An SBA loan may be just what you need to level up your business and stay competitive. While having a strong credit score improves your chances of qualifying and getting better loan terms, some lenders allow flexibility. It’s possible to get approved even with bad credit in some cases.

However, understanding SBA loan requirements can greatly improve your chances of hearing “yes” from a lender and can cut down on application time. This article covers the different loan types, minimum requirements, and steps you can take to improve eligibility, even if your credit is less than ideal.

Can you get an SBA loan with bad credit?

It’s true that a better score often leads to better credit terms, but approval can also depend on these factors:

  • The specific loan program or type of loan you’re applying for
  • The lender’s internal lending rules and policies
  • Business characteristics such as your time in business, demonstrated success, and cash flow
  • Whether you can put up large amounts of collateral
  • Your specific credit issues (amounts owed, late payments, bankruptcies, etc.)

Because multiple factors play into how a lender assesses risk, there’s not a one-size-fits-all list of things to aim for. A business that’s lacking in creditworthiness may make up for it with a proven business plan and valuable collateral to secure the loan. Lenders look at the full picture, not just a credit score.

Best SBA loan programs for borrowers with bad credit

If your business got off to a rocky start or you’ve made some missteps in the past, you’re not shut out of financing. In fact, lenders report that a business’s overall financial position is the main thing they look at, not credit history.  

Because the individual lenders (banks, neobanks, credit unions) set additional requirements, on top of general SBA loan requirements, for their institutions, you may do best by shopping around. Here are the general loan options available to help you get started.

SBA Microloan Program

This SBA loan program focuses on underserved communities and startups, which often face unique challenges in starting and keeping a business going. The minimum credit score for these loans is typically around 620. (Although, because lenders each set their own internal guidelines, this can vary slightly.)

The maximum amount businesses can borrow through the program is $50,000, making this a better option for improvements, working capital, supplies, or equipment. The loan funds cannot be used for paying off debt or purchasing real estate, and average around $13,000 per loan. Plan to demonstrate creditworthiness with a strong business plan and a willingness to work with a technical assistance partner to improve your chances of approval.

SBA 7(a) Loan

This loan is admittedly a bit more difficult for those with bad credit to access. If you can show business strength, your chances improve. Things lenders may use to offset a low credit score include:

  • Strong collateral (property, equipment) that can be used to secure the value of the loan
  • Solid business cash flow
  • Demonstrated history of being successful in your business for multiple years

Established businesses may achieve better results than startups and those without a proven track record of profitability.

Key requirements to offset poor credit

The saying, “credit isn’t everything,” may be true when it comes to SBA loans, as long as you can show lenders your other business strengths. Any or all of the following can work in your favor and help a lender overcome objections to past late payments, bankruptcies, and defaults.

  • Time in business, especially if longer than two years
  • Consistent revenue, increasing month over month
  • A positive cash flow, with few if any annual losses
  • A well-prepared business plan that shows your goals, details for improving profits, and plans for expansion (if applicable)
  • A detailed explanation of how you’ll use the funds and pay the loan back over time
  • Collateral, such as property, or personal guarantees of how you will cover the value of the loan in the event of an unforeseen business decline

Lenders generally don’t want to see recent bankruptcies, tax liens, or defaults on federal loans. If you have these on your credit report from years ago, be prepared to show evidence of how you’ve overcome or changed course.

Tips to improve your SBA loan chances with bad credit

Your credit score is a constantly changing metric that can show a bank you’re responsible enough to take on new credit. Because it changes often, there are steps you can take to improve it for the near future, possibly in time for your next SBA loan application.

Actions to take include:

  • Pay off existing debts, or pay down as much as you can in the short-term
  • Check your business and personal credit reports, correcting any errors you find
  • Build your business credit, which can be used if your personal credit is weak
  • Partner with a business advisor or community lender, who may be more open to businesses in your situation
  • Start with a small loan (such as a microloan) and borrow only what you need
  • Consider short-term loans, which can be paid back quickly to build business credit

Alternative paths if SBA loans aren’t an option yet

If, despite your efforts, you’re still not in a position to qualify for an SBA loan, you may still have choices.

Secured business credit cards require you to put down a cash deposit or collateral to access a line of credit, but they do offer credit benefits and liquidity you can use to grow your business.

Revenue-based financing and invoice financing agreements are like mini loans from the companies you get supplies and inventory from; they allow you to pay for your products in increments, instead of all at once.

Even small, short-term loans can build your repayment history and put you on track for a better credit score. This newer score may put you in the driver’s seat for a better, bigger SBA loan down the road.  

Credit isn’t everything

Can you access a business loan with poor credit? In some cases, yes! But being informed is part of the hard work needed to be sure you get the best terms possible. Come prepared with all the documents and a proper strategy for how you’ll use the money.

While you may not get approved for the full amount of your loan request, 28% of small businesses still get partial funding. Finding a lender that frequently services businesses like yours can greatly improve your chances. Ready to get started? Let Lendio help you with this first step of the journey.