What is a bad credit business loan?
Bad credit business loans are designed for companies with bad or limited personal or business credit. Eligibility requirements are more relaxed: Some lenders offer loans to small businesses with personal credit scores as low as 500. Minimum time in business and required annual revenue may also be lower. Keep in mind that bad credit business loans tend to have higher interest rates and fees, since the lender is taking more risk. They may also come with personal guarantee requirements. Bankrate’s list of lenders can help you get a quick look at the requirements and get an idea of which lender is best for you.
What is a bad credit score?
A bad credit score depends on the credit scoring model the lender uses. Most small business lenders look at your personal score rather than your business credit score, especially if you haven’t been in business for long.
For personal credit, a FICO score of 300 to 579 is considered bad credit. However, even if you have fair credit (FICO score of 580 to 669), you may still have to rely on a bad credit business loan.
Having a bad credit score can be caused by multiple factors, such as previous bankruptcies, missed loan or bill payments and multiple hard credit checks in a short period of time.
Lenders may also consider business credit scores, especially if you’re pursuing an SBA loan. Depending on the scoring model, business credit scores may range from 0 to 100, with scores of 0 to 49 indicating a high-risk borrower.
How does a bad credit business loan work?
Business loans for bad credit borrowers work similarly to any other loan. You submit an application and any documentation requested by the lender. Once approved, you can use the loan funds for business purchases. You then repay the bad credit business loan over a set time period with interest rates and fees.
Depending on the lender, underwriting for a bad credit business loan may take longer, and the lender is more likely to ask for supporting documentation that shows your ability to repay the loan. If you opt for a secured loan over an unsecured loan, you’ll need an asset of value as collateral, such as equipment or real estate. Unsecured loans don't need collateral but are aimed at companies with strong credit.
Requirements for a bad credit business loan:
- Revenue. The more your business makes, the easier it is to get a loan. Some lenders have minimum revenue requirements of $100,000, though you can find lower revenue requirements like $30,000 with specific lenders.
- Business plan. The business plan shows the lender how you expect to grow your business sustainably over time. It explains your expected revenue, your business model and how it stands out in the competition, your marketing strategy and key measurements you’ll use to gauge your success. Not all lenders require a business plan, but it can help you get approved by showing that you’ve done your homework on growing your business.
- Credit history. Though these loans are aimed at companies with bad credit, the lender will still look at your credit report. Some especially negative factors, like a recent bankruptcy, could block you from getting a loan.
- Time in business. New companies are risky propositions for lenders. Many lenders won’t offer loans until your company has been around for at least six to 24 months.
- Collateral: Business loans with bad credit often require collateral to be used as repayment because the collateral mitigates the lender's risk in the event of default.
- Personal guarantee. Many business loans require you to sign a personal guarantee, which secures the loan with your personal assets. Most lenders require it in addition to collateral or a down payment.
- Existing business debt. The lender will consider your existing debts and whether you have enough financial strength to cover repayments on a new loan.
You’ll also need to provide documentation for the lender when you apply for a bad business loan. These documents include:
- Profit and loss statements
- Business formation documents
- Recent bank statements
- Business license and operating agreement
- Employer identification number (EIN)
- Recent personal and business tax returns
- Balance sheets
- Proof of business insurance
- Payroll records
- Expected revenue
- Driver’s license
- Lease agreement
- List of accounts payable and accounts receivable
- Business loan documents
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