The process of finding financing for a small business is difficult enough. Finding a small business loan when your company has bad credit can be a daunting task, if not impossible to accomplish for many companies. Even more, the process of finding out how to get a small business loan with bad credit isn’t exactly clear. Fact is, traditional lenders (large banks, small banks, community banks, private institutional lenders) aren’t likely to lend to a small business owner unless they have good personal credit and also business credit. And that’s not to mention traditional lending companies require exceptional cash flow and great collateral before they are willing to offer lending assistance. On top of that the traditional commercial banks will require a down payment (or equity injection) of anywhere between 10-40% depending on risk (the higher the credit risk, the larger the down payment). For many business owners these criteria are difficult to meet even under the best of times. During a downswing in the business cycle, these criteria may become impossible. Are there funding options available for small business owners who don’t qualify for a conventional commercial loan because of bad credit? The answer: yes.
While bad credit may have stopped you from getting a business loan the number of bad credit business lenders aren’t enormous, there are plenty of funding options to companies with poor credit.
Credit Score Requirements
| Bad Credit Loan Type | Credit Score Needed |
|---|---|
| Alternative | 600 |
| Cash Advance | 500 |
| Asset Based Loans | 550 |
| Bridge Loans | na |
| Invoice Financing | na |
| Equipment Finance | 550 |
Comparing Bad Credit Lenders
| Bad Credit Loan Type | Rates | Terms | Funding | |
|---|---|---|---|---|
| Alternative | 7-25% | 1-5 years | 3-10 days | |
| Cash Advance | 1.16-1.55 | 4-24 months | 1-3 days | |
| Asset Based Loans | 8-25% | 1 – 3 years | 7-30 days | |
| Bridge Loans | 7-25% | 1-2 years | 1-7 days | |
| Invoice Financing | 1-3% | 30-90 days | 1 days | |
| Equipment Finance | 8-15% | 1-5 years | 7-10 days |
Alternative Lending for Bad Credit
Alternative online lenders offer both term loans and lines of credit to companies with poor credit. Mid Prime alternative small business loans provide financing for businesses that don’t quite have the credit to get traditional bank-rate lending, but have credit scores that deserve lower rates and better terms than what merchant cash advance and other high-interest lenders offer. Whereas most banks (and SBA lenders) require the small business owners have credit scores north of 650 to get a business loan, a mid prime lender usually has a minimum requirement of 600.
On top of that, most traditional commercial lenders require an equity injection (down payment) between 10-40% of the total loan amount to get a traditional bank loan, a mid prime alternative lender rarely requires an equity injection to get funding for their business.
- Rates: 7-25%
- Terms: 1-5 years
- Origination fees: 1-5%
- Funding time: 7-10 days
Cash Advances With Bad Credit
Merchant Cash Advance financing (also referred to as an ACH loan or business cash advance) is not a small business loan, but is instead a type of financing in which a business sells a portion of their future credit card sales and/or future commercial bank deposits at a discount to a factoring company in return for immediate cash funding. Repayment of an ACH loan or MCA loan is usually made each business day automatically through the daily withdrawal from a company’s bank and/or merchant accounts of either a fixed amount, or through a percentage of the company’s transactions. Since merchant cash funding with bad credit are not loans, they commercial lenders that provide this type of business financing use an interest rate called a “factor rate.”
A factor rate is the total interest that will be paid back, irregardless of how long it is paid back. If you have a factor rate of 1.20, you will be paying back the total amount forwarded to you by the lender, but also pay an additional 20% of the funded amount, no matter how long it takes to payback. A factor rate is the total interest that will be paid back, irregardless of how long it is paid back. If you have a factor rate of 1.20, you will be paying back the total amount forwarded to you by the lender, but also pay an additional 20% of the funded amount, no matter how long it takes to payback.
- Factor rate: 1.16-1.55
- Terms: 4-24 months
- Fees: 0-3%
- Funding time: 1-3 days
Asset Based Loans With Bad Credit
If a company is looking for a business loan with poor credit, another option that may help is through the use of asset based financing. Asset based lenders (or ABL) use a company’s commercial assets as collateral to back-up the loan. An asset based lending company offering bad credit loans will offer either a term loan or line-of-credit, and the size of the credit facility will be offered at a percentage of the collateral’s worth (commercial real estate, accounts receivable, inventory, personal assets and other hard assets).
- Rates: 8-25%
- Terms: 1-3 years
- Can have expensive monitoring fees
- Funding time: 1-3 weeks
Bridge Loans with Bad Credit
Bridge loans are often used by companies with bad credit to pay for whatever financial needs a company may face on a temporary basis. Bridge loans have a variety of uses including working capital, purchases, advertising, make payroll, pay taxes. But for companies with bad credit, the availability of bridge loans can be difficult without sufficient collateral of good cash-flow.
- Rates: 7-25%
- Terms: 1-2 years
- Fees may be high
- Funding time: 1-7 days
Invoice Financing
Invoice financing (or commercial factoring) is a way for company’s with poor credit who need a business loan to obtain financing without the need for substantial credit. A factoring company will either purchase an invoice or receivable from a small business at a discount, and will then collect the invoice’s value from a third party. Since the small business who sells the invoice doesn’t need to make any payments, there isn’t a need for substantial personal or business credit.
- Amount forwarded: up to 94%
- Fees: 1-3%
- Funding time: 1 day
