the 0% APR period is over, you’ll have to start paying interest. 

Bear in mind that interest accrues during the 0% period at the normal rate, but you don’t have to pay any of that interest if you pay off your balance before the period is over. 

Many cards come with rewards or cash back programs. These kinds of programs make a lot of sense if you’re really good at paying off your balances each month. 

By paying off your balance regularly, you’ll be able to earn cash back, miles, or any other perks offered for free. That’s right, free money.

Our business credit cards range from $1,000 to $500,000. Approval and funding can come in as little as a week, and interest rates start at 8%.

Merchant Cash Advance

It may actually take longer to say merchant cash advance than to qualify for one. The requirements for this type of financing are relatively lenient due to the nature and terms of the loan.

In most cases, there won’t be a credit pull. Your lender will simply want to review your past 4–6 months of bank statements or receivables.

A merchant cash advance is the preferred option for many businesses that need fast access to capital. Most businesses aren’t ready for the unexpected, which is where a merchant cash advance (MCA) comes in handy. It’s financing that comes in clutch right when you need it.

You can have a merchant cash advance authorized and available to use in just 24 hours. That’s what really sets it apart from all other funding types. A merchant cash advance lets you borrow against future earnings to get the cash you need when you need it.

Because merchant cash advances are so speedy, the most common uses for them usually fall into 2 categories: emergencies and opportunities.

Emergencies include an unexpected increase in demand, times of famine, equipment breakdowns, etc. Opportunities include property sales, equipment sales, urgent purchase opportunities, and more. A merchant cash advance makes it possible to mitigate emergencies and maximize opportunities when you don’t have the cash lying around to do so.

The only downside of an MCA is the high interest rate. It’s set at 18%, but that’s really a small concession when the need is urgent.

Honorable Mentions

We don’t have time to talk about all of the low-credit offerings available to our lending marketplace clients, but we couldn’t go on without at least spotlighting 2 more offerings:

  • Line of credit: It’s a revolving door of funds available to your business whenever you need it—a lot like a business credit card but without the plastic.
  • Equipment financing: Equipment has inherent value that makes it a worthwhile investment for lenders. This financing will help you get that new, shiny toy you’ve had your eye on for months.

Remember, these financing options are just a short application away. 

Other Low-Credit Financing Sources

If you’re still feeling pressed for ideas on how to get financed, take a look at some of the options mentioned below. They all come with their ups and downs, but they’re worth considering.

Crowdfunding

The average Joe doesn’t usually care to look up your credit score. On crowdfunding platforms like Kickstarter, what matters more than anything is the marketability of your product. If you can share the vision of your product and generate exposure to your project page, you’ll likely be pretty successful. 

There are a few downsides to crowdfunding, however. For example, if you want to use Kickstarter, be aware that people are looking for a product that you can mail to them at the end of the production cycle. If your business is service-based or some kind of restaurant, you’re highly unlikely to have success on the site. 

Thus, crowdfunding works best for businesses looking to fund product development and dispersal. So if your business is product-based, Kickstarter may be a viable way to grow your working capital and finance your inventory. But that’s about it. 

Angel Investors and Venture Capitalists

These kinds of investors will want to take a detailed look at your company, but they may not particularly value your credit score. Why? Because you won’t actually be paying them back. Instead, they’ll be investing in your company and asking for a portion of your equity.

Because of this, you will lose some control over your business as the investor becomes a crucial decision-maker in the future of the company.

Also, women seeking venture capital funding are at a disadvantage. Even though women own 36% of all businesses, they only received 2% of the $85 billion invested by venture capitalists in 2017.

Additionally, venture capitalist groups tend to be very industry-biased. In the 2nd quarter of 2019, $12 billion of VC funding went to businesses in the internet space. Health care came in a distant second with $4.6 billion.

In other words, if you have the specific kind of business investors are looking for, your financials are top-notch, and you’re OK with losing some control, then angel investment or venture capital may be the way to go.

Growing Your Credit for the Future

Once you’ve secured financing, you’ll be on the path to building credit for the future. Here’s one crucial piece of advice we’ll leave you with: make your payments on time. If you are consistent in making your payments, your credit will grow. 

As your credit grows, you’ll be able to access better interest rates and a wider range of lending products. Your credit future starts now. It starts when you decide to take charge of your credit. And we’re here to help you every step of the way.

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Andrew Mosteller

Andrew Mosteller is a freelance writer and regular contributor to Lendio News. His upbringing in an entrepreneurial family nurtured a passion for small business at a young age. Andrew's father, an equity fund manager, taught him the ins and outs of investment financing. Now, Andrew spends his time writing copy for business owners, helping them expand and advertise their unique brands. He's also studying Strategic Communications at the University of Utah. When Andrew's fingers aren't glued to the keyboard, he spends his time reading, podcasting, composing music, and bombing down the ski slopes.