How to secure business financing with a poor credit history
Credit scores are an essential part of borrowing. Similar to the way personal credit impacts your ability to make large investments (such as buying a house or renting an apartment), a low business credit score can limit your funding options for your business.
According to the National Small Business Association (NSBA) in its Small Business Access to Capital Survey, 20 percent of small business loans are denied due to business credit.
If you have bad business credit (or no credit history at all), convincing traditional banks and lenders to finance you can be an uphill battle. Their goal is to reduce risks. And a poor credit history signals that you may not be as likely or able to pay back your loans.
Even if lenders do consider your application, the process may take longer, they may require additional paperwork and documentation, and you may have to provide other collateral to secure the funds.
Of the businesses surveyed by the NSBA, 43 percent said they couldn’t find sources for funding in the last four years. The consequences? Workforce cuts, benefit reductions, and failure to meet demand.
In other words, obtaining adequate financing is crucial for the future of your business. So what can you do if you have bad credit? Here are four financing options for businesses without a strong credit history.
4 Best Small Business Loans for Companies with Bad Credit
1. Short-term loans
Short-term loans offer businesses quick access to funds over a limited period (typically a few months up to a few years). The lender provides an up-front, one-time, lump-sum loan for a set repayment term. The borrower must repay the loan (usually in monthly installments) within this set time frame.
Most short-term loans require a credit score of 550 or higher (compared to traditional loans that require credit scores over 640), making short-term loans a good alternative for businesses with poor credit history.
One main difference between a short-term loan and other loans is that they tend to use a factor rate instead of charging an interest rate. A factor rate is a multiplier that determines the total cost of the loan. So if your factor rate is 1.4 on a $10,000 loan, your total repayment amount for the loan would be $14,000.
2. Invoice financing
Businesses with little (or poor) credit history can leverage their outstanding invoices as collateral for funding. This option is called invoice financing or accounts receivable (A/R) financing.
Businesses can use invoice financing for outstanding invoices worth a total of at least $1,000 that are due within 90 days. You can typically borrow a loan amount up to the sum total of your outstanding invoices.
Although invoice financing has a higher sticker price than other loan types — with 10 percent to 80 percent APR—you can get access to funds quickly, and because A/R financing is backed by your outstanding invoices, they don’t always require a credit check.
3. Invoice factoring
Invoice factoring is similar to A/R financing except the financing company actually buys your outstanding invoices at a discount. You are typically paid for those invoices in two installments—an advance rate and then the remaining invoice balance, minus fees or discounts.
This type of financing is good for businesses that have clients who don’t pay for goods and services right away and need to manage their cash flow. Invoice factoring gives businesses access to fast cash, an easy approval process, and better cash flow.
However, invoice factoring can be expensive and you give up some control over your customer relationships since the factoring company usually collects on the invoices directly.
Your customers’ credit history could also affect your approval for invoice factoring, so it’s best to use invoices from reliable clients who you know will pass any credit checks. If you’d rather rely on only your business’s credit history, A/R financing might not be the right fit for you.
4. Business line of credit
You’ll use a business line of credit like a personal credit card. Your bank or lender gives you access to a certain amount of funds that you can draw from any time you need. You don’t make payments or even incur interest until you start using the funds.
This is often called a revolving line of credit because you can draw on the funds over and over again. For example, if you borrow $40,000 on a credit limit of $100,000, you need to pay back only the $40K (plus interest) to have access to the full $100,000 again—without having to take out another loan.
Although you may have to pay higher interest rates if you have a bad credit history, most businesses can qualify for a line of credit even with a poor score. Plus, it’s a great way to build up your credit history so you have even better financing options in the future.
Building your credit score through a business line of credit could be the best route for your business’s future. You can focus on small, more reliable investments to help you repay without worry. Then, once you’ve raised your score, take larger steps to grow your business with better small business loan options and interest rates.
Lack of good credit history isn’t the end of the world for your small business. You can still access financing through a number of alternative lending solutions.
To improve your rates and chances for approval, work on building up your personal and business credit history and, in the meantime, take advantage of these low-credit loan options to keep your business moving forward.