Can You Get a Small Business Loan With Bad Credit? Here's What You Need to Know

Estimated Reading Time

7 minutes

Key Takeaways

• Bad credit is generally defined as a FICO score below 670.
• SBA Microloans are a good alternative for individuals with bad credit.
• Loans may be available through alternative or online lenders, but with higher costs.
• Offering to secure the loan with collateral and showing a strong business plan may increase your chances of getting a loan.

Table of Contents

• Can You Qualify for a Small Business Loan With Bad Credit?
• Understanding Bad Credit in Business Loans
• SBA Loans: An Overview for Bad Credit
• Alternative Avenues for Business Loans with Bad Credit
• Navigating the Loan Landscape
• Increasing Your Loan Prospects
• Conclusion

Can You Qualify for a Small Business Loan With Bad Credit?

In the whirlwind world of entrepreneurship, funding can make or break a small business whether it’s just getting off the ground or looking to expand. But for numerous would-be entrepreneurs, their credit scores are a steep barrier to entry. Thousands of entrepreneurs are asking the pressing question of the moment: Can you get a small-business loan with bad credit?

Understanding Bad Credit in Business Loans

First off, let’s determine what does “bad credit” really mean to a lender. In general, a FICO score in the low 670s is considered to be subpar. That characterization is made in the personal as well as the business credit sense. Most potential lenders are worried about this key number. But certain lenders, particularly those providing loans for bad credit, may approve applications with scores as low as 500.

SBA Loans: An Overview for Bad Credit

The SBA (U.S. Small Business Administration) is one of the few organizations that doesn’t leave businesses and individuals out based solely on credit score. They offer a range of options, but the SBA Microloans are great for borrowers who have bad credit. These loans can have a cap of $50,000 but the average is about $13,000. These loans are designed specifically for young companies and entrepreneurs in underprivileged categories and tend to have more relaxed eligibility requirements than other SBA products. Oddly enough, the SBA doesn’t have a minimum credit score requirement for these microloans. Candidates with poor credit scores may also be considered, but may be required to offer some form of collateral as well as a personal guarantee. However, it’s important to note that funds are usually administered through SBA-approved local lenders, so the requirements and terms could differ. For other larger SBA loans, the picture changes a little bit. Most lenders require a minimum of 620 to 650 credit score. They are likely to struggle to get sizable loans, unless they can provide strong offsets to their poor score, for example due to an abundance of valuable collateral or a clear, actionable business plan.

Alternative Avenues for Business Loans with Bad Credit

With the credit lines of credit and bank loans drying up, a lot of would-be borrowers are turning to Alternative and Online Lenders. These outfits, many of which are online lenders and non-bank finance companies, are now going to more and more lengths to attract when it comes to offering credit to people now with low, or “bad,” credit scores, perhaps as low as 500. However, there's a catch. These loans, which are usually laden with higher interest rates and various fees, are indicative of the greater risks that the lenders see. Also, terms and maximum amounts of loans may be strict, but almost any lender might still be able to require a solid business plan, actual evidence of income or personal and business guarantees.

Navigating the Loan Landscape

For the people who are committed to finding a loan, even with very bad credit, it’s important to be aware of what is waiting, on the far side of the “loan divide.” Primarily chances of acceptance and good loan terms can rise if there is collateral provided, a personal guarantee committed, and business cash flow demonstrated. But expect to receive increased interest rates, shorter repayment schedules, and more stringent terms compared with individuals with better credit scores. It’s important to demystify the no-credit-check business loan myth. Those sorts of loans are nearly impossible to get -- especially as they pertain to business.

Increasing Your Loan Prospects

As difficult as the process sounds, it is not without solutions. So you want an indestructible business plan that highlights potential marketability and managerial experience. It can also reduce lender risk perception, particularly if combined with a security arrangement or personal guarantee. In addition, investigating support from local non-profit organizations or community-based business lenders could open more doors. They tend to have less restrictive requirements, in keeping with their mission-values. Let’s summarize some of the key programs and resources for clarity:

Conclusion

While it won’t necessarily be easy, and you might not have the same range of options as someone with a more pristine credit score, it is totally possible to get a small business loan with bad credit. With conscientious research into SBA microloans with approved local lenders, and the examination of alternative/online lenders avoiding traditional credit strictures, albeit higher price of money, the future looks optimistic and full of potential. With collateral and a solid business plan and other aspects of your application strengthened, it’s easier to collect favorable replies from the loan space. So, for any aspiring entrepreneur with big plans and poor credit, realize that, although the road may require some extra work, that hope is also duly warranted. With a little information and determination, you can truly get that push that you so desperately need for growth.