Best Small Business Loans for Bad Credit
Starting or running a small business often requires capital—whether to cover operational costs, invest in inventory, expand, or manage cash flow gaps. However, securing financing can be challenging if you have bad credit. Traditional lenders like banks usually require good to excellent credit scores, making it difficult for entrepreneurs with poor credit histories to access funding.
Fortunately, there are several loan options and lenders that specialize in offering small business loans for bad credit. These lenders often consider more than just your credit score, looking at your business’s overall health, cash flow, and other factors.
This guide explores the best small business loan options for bad credit, key considerations when applying, and tips for improving your chances of approval.
Understanding Bad Credit and Its Impact on Business Loans
Before diving into loan options, it’s important to understand what “bad credit” means in the business context.
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Personal Credit Score: Many small business loans require a personal credit check, especially for startups or sole proprietors. Scores below 600 are generally considered poor.
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Business Credit Score: Established businesses may have a business credit score, which ranges similarly but isn’t as widely used.
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Impact: Bad credit signals risk to lenders. It can lead to higher interest rates, lower loan amounts, and stricter repayment terms.
Despite these challenges, bad credit doesn’t mean you’re out of options.
Best Small Business Loans for Bad Credit
1. Online Business Loans
Online lenders are some of the most accessible options for small businesses with bad credit. Unlike traditional banks, they often have more flexible underwriting criteria.
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Pros: Fast application process, flexible requirements, quick funding (sometimes within 24-48 hours).
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Cons: Higher interest rates and fees compared to banks.
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Examples:
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BlueVine: Offers lines of credit and invoice factoring with minimum credit scores around 600, sometimes flexible.
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OnDeck: Provides term loans and lines of credit with minimum credit scores near 600; they look at business performance too.
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Kabbage: Now part of American Express, offers lines of credit with flexible credit requirements.
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2. Merchant Cash Advances (MCA)
MCAs provide upfront cash in exchange for a percentage of future credit card sales or daily bank deposits.
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Pros: No strict credit score requirements, quick funding.
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Cons: Very high costs and fees; repayment depends on sales volume.
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Best for: Businesses with steady daily credit card sales.
3. Microloans
Microloans are smaller loan amounts typically offered by nonprofit organizations or community lenders.
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Pros: Designed for entrepreneurs with limited credit history or bad credit, lower interest rates than MCAs.
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Cons: Loan amounts are smaller (usually under $50,000), longer approval times.
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Examples:
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SBA Microloan Program: Loans up to $50,000, typically offered through nonprofit intermediaries. Credit score is a factor but flexible.
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Accion Opportunity Fund: Focuses on small business owners with poor credit or limited credit history.
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4. Equipment Financing
If your funding needs are specific to purchasing equipment, equipment financing can be an option.
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Pros: The equipment itself serves as collateral, making it easier to qualify despite bad credit.
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Cons: Limited to equipment purchase; might have higher rates for bad credit.
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Examples:
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Equipment leasing companies or lenders that specialize in equipment loans often work with businesses with less-than-perfect credit.
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5. Invoice Financing
If your business invoices clients but waits 30-90 days to get paid, invoice financing lets you borrow against those invoices.
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Pros: No need for perfect credit; approval based on invoice quality.
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Cons: Fees and factoring discounts reduce total payout.
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Examples:
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BlueVine and Fundbox offer invoice factoring and financing solutions.
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6. Personal Loans for Business Use
While mixing personal and business finances isn’t always ideal, some entrepreneurs use personal loans as a funding source.
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Pros: Easier to qualify for small amounts, fewer requirements.
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Cons: Personal credit impacts terms; risk to personal credit if business fails.
How to Improve Your Chances of Getting a Loan with Bad Credit
Getting approved for small business loans with bad credit requires strategy. Here are some tips:
1. Prepare a Strong Business Plan
Show lenders your business model, revenue projections, and how you plan to repay the loan. A solid plan builds confidence.
2. Show Cash Flow and Revenue
Lenders want to see your ability to repay. Provide recent bank statements, tax returns, and profit/loss statements.
3. Provide Collateral
If possible, offer collateral (property, equipment, inventory) to secure the loan and reduce lender risk.
4. Consider a Co-Signer
A co-signer with good credit can help you qualify and get better terms.
5. Build Business Credit
Separate your personal and business finances. Use business credit cards, pay suppliers early, and register your business with credit bureaus.
6. Shop Around
Different lenders have different criteria. Applying to multiple lenders improves your chances but avoid too many credit inquiries in a short time.
Pros and Cons of Bad Credit Business Loans
| Pros | Cons |
|---|---|
| Easier approval than traditional bank loans | Higher interest rates and fees |
| Fast access to funds | Smaller loan amounts in some cases |
| Variety of loan types available | Risk of debt cycle if not managed properly |
| Some lenders look beyond credit scores | May require collateral or co-signer |
Final Thoughts
Bad credit can be a hurdle, but it’s not the end of the road for small business financing. Many lenders understand that entrepreneurs can face credit challenges for various reasons and offer flexible loan options accordingly.
Your best bet is to identify what type of funding fits your business needs, prepare your financial documents carefully, and approach lenders that specialize in bad credit loans. Additionally, consider improving your credit and business financials over time to access better terms in the future.
Remember, borrowing responsibly and making timely payments can help rebuild your credit profile and strengthen your business’s financial foundation.