There is a trade off. Business owners with bad personal credit can often secure financing, but the more perceived risk the lender assumes because of your poor credit history, the more likely you are to pay a higher annual percentage rate (APR) to mitigate the extra risk.
This can seem counterintuitive—why would lenders charge more to the business owners who historically have the most trouble paying back debts? Doesn’t it make sense for the lender to charge less so the bad credit borrowers will have a better chance of paying it back?
That may sound better from the borrower’s perspective, but unfortunately it’s the lender’s money, and thus the lender’s ball game. Lenders look at your credit history and try to determine what you will do in the future based upon what you’ve done in the past (your credit profile). Lenders charge a higher interest rate to individuals with low credit scores to offset a higher expected default rate. Lenders need you to make each and every periodic payment in order to return a profit. They lose money if you default and the higher interest rates they charge less creditworthy borrowers helps mitigate some of that risk.
Let’s take a look at some of the better options when it comes to business loans for bad credit.
A less-than-perfect credit profile makes it more difficult to qualify for a loan so you should expect it to take more work to find a lender willing to work with your business. If your credit profile is struggling, the steps I recommend for financing include:
Less-than-perfect credit can be a symptom of underlying financial stress on a business. Before you take a loan, make sure your financial house is otherwise in order. Most lenders understand that there are sometimes circumstances (like the aftermath of the current COVID-19 crisis) that will pull a business credit profile down, but that makes it more important than ever that you understand your profit and cash flow situation.
Unfortunately, the higher-interest loans available to borrowers with weak credit can wreak the most havoc on those same borrowers if they aren’t very careful with the lender they choose, the amount they borrower, and how they manage their cash flow to make the periodic payments.
You can learn more about additional small business financing options here.
What is considered bad credit for one lender might be considered OK credit for another. With that in mind, it might be easier to describe what good credit it and work back from there.
800-850 (Exceptional): With a score above 800 borrowers will be able to choose the credit options that are optimal for their situations, often with the lender they choose.
740-799 (Very Good): If your credit score falls within this range you are considered a low-risk borrower. A borrower with this credit score will be able to pick and choose the loan that makes the most sense for their business use case.
670-739 (Good): This is considered a good score and many in the U.S. fall within this range. A borrower with this type of score can expect to see more options and more approvals.
580-669 (Fair): This is considered a moderate-risk score. A small business loan is very possible, but will likely not come with the best interest rates. Most traditional lenders won’t offer a small business loan to borrowers in this category.
500-579 (Poor): There is some financing available for borrowers with this type of credit score, but it’s considered a high-risk score and will likely come with fewer options and higher interest rates.
Below 500 (Very Poor): With this credit score it is unlikely a business owner will qualify for a business loan.
Although there are options available to borrowers with a poor credit score, not every loan application will be approved. For those borrowers who can’t get a business because of their poor personal credit score, taking actions to start improving your score today is where they should focus their attention.
There is no short-cut to a strong personal score, but there is good news. Over time, consistently working on your personal score will help you improve your score. Taking these steps will put your score on the path to recovery:
By following these three guidelines, you might be surprised at how quickly you start to see results. Don’t trust anyone who wants to charge you upfront to fix your score. The bureaus have seen all the gimmicks and schemes and will see right through them if you try them. It might even further hurt your score. This is one case where slow and steady really does win the race.
Don’t give up on finding financing for your business if your credit is less than perfect. Look into alternative lending options and work on your credit in the meantime. You may need to start small, but use each amount of financing you get as a stepping stone to grow your business.