Starting a business is an exciting journey, but it often comes with financial hurdles. If you’re a new entrepreneur, one of the biggest challenges can be securing business loans for startups, especially if you have bad credit. But here’s the good news: Having bad credit doesn’t mean you have to give up on your dream. You just need to know where to look, how to prepare, and which strategies work best for you.
In this detailed guide, we’ll explore various financing options for startups with limited or poor credit, highlight the best business loans for 2024, and give you actionable tips to improve your chances of quick approval business loans. Let’s dive in!
Why Is Credit So Important for Business Loans?
Before we get into how to get business loans with bad credit, let’s take a moment to understand why credit scores matter. Banks and other lenders use your credit score to gauge how likely you are to repay loans. A high credit score suggests you’re financially responsible, while a low score might raise red flags.
But here’s the reality:- Many new entrepreneurs and small business owners don’t have strong credit, either due to personal financial struggles or lack of business credit history. Traditional lenders like banks usually prefer working with borrowers who have a credit score of 650 or higher. If your score is lower, they may see you as a risky investment.
Don’t worry though—there are still plenty of options to explore!
Types of Business Loans for Startups with Bad Credit
When you have bad credit, you’ll need to get creative and explore alternative financing options. Here are some of the most common types of small business loans for bad credit:
Online Lenders
Online lenders tend to be more flexible when it comes to credit requirements compared to traditional banks. They assess other factors like your cash flow, business plan, and revenue projections.
Key benefits of online lenders:- Faster application process. Less stringent credit requirements. Higher approval rates for businesses with bad credit. Some reputable online lenders for startups with bad credit include OnDeck, BlueVine, and Kabbage. These lenders are often more willing to work with you if you have strong business potential, even if your credit score is less than stellar.
Microloans
Microloans are small loans offered by non-profit organizations or government programs. They are perfect for startups needing less than $50,000 to get off the ground.
Microloan providers include:- SBA Microloan Program: Provides loans up to $50,000 with lower credit score requirements than traditional SBA loans. Accion: A non-profit organization that helps entrepreneurs, especially minorities and women, with low-interest loans.
Although microloans have lower amounts, they are a great way to get the capital you need while building your business credit.
Invoice Financing
If your business generates invoices for services or products, you can leverage invoice financing to access quick funds. This is where a lender advances you money against your outstanding invoices.
Benefits:- Your credit score isn’t the main focus; your customers’ ability to pay their invoices is. You can get funds fast without taking on additional debt.
Companies like Fundbox and BlueVine specialize in invoice financing, making it a quick and easy option for businesses needing working capital.
Merchant Cash Advances
A merchant cash advance (MCA) is a type of loan where you receive a lump sum of cash in exchange for a percentage of your future sales. This is a high-risk, high-reward option, as it can get expensive due to high interest rates.
When to consider MCA:- You need cash quickly (typically within a day or two). You have consistent credit card sales and don’t mind parting with a percentage of those sales.
While MCAs aren’t cheap, they offer a solution for businesses that need immediate access to cash and are struggling to get approved for traditional loans.
Equipment Financing
If your startup needs equipment to operate (e.g., computers, machinery, vehicles), equipment financing is an option that doesn’t rely heavily on your credit score. The equipment itself serves as collateral for the loan.
Advantages of equipment financing:- Lower credit score requirements. Your equipment is the collateral, which reduces the lender’s risk. You own the equipment once the loan is paid off
Companies like Crest Capital and Balboa Capital are popular choices for equipment financing.
Business Credit Cards
Business credit cards are an accessible form of financing for startups with bad credit. Many business credit cards come with low credit score requirements and can be used to cover everyday expenses.
Some business credit cards for bad credit include:- Capital One Spark Classic for Business. Wells Fargo Business Secured Credit Card
With responsible use, a business credit card can also help you build or rebuild your credit score.
How to Improve Your Chances of Getting a Business Loan with Bad Credit
Getting small business loans for bad credit may be challenging, but it’s not impossible. Here are some steps you can take to increase your chances of approval.
Prepare a Strong Business Plan
A well-thought-out business plan can help mitigate concerns about your credit score. It shows lenders that you have a clear path to success and a plan to manage finances effectively.
Your business plan should include:- Revenue projections: Lenders want to see that you have a viable plan for generating revenue. Cash flow analysis: This shows how your business will handle loan payments. Market research: Demonstrate that there’s demand for your product or service.
Offer Collateral
Collateral reduces the lender’s risk and increases your chances of getting approved for a loan. It can be personal or business assets, like real estate, equipment, or inventory.
Types of collateral:- Real estate (personal or business property). Vehicles or equipment. Future invoices (if using invoice financing)
Seek a Co-Signer
A co-signer with good credit can improve your odds of approval. This person will act as a guarantor and agree to repay the loan if you default.
Who can be a co-signer:- A trusted family member or friend. A business partner
Keep in mind, your co-signer will be taking on a significant financial responsibility, so ensure you can meet your loan obligations.
Apply for a Smaller Loan
Lenders may be more willing to approve you for a smaller loan if you have bad credit. While it may not be as much as you hoped for, it’s a good start and can help build your credit for future borrowing.
Consider these steps:- Start small and repay the loan on time. Use microloans or short-term financing to build your credit profile.
Build Business Credit
Separate your personal and business finances to establish a strong business credit score. Start by applying for a business credit card or vendor lines of credit, and make timely payments to improve your credit score.
How to build business credit:- Open a business bank account. Get a business credit card and pay the balance on time. Work with vendors who report to business credit bureaus.
The Best Business Loans for Startups in 2024
As 2024 approaches, finding the best business loans for your startup is critical. Even with bad credit, there are financing options tailored for small business owners. Here’s a breakdown of some of the top choices:
OnDeck
Loan type: Term loans, lines of credit. Credit score requirement: 600+. Loan amount: Up to $250,000. Best for: Startups with steady revenue seeking a quick approval process
BlueVine
Loan type: Lines of credit, invoice financing. Credit score requirement: 600+. Loan amount: Up to $250,000. Best for: Businesses needing flexible, revolving credit with fast funding
Fundbox
- Loan type: Invoice financing, lines of credit
- Credit score requirement: 500+
- Loan amount: Up to $150,000
- Best for: Startups with outstanding invoices and lower credit scores
Kabbage (American Express)
- Loan type: Lines of credit
- Credit score requirement: 640+
- Loan amount: Up to $250,000
- Best for: Businesses with short-term financing needs
Accion
- Loan type: Microloans
- Credit score requirement: Flexible (depends on location)
- Loan amount: Up to $50,000
- Best for: Minority and women-owned businesses