Best Business Loans for Bad Credit of 2020

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As a small-business owner, you need access to capital to fund your business. One way to access capital is through a small-business loan. Small-business loans are typically used to fund startups or to grow businesses, to help buy inventory or furniture, to pay for marketing, or to strengthen the financial foundation of your business. However, accessing credit can be difficult for small businesses, especially those whose owners have bad credit.

According to the 2017 Small Business Credit Survey, the most recent one from the Federal Reserve, 40% of small businesses applied for some form of financing in 2017 – a modest decline from 45% in 2016. Of those that applied for financing, 82% received at least some financing, and 58% of applicants received the full amount sought.

A lack of affordable capital can negatively affect a business. Fifteen percent of businesses less than 2 years old and 7% of businesses 16 years or older reported that insufficient financing caused a decline in profits, according to a 2017 U.S. Small Business Administration Office of Advocacy report.

For business owners with bad credit, getting a traditional bank loan can be very difficult. However, alternative lenders offer multiple funding options for those with bad credit. Some of these lenders have no credit score requirements and consider additional factors, including business revenue or length of time in business.

In this guide, you’ll learn how small-business loans work and how you can find the best loan from an alternative lender to start or expand your small business, even if you have bad credit.

What Are the Best Bad Credit Small Business Loans of 2020?

  • BlueVine: Best lender for borrowers with FICO credit scores as low as 530.

  • Funding Circle: Best lender for borrowers with FICO credit scores as low as 620.

  • Kabbage: Best Lender for Alternative Qualification Requirements

  • OnDeck: Best lender for borrowers with FICO credit scores as low as 600.

U.S. News conducted an in-depth review of the leading bad credit small-business loan companies, researching key factors, including customer service ratings, qualification requirements and loan options.

There is no single loan that is perfect for every business, but U.S. News recommends top performers based on their strengths in key areas. These recommendations can support your research by showing you the loan most likely to meet your needs. They are a good starting point for most small businesses, but you should thoroughly research each option yourself.

Best lender for borrowers with FICO credit scores as low as 530.

BlueVine offers a variety of business loans, including business lines of credit, term loans and invoice financing. Businesses that have been operational for at least six months may qualify.

Highlights

  • Loan types: Term loans, lines of credit, invoice financing
  • Minimum years in business: 6 months
  • Minimum annual revenue: $100,000
  • Minimum FICO credit score: 530 for invoice factoring, 600 for line of credit or term loan
  • Loan amounts: $5,000 to $5,000,000
  • Loan terms: 6 months to 1 year for lines of credit, 26 weeks to 52 weeks for term loans
  • Origination fee: N/A
  • BBB rating: A+

Best Features

  • Invoice factoring credit lines can be as large as $5 million.

  • Disbursement usually occurs within 24 hours.

See full profile

Best lender for borrowers with FICO credit scores as low as 620.

Funding Circle is a small business lending platform. Globally, investors on the platform have lent more than $8.6 billion since 2010. There is no minimum annual revenue requirement.

Highlights

  • Loan types: Fixed-rate term loans
  • Minimum years in business: Two
  • Minimum annual revenue: None
  • Minimum FICO credit score: 620
  • Loan amounts: $25,000 to $500,000
  • Loan terms: 6 months to 5 years
  • Origination fee: Our fee structure is simple: we charge a one-time origination fee on each loan we fund ranging from 3.49% to 6.99%. Just like your interest rate, your origination fee will be determined during our underwriting process and is based on your creditworthiness and term chosen.
  • BBB rating: A+

Best Features

  • Term loans of up to $500,000 are available.

  • Funding Circle does not have a minimum annual revenue requirement.

See full profile

Best Lender for Alternative Qualification Requirements

Kabbage launched its lending platform in 2011 and has helped more than 170,000 small businesses access more than $6.5 billion in financing. Loans as small as $500 are available.

Highlights

  • Loan types: Lines of credit
  • Minimum years in business: One
  • Minimum annual revenue: $50,000
  • Minimum FICO credit score: Kabbage looks at your business performance — not just a credit score — to let you know right away how much funding you can access.
  • Loan amounts: $2,000 to $250,000
  • Loan terms: 6 months to 18 months
  • Origination fee: None
  • BBB rating: A+

Best Features

  • alternative qualification requirements

See full profile

Best lender for borrowers with FICO credit scores as low as 600.

OnDeck has served 100,000 borrowers since 2007. The lender offers term loans and lines of credit with fixed interest rates. Term loans of up to $500,000 are available.

Highlights

  • Loan types: Fixed-rate term loans, lines of credit
  • Minimum years in business: One
  • Minimum annual revenue: $100,000
  • Minimum FICO credit score: 600
  • Loan amounts: $5,000 to $500,000
  • Loan terms: N/A
  • Origination fee: N/A
  • BBB rating: A+

Best Features

  • Both term loans and lines of credit are available.

  • Borrowers with FICO credit scores of 600 or higher may be approved.

  • Loans from $5,000 to $500,000 are available.

See full profile

What Is Bad Credit?

The term bad credit refers to a fair or poor credit score, usually a FICO score below 670. Your credit score is a numerical representation of your creditworthiness, or how reliable you are at repaying debts. If you have a poor history of repaying debts, you will have a bad credit score.

While credit score ranges can go as low as 300, you typically need at least a FICO score of 530 to qualify for a bad credit loan. Each lender will look at your score to determine what level of risk it is willing to bear.

Several credit-scoring models are used today, but the most common one is the FICO scoring method. A second type of credit-scoring model, the VantageScore, is becoming more common.

  • Exceptional (800-850)
  • Very good (740-799)
  • Good (670-739)
  • Fair (580-669)
  • Poor (300-579)

The VantageScore follows a similar model, and its ranges are defined as:

  • Excellent (750-850)
  • Good (700-749)
  • Fair (650-699)
  • Poor (550-649)
  • Very poor (300-549)

When a business loan or any other credit product is marketed for bad credit, it is generally aimed at those with a credit score lower than good on the FICO scale. Because they have little creditworthiness in the eyes of lenders, people with a credit score in the range of 300 to 669 can find it very hard to get approval for a small-business loan from a traditional bank lender.

Receiving approval for a small-business loan is always easier when the applicant has strong credit and steady business revenue because loan approvals factor in three main criteria: cash flow, credit history and collateral coverage, explains Jay DesMarteau, head of regional commercial specialty segments at TD Bank.

“When a business owner has poor or unsteady cash flow, banks and lenders often focus more on the company’s documented financial history and assets,” DesMarteau says. “Those with poor credit scores may struggle with their loan approval.”

In addition to your personal credit score, your business credit score may be a deciding factor in receiving financing, particularly from traditional lenders. As with personal credit scores, there are different business scores, each with its own scoring ranges and intents. Your business credit score reflects your payment history on accounts associated with your business. However, your personal credit history will be used exclusively if your business has no credit history, as with a startup.

Work on improving your personal and business credit so you’ll have more options for funding. With good business credit, you may be able to qualify for U.S. Small Business Administration, or SBA, loans, traditional bank loans and other small-business loans without having to rely on your personal credit.

How Does Alternative Lending Work?

Alternative lending refers to the broad range of loans for consumers and business owners outside of traditional bank loans. They fill the gap in funding options by offering loans to people and businesses that many traditional banks will turn away. Usually, alternative lenders offer loans online and may not have a brick-and-mortar presence like most banks.

Startups in business for five years or less that have a medium or high credit risk are likely to see better approval odds with online lenders than traditional lenders. Forty percent received at least some financing. Among the same group, 49% received financing from large banks and 47% from small banks.

There are two main categories of alternative lenders:

1. Direct lenders. Usually geared toward small to midsize businesses, direct lenders are finance companies that fund your loan while cutting out intermediaries such as private equity firms, brokers or investment banks. While working with direct lenders means you don’t deal with an in-between, many direct lenders now have financial backing by banks.

2. Peer-to-peer lenders. Through an online marketplace, peer-to-peer, or P2P, lending directly connects borrowers with investors who typically fund small chunks of a diversified loan portfolio. Approval requirements may be less rigid than traditional lenders, and these loans offer faster access to capital, but with less stringent lending criteria, alternative lenders take greater risks with borrowers. With higher risk comes higher interest rates; the APR for a 36-month P2P loan starts at 15%, and it could reach 45% for a four-month institutionally backed loan.

What Types of Small Business Financing Are Available?

Small-business loans work like any other loan, with the condition that the funds be used for business-related purposes. Some loans can be used for working capital and have looser spending requirements, while others have to be used for specific expenses, such as a commercial mortgage, invoicing or new equipment.

Types of small-business loans that alternative lenders offer include:

Term loans are lump-sum loans that provide businesses with a sum of capital. Businesses agree to repay a term loan over a fixed amount of time with a set payment schedule. Each payment you send to the lender includes the principal amount, plus the interest you owe on the loan for that period.

Business lines of credit are similar to credit cards. With a business line of credit, a lender approves you for a pool of funds, otherwise known as a revolving line of credit. As with credit cards, there is a limit to how much you can borrow. With a business line of credit, you’ll be charged interest only for the amount of money you draw, not on the maximum limit.

You can access your line of credit for any business-related needs, whether it’s to expand your business, to fill in gaps from cash flow issues, or to purchase inventory or equipment. As long as you make the minimum payments and don’t go over your limit, you can use your line of credit for as long as you need it. When you’ve repaid the lender in full, you have access to your full line of credit. Borrowers with poor credit are likely to receive business lines of credit with higher interest rates and lower maximum limits.

With equipment loans, lenders typically finance 80% to 100% of the cost of your equipment. The equipment acts as collateral for the loan. While traditional lenders may be reluctant to offer equipment loans to small-business owners with poor credit, alternative lenders are more likely to do so.

If your small business struggles with ongoing cash flow issues because you’re waiting on outstanding invoices to be cleared, invoice financing – also known as factoring – is an option. With invoice factoring, you sell your unpaid invoices to a lender at a discount. The lender pays you the majority of the amount owed on the invoice upfront and keeps a portion of the outstanding amount – usually 20% – until the invoice is paid.

Invoice financing can be a risky choice. There is a factoring fee based on a percentage of the invoice, plus interest charged on the cash advance. The fees can quickly add up, so small-business owners should carefully weigh the costs when considering invoice financing.

For small-business owners who need speedy access to capital, a merchant cash advance, or MCA, is a financing option. With an MCA, the lender provides you with a lump-sum of cash for a percentage of your anticipated sales.

You repay the advance, plus fees, with either a portion of your future credit and debit card sales, or with fixed daily or weekly transfers from your bank account. Your fee is determined by a risk assessment. Lower-risk borrowers will have lower fees and more favorable borrowing terms than higher-risk borrowers.

Borrowers should beware of the long-term financial implications of merchant cash advances. ”It’s almost like a drug,” says Kevin Monahan, area director for the Florida Small Business Development Center at the University of North Florida. “Small-business owners need the money desperately, resort to paying high interest rates, and find themselves with less and less money.”

Merchant cash advances are often a poor choice for businesses. They typically have high interest rates that can hit triple digits.

What Costs Are Associated With Small Business Loans?

Keeping loan costs minimal allows you to invest profits back into your business, so the lower your fees, the better. Small-business loan costs typically include the following:

  • Annual percentage rate. The APR is the interest charged on your loan every year. The difference between the APR and the interest rate is that the APR includes all loan fees and associated costs. If you have poor credit, you will typically have a higher APR than small-business owners with strong credit.

  • Down payment. In some cases, the down payment for your small-business loan is covered by collateral. Small-business loans may require an equity investment. Down payment requirements vary, but you typically will need to invest about 25% of your own capital when taking out a loan. However, the more you put down as a down payment, the less risky you are to lenders. If you have poor credit, you may need to give a larger down payment.

  • Factor rate. A factor rate is typically used for merchant cash advances to determine how much the borrower will owe in interest. Instead of a percentage, the interest rate for invoice factoring is expressed as a decimal, such as 1.1 to 1.4. For example, if a small business takes out a $10,000 loan with a 1.4 factor rate, and the term of the loan is one year, it will pay a total of $14,000 on the loan. Your factor rate is determined by your industry, years in business, business stability and average monthly sales, which can be in the form of credit cards or other types of payment.

  • Origination fee. This fee is for processing a new small-business loan. Some alternative lenders incorporate the origination fee into the loan balance or the interest rate. Other lenders don’t charge an origination fee. With poor credit and a higher risk than other borrowers, you may be subject to paying a higher origination fee.

  • Underwriting fees. Underwriters charge these fees to review and verify the documentation for your loan application and prepare the loan.

  • Closing costs. These fees are any other costs tied to closing the loan, such as filing and recording fees, a loan-packaging fee, business valuation or commercial real estate appraisal.

  • Additional fees. Other fees associated with a small-business loan include late payment fees, check processing fees and prepayment fees, which are sometimes charged if you make early payments.

How Can You Get a Small Business Loan?

Applying for a small-business loan requires preparation, especially if you have poor credit. You can increase your chances of approval and secure the best terms by improving your credit and creating a business plan that will make lenders more confident in your business.

  • Improve your personal credit. If you’re planning to start a business, prepare several months to a year in advance to present your personal finances as attractively as possible, recommends S. Michael Sury, lecturer in finance at the University of Texas at Austin. Order a credit report and check your score. Often, you can get your credit score for free from banks, credit card issuers and free credit monitoring services. You can purchase your FICO score at myFICO.com. The FICO score is most commonly used by lenders. Improve your personal credit score by making on-time payments, dealing with delinquencies and paying down large balances when possible. Some errors, such as incorrect outstanding balances, may negatively affect your credit score. By disputing and correcting these errors, you could improve your score.

  • Build your business credit score. A business that has a separate credit profile may not have to solely rely on the owner’s personal credit history when obtaining financing, DesMarteau points out. This can give your business a stronger credit picture and increase your chances of loan approval. If you want to build your business score, consider getting a business credit card or opening a line of credit. Set a maximum limit you’re comfortable with and make on-time payments. If you already have a business credit score and want to improve it, rebuilding a business credit score is similar to improving a personal credit score, explains Rod Griffin, director of public education at Experian, one of the three major consumer credit bureaus. Catch up on any late loan payments, and make sure your vendors are paid on time to help improve your business credit score.

  • Write a solid business plan. Sury recommends a well-thought-out business plan with a well-formulated mission, strategy and plan for execution to boost your odds of securing financing through a lender. Your business plan should include projected financial statements constructed under various realistic scenarios, such as conservative, moderate and aggressive growth.

  • Find other ways to boost your creditworthiness. If you have bad credit, boost your creditworthiness by asking for letters of reference from personal and business creditors and vendors you’ve worked with. The letters should indicate that you have a history of making on-time payments. If you have a strong management team, you can highlight the background, experience and creditworthiness of the team, Sury says. Having a business partner with strong credit as a guarantor on the loan can boost your odds of getting approved.

When applying for a small-business loan, a significant amount of documentation is involved. To ensure the application process goes smoothly and you get approved for the amount of money and terms you need, have the following information and documents on hand:

  • Personal information
  • Resume
  • Business plan
  • Income tax returns
  • Loan application history
  • Bank statements
  • Collateral
  • Use of loan
  • Debt schedule
  • Legal documents

For in-depth information on the loan application process, read the U.S. News Small Business Loans guide.

How Can You Choose a Loan?

When choosing an alternative lender for your small business, pay close attention to the lender’s eligibility requirements, loan options, costs and reputation. Keeping these factors in mind will aid you in finding a lender with a higher chance of approving your loan and offer you solid customer service and the best terms possible with reasonable costs.

  • Minimum personal credit score
  • Minimum years in business
  • Minimum annual revenue

Loan types: During your search, look for a lender that offers the type of loan you need (i.e., a line of credit, invoice financing, term loan). To make sure you get approved for enough funding to start or expand your business venture, before you begin your search, draft a detailed business plan and zero in on the type of funding you need.

“The business plan should present in clear and concise terms your company’s unique value proposition, the current revenue and profit model, current cash flows, the burn rate, and how new cash infusions into the company will be used,” Sury says.

Loan limits: If the lender doesn’t extend financing in the amount you need, do your best to find one that will. If you have bad credit, you could consider lowering the amount you need or turning to creative sources of funding.

Loan term: Your loan’s term is the amount of time you have to make payments on the loan. Note that if you take a loan with a shorter length, it will have higher monthly payments, but you may pay less in total interest on the loan. If you take out a loan with a longer term, your monthly payments may be lower, but you may have to pay more in total interest over the life of the loan. For small-business owners with bad credit, there may be fewer options and less flexibility with your loan term, so beware of taking on a loan with repayment terms you won’t be able to manage.

Look for a lender with the lowest costs, including:

  • APR
  • Down payment
  • Factor rate
  • Origination fee
  • Underwriting fees
  • Closing costs
  • Additional fees

Read reviews to find out how businesses rate the service and products each lender offers. Two good review sources for alternative lenders are Trustpilot, which rates companies based on an aggregate of customer reviews, and the Better Business Bureau.

What Can You Do if You’re Denied a Small Business Loan?

If you’re denied a small-business loan or can’t secure enough financing because of poor credit, there are some things you can do to get the capital you need:

  • Lower the amount of capital you need. You may need to work with less financing than you initially anticipated, explains P. Simon Mahler, a certified business mentor with SCORE, a nonprofit that offers free mentorship and education to small businesses. Reassess your business plan and look for areas where you can lower expenses by bootstrapping, finding lower-cost alternatives or cutting certain expenses for the time being. “With all the tools and resources that are out there, you can build your own website, or market yourself on social media at no cost,” Mahler says. “You can use the city library for free Wi-Fi and spend very little money on a brochure to market your business.”

  • Add business partners. Adding business partners can strengthen the creditworthiness of your business. Lenders may consider the total personal income and collateral of all owners of the business, so adding more business partners means you’ll have more income and collateral for the lender to calculate against your funding needs. Choose partners with good credit and income and, ideally, experience in your industry.

  • Seek creative funding. As only 46% of businesses typically receive the full amount of funding they seek , many have to get creative. Consider asking friends, family, private investors and potential customers to invest in your business. You can seek funding through a crowdfunding campaign via Indiegogo, Kickstarter or GoFundMe. It’s important not to be idle while waiting to hear from lenders on the status of your application. “There’s an opportunity cost when you’re waiting to hear back from the lender,” Mahler says. “As a small-business owner, you can’t take your foot off the pedal. During that time, you could be marketing your business and finding new customers.”

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who are advertising clients of U.S. News. Advertising considerations may impact
where offers appear on the site but do not affect any editorial decisions,
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