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How to Identify Small Business Loans for People with Bad Credit

It’s easy for owners who have good credit to get small business loans at favorable rates.

But according to a recent report, 56% of Americans have subprime credit scores, which have historically been defined as FICO scores below 640. It’s certainly not uncommon for small business owners to find themselves in that majority.

Unfortunately, it’s a lot harder for folks with bad credit scores to secure funding and loans for their companies. Generally speaking, traditional financial institutions are considerably less likely to sign off on loans for businesses whose owners have bad credit. That’s because credit scores give a good indication of how likely someone is to settle their debts. The lower your score, the more likely a bank will think you are to default on a loan.

While it may be trickier to get a small business loan if you have bad credit, it’s not impossible. Here’s how you can secure funds despite your credit score.

1. Create a bulletproof business plan.

First things first: If you’re looking to secure funding, you need to be sure that you can convince your audience—whoever happens to be in it—about the merits of your business. To do that, you need to have a strong business plan that outlines how your company will succeed.

Business plans should include your value proposition; which customers you will target; how you will target them; what your business model is; how much money you need to get started; and when you expect to be profitable, among other things.

2. Tap into your personal network.

With a robust business plan in place, you can turn to your friends, family, and business associates to see whether any of them would be interested in financing your idea.

Be honest about your credit history and make sure they thoroughly understand the risks—and envisioned rewards—before writing you a check.

3. Take your case to the crowdfunding community.

The American crowdfunding industry is surging. While venture capitalists collectively pour $30 billion into businesses each year, investors threw upwards of $34 billion into crowdfunded projects in 2015. Phrased another way, more money was pledged to projects on platforms like Kickstarter and Indiegogo than VCs funneled into traditional Silicon Valley startups.

If you’re up for the challenge, pitch your business idea to the crowdfunding community. If your project ultimately gets supported, you can give your early investors different rewards depending on their particular level of support.

4. Consider alternative financing sources.

It’s easier than ever before to explore small business financing options online. Thanks to the rise of platforms that match lenders with those seeking funding, small business owners with bad credit are able to secure loans in a matter of days.

Many of these lenders will finance businesses owned by folks with bad credit based on how well their companies are performing. These loans don’t require collateral, meaning your business won’t have to fork over its assets in the event you default.

5. Apply for grants.

They might be hard to secure, but private foundations, nonprofit organizations, and government agencies offer small business grants. They do exist. For example, there are specific business grants for U.S. veterans. There are also small business grants for women. If you’ve got the time, it couldn’t hurt to apply for relevant grants.

6. Take steps to rebuild your credit.

Though you will likely be able to secure small business loans via alternative lenders even if you have bad credit, you can’t run away from your credit score forever.

There’s no better time than the present to begin rebuilding your credit score. To do that:

  • Pay your bills on time. Your payment history accounts for 35% of your credit score.
  • Ask someone (a friend or family member) to let you get a credit card on their account, and pay that person on time each month. This’ll help build your credit history.
  • Keep your credit card balances low. Your credit card utilization rate is the second most important factor in the credit score equation.
  • Don’t close credit cards. You’ll hurt the length of your credit history, adversely impacting your score.
  • Stay on top of your credit scores with free tools like Credit Karma. Don’t be surprised.

After rebuilding your credit score, you should have an easier time securing a small business loan in the future. Good luck!

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