There are many reasons why business owners may have a less than optimal credit score, including bankruptcies, late or missed payments, or credit utilization ratio that is too high.
Prior to The Great Recession of 2008, it was difficult for business owners with bad credit to secure funding. The post-recession “credit crunch” caused bank lending to dry up, even business owners with good credit scores were having trouble getting loans. This led to the emergence of digital non-bank lenders who are willing to provide funding even to owners with poor credit. Thanks to the wide range of resources available in today’s business world, getting a business loan with bad credit can be challenging, but not impossible.
First off, it is important to establish what is considered “bad credit.” BadCredit.org ranks FICO credit scores into five sections:
- Exceptional – 800-850
- Very Good – 740-799
- Good – 670-739
- Fair – 580-669
- Poor – 300-579
In 2022, the average FICO® Score☉ in the U.S. reached 714, according to Experian credit rating service, which means the average score is in the “good” range. However, BadCredit.org found that close to 20% have credit scores between 580-669, which is in the range considered fair, and 11.1% of Americans have FICO scores below 550, which is poor.
Business owners with less than stellar credit histories – or no credit history at all – will likely find it difficult to secure a traditional commercial loan or an SBA loan from a bank. The primary concern for a lending institution is whether a borrower will be able to pay the loan back and having a low credit score signals that you have had challenges in paying back debts. However, while getting a business loan with bad credit history is challenging, it is not impossible, and there are a number of different options available today.
1. Business Credit Cards
Starting smaller is a good option for those with bad credit. Try applying for a business credit card and establish a track record of paying every month on time and in full to prove your creditworthiness. Experian says that most small business credit card companies look for a FICO® Score☉ of 670 or higher.
Can you get a business credit card with a credit score of less than 670? Yes, but the terms may not be attractive. For instance, the credit limit offered might be low (just a few thousand dollars or even a few hundred), and the interest rates they charge will be higher than the rates offered to people who have good credit scores. Credit card interest rates sometimes go up to 29.9%. Credit information website WalletHub suggests the Discover it® Secured Credit Card and the Capital One Quicksilver Secured Cash Rewards Credit Card as two of the best business credit cards for applicants who have low credit scores.
When applying for a small business credit card, you will likely be asked to provide information including:
- Business name, address and phone number
- Length of time in business
- Annual business revenue
- Federal Tax ID: Employer Identification Number (EIN) or your Social Security number.
- Personal financial information.
2. Business Line of Credit
Another option for those with lower credit scores is a business line of credit. While a business loan gives out certain fixed amounts of capital, a business line is a pool of money that is available for use when the business needs it. The businessowner pays interest only on the amount borrowed from the line of credit.
A business line of credit can be used for general business expenses. Some requirements for a line of credit include a FICO score of 580 or higher, a minimum of 12 months in business, and collateral. Depending on the lender, the business line of credit may require weekly payments and interest rates can be high. BankRate.com reports that a business line of credit can have an APRs as high as 60%. Borrowers with better credit scores most likely will receive lower interest rates.
3. Invoice Factoring
For companies that have unpaid invoices, factoring is a financing method in which you sell your accounts receivable at a discount in exchange for a lump sum cash amount. The upside is that factoring enables business owners to get money quickly, but they pay a premium for that speed in the form of higher interest rates. Additionally, factoring companies often tack on fees for wire transfers, returned checks, and late collections.
4. Merchant Cash Advance
If your credit scores is in the 525-550 range, a merchant cash advance (MCA) is an option. A n MCA lender provides a certain amount of capital to use for expenses. However, instead of paying off the debt directly, the borrower pays it through a percentage of future credit card or debit card sales over a set period of time.
Typically, business owners applying for merchant cash advances must have $150,000 to $200,000 in annual revenue and must be in operation for 18-24 months. The advantages of MCA financing are that it is a way to get credit quickly, it provides an opportunity to secure capital even if you have bad credit, and the payments correlate with your company’s financial health. This means that when sales are slower you make smaller payments. Keep in mind that while non-bank “alternative” lenders are willing to lend money to people who would not normally qualify for bank loans, the interest rates can be 30-40% or more.
Even during the current business credit crunch, business owners with bad credit indeed have options to secure funding, each with its pros and cons. The advantages are that these options provide capital to people whose credit scores do not qualify them for traditional commercial loans or SBA loans. Borrowers are able to secure money quickly and have some flexibility on payment. The disadvantages are that the funding comes at a high cost of capital.
It is important to examine all the options carefully and use the internet to comparison shop. Business owners should make sure to do their research on what kind of loan options will be best for them and their businesses.
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