How To Get Small Business Financing With Bad Credit

When you’re running a small business, having access to reliable funding is the difference between sustainable growth and daily struggles. But what happens when your credit score isn’t where you want it to be? While bad credit may seem like a roadblock, it doesn’t have to be the end of your small business dreams. From alternative lending options to tips for improving your financial profile, we’ll show you how to overcome credit challenges and get your business the support it needs.

Understanding Credit Scores and Their Impact on Business Funding

Your credit score—also known as a FICO score—is a three-digit number that gives lenders a snapshot of your creditworthiness based on your credit history. Ranging from 300 to 850, it’s calculated using five key factors: payment history, amounts owed, length of credit history, new credit, and types of credit used.

Credit Score Significance

When it comes to FICO scores, lenders generally break them down into categories: scores of 670 to 739 are considered “good,” 740 and above are “very good” to “excellent,” while anything below 670 is typically labeled as “fair” or “bad” credit.

For small businesses, a FICO score in the “bad” range can limit your financing options because lenders see these scores as a sign of higher risk. This means lower credit scores can lead to higher interest rates, stricter loan terms, or even rejections. Conversely, a score in the “good” or “excellent” range improves your chances of not only getting approved for funding but also securing more favorable terms that can help your business grow.

Annual Approval Rates Based on Credit Risk

According to the Federal Reserve Bank, 43% of high-credit-risk and 31% of medium-credit-risk businesses were denied loans, lines of credit, or merchant cash advances from big banks in 2023. However, a study by FinImpact showed that alternative lenders approved small business loans more often than big banks. These numbers reflect the challenges small business owners with low credit scores may face in securing funding, but they also prove that lower scores don’t have to signal the end of your small business goals, especially if you choose to go the alternative financing route.

Improving Your Chances of Funding Approval

While you work to increase your credit score, there are some steps you can take to improve your chances of securing the small business funding you need. We’ve outlined them for you below.

Update Your Business Plan

Lenders want to see a clear roadmap for your business’s future, including how you plan to generate revenue, manage expenses, and achieve growth. A well-structured business plan demonstrates that you’ve thoroughly thought through your business strategy and are prepared for any challenges that may arise. This can significantly increase lender confidence, as it shows you’re organized, focused, and have a realistic plan for success. For businesses with bad credit, having a detailed plan can help offset concerns about your financial history and make lenders more willing to take a chance on you.

Demonstrate Strong Finances

Showcasing strong financial management is key to building lender confidence, especially if your credit score isn’t where you want it to be. One of the best ways to do this is by presenting solid bank statements and up-to-date accounting records that clearly demonstrate your business’s cash flow and financial health. Lenders want to see that you’re capable of managing your finances responsibly, so showing consistent revenue, timely payments on existing debts, and a steady balance sheet can go a long way in proving your financial stability.

Secure a Co-signer

A co-signer—typically someone with better credit or a stronger financial profile—agrees to take responsibility for the loan if you’re unable to make payments. This reduces the risk for lenders, making them more likely to approve your loan or line of credit. A co-signer may also help you secure better terms, such as lower interest rates or longer repayment periods.

Show Strong Annual Revenue

Lenders may overlook a low credit score if your business shows strong and consistent revenue because it proves that your operation is financially viable and capable of generating the cash flow needed to repay a loan. High revenue indicates that, despite past credit issues, your business is currently performing well and has the financial resources to meet its obligations.

Compare Different Lenders

When navigating the complexities of securing small business financing with bad credit, it’s crucial to explore multiple lenders. Different types of lenders, like traditional banks, credit unions, and online lenders, all have their own criteria for approval, and some may be more flexible than others when it comes to credit history. Researching lenders will help you find the best option for your business’s needs. It’s about finding the right fit, and you might be surprised at the competitive options available beyond the traditional loan routes.

Types of Bad Credit Business Financing

There are four main types of traditional financing small businesses with bad credit may have better luck qualifying for short-term funding, business lines of credit, SBA microloans, and equipment financing.

Short-Term Funding

Short-term funding refers to loans or cash advances designed to be repaid quickly, usually within three to 18 months. These loans help small businesses cover immediate expenses like inventory purchases, payroll, or unexpected costs. Lenders who offer short-term financing typically place less emphasis on credit scores and more on your business’s cash flow and overall financial health. Even with a lower FICO score, you may still qualify for the capital you need—albeit with higher interest rates or shorter repayment periods.

Business Lines of Credit

A business line of credit provides flexible access to funds that you can draw on as needed, much like a credit card, up to a predetermined limit. You only have to pay interest on the amount you use, making it a great solution for managing cash flow or unexpected expenses. Some business line of credit lenders focus more on your current business performance, revenue, and collateral rather than just your credit score, so you may be approved for funding regardless of a less-than-ideal score. As you responsibly use and repay the funds, you can improve your credit profile, making future financing easier.

SBA Microloans

SBA microloans are small loans, typically up to $50,000, offered through the U.S. Small Business Administration’s lending partners to help businesses cover startup or expansion costs. These loans are particularly well-suited for entrepreneurs and small business owners with bad credit because the SBA guarantees a portion of the loan, reducing the risk for lenders and making it easier to qualify. While credit is still considered, the focus is more on the borrower’s business plan, experience, and collateral.

Equipment Financing

Equipment financing is a loan designed to help businesses purchase machinery, computers, vehicles, or other essential equipment. What makes this option particularly appealing for those with bad credit is that the equipment itself serves as collateral for the loan. This reduces the lender’s risk, making it easier for businesses with lower credit scores to qualify. The loan amount is tied to the value of the purchased equipment, and if repayments aren’t made, the lender can seize the equipment. This type of financing allows businesses to acquire the tools they need without large upfront costs.

Alternative Funding Options

If the traditional small business financing route isn’t quite right for you, looking at alternative funding options that may rely less heavily on your credit score to determine eligibility could be the next best step. The most common alternative financing options include:

Crowdfunding

Crowdfunding is an alternative way for small businesses to raise capital by appealing directly to individuals through online platforms like Kickstarter, GoFundMe, or Indiegogo. It doesn’t require a credit check because you’re relying on external backers who believe in your business, not traditional lenders. Crowdfunding gives you the power to raise money without the usual barriers of credit while building a loyal community of supporters.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending connects borrowers directly with individual investors through online platforms, effectively bypassing traditional banks. This process can be a great financing option for those with bad credit because P2P lenders often consider our business’s cash flow, revenue, and overall financial picture. While interest rates may be higher for those with lower credit scores, P2P lending still provides an opportunity to access much-needed capital without the strict requirements of traditional bank loans.

Business Grants

Business grants are money awarded to businesses for specific purposes that don’t need to be repaid. They are typically offered by government agencies, private foundations, and corporations to support businesses that meet certain criteria, such as those in specific industries, locations, or demographics. Grants don’t require a credit check of any kind. To find grants, research government websites like Grants.gov or SBA.gov and explore local economic development programs or private organizations that offer grants for small businesses.

Business Credit Cards

Business credit cards allow businesses to make purchases up to a set credit limit and pay off the balance over time. They can be a powerful tool for managing expenses, improving cash flow, and even earning rewards on everyday business purchases. For businesses with low credit scores, securing a business credit card can still be possible, especially if you start with a secured card, where you put down a deposit as collateral. Using a business credit card responsibly is also a key step in building your business credit.

Revenue-Based Financing

Mantis Funding offers small businesses revenue-based financing (RBF), a flexible funding option where a business receives capital in exchange for a percentage of its future revenues rather than fixed monthly payments. One major advantage of RBF is that many providers focus less on your credit score and more on your business’s revenue history and growth potential. This makes it an ideal choice for business owners with bad credit who still have strong revenue streams.

Navigating Lender Criteria and Requirements

When it comes to securing small business funding, every lender operates with its own set of criteria and risk thresholds. Some may focus heavily on your credit score, while others might prioritize cash flow, revenue, or collateral. That’s why it’s crucial to shop around and explore different lenders before settling on one. What might seem like a roadblock with one lender could be an opportunity with another, especially for businesses with bad credit.

By comparing terms, rates, and approval conditions across various lenders—whether traditional banks, online platforms, or credit unions—you can find the best fit for your business’s unique financial situation. Shopping around increases your chances of approval and helps you secure the most favorable terms so you can get the funding you need without taking on unnecessary financial risk.

Importance of Bank Statements

Bank statements give lenders a clear picture of your cash flow, showing how much revenue comes in and how consistently it’s managed. Lenders rely on this information to determine whether your business generates enough income to cover loan repayments, especially if you have a lower credit score. Maintaining accurate, up-to-date bank statements is crucial because any discrepancies or gaps can raise red flags and delay or even derail your funding approval.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is a financial metric that lenders use to evaluate a business’s ability to cover its debt obligations. It’s calculated by dividing your net operating income by your total debt payments. Lenders typically prefer a DSCR between 1.25 and 2, as it indicates that your business has enough income to not only pay its debts but also have a cushion for unexpected expenses or downturns. Maintaining a strong DSCR signals to lenders that your business is financially stable and capable of handling additional debt, increasing your chances of securing favorable funding terms—even with bad credit.

Interest Rates and Terms

Before choosing a small business financing option, it’s important to understand that bad credit may result in high interest rates and less-than-favorable funding terms. Pay close attention to these aspects when weighing your options.

High Interest Rates

Lenders view businesses with lower credit scores as higher risk, which often results in much steeper interest rates—sometimes reaching as high as 99%. These rates can significantly increase the total cost of borrowing, making it harder to keep up with payments and potentially putting your business in a worse financial position. Before accepting any funding, it’s crucial to understand the full impact of the interest rate on your repayment schedule. Shopping around and exploring alternative options can help you find more favorable rates and avoid the pitfalls of high-cost borrowing.

Funding Terms

For businesses with bad credit, financing often comes with shorter terms, typically 24 months or less, as a way for lenders to mitigate their risk. These short-term loans require more frequent payments—sometimes even daily or weekly—compared to traditional long-term financing. While the faster repayment schedule can help you access capital quickly, it also means your cash flow will need to be carefully managed to keep up with the increased financial demands.  Understanding these terms before committing is crucial to ensure that your business can handle the repayment structure without facing additional financial strain.

Conclusion

Securing small business financing with bad credit may seem like a challenge, but it’s far from impossible. By understanding the various options available, you can find a path forward that suits your business needs. With the right approach and careful planning, you can overcome credit hurdles and access the funding needed to keep your business thriving.

Ready to explore personalized small business financing options? Contact Mantis Funding today!