Most business owners struggling to overcome poor credit have a notoriously hard time qualifying for the financing they need to grow their businesses. In fact, just 10 years ago, these entrepreneurs might not have had any small business financing options on the table.
The reason: Traditional banks have always had tight credit requirements for small business owners, and a less-than-perfect credit score generally precluded entrepreneurs from qualifying.
Thankfully, though, times have changed in the world of business lending. Alternative, non-bank lenders have entered the market, willing to work with borrowers with poor credit.
What are the best loan options for entrepreneurs with bad credit? Here are your three top options.
1. Short-term loans
If you’re looking for bad credit business loans that come with a structure you’re familiar with, short-term loans might fit the bill.
Short-term loans are structured like the traditional term loans you know well: You receive a lump sum loan that you’ll pay back with fixed payments over a predetermined amount of time. They’re almost exactly like what traditional bank lenders offer — with a few key differences.
First,, these loans are, well, short. Instead of being offered over a multi-year period, these loans have terms lasting anywhere from just three to 18 months. And because they come with such short terms, they’re most often paid back with daily or weekly repayments instead of a typical bank loan’s monthly repayments.
Short-term loans also have lower limits (ranging anywhere from $2,500 to $250,000), meaning that the borrower’s payments will be proportionally less than what you’d be responsible for with a bank loan.
Fortunately, it doesn’t take much time or effort to apply for a short-term loan. They often have simple applications and a short waiting time to funding, so if you need quick cash to act on an important business decision, a short-term loan can be a great fit.
Further, short-term loans are at the top of the list for the best loans for bad credit, as these lenders typically work with borrowers with a minimum FICO score of 550. Thanks to the loan’s short-term and frequent payments, lenders can take on more risk when it comes to choosing whom to work with.
So, if you’re looking for a predictable and straightforward small business loan with your bad credit, a short-term loan could be for you.
2. A business line of credit
While traditional banks are known for their business lines of credit, alternative lenders offer smaller, shorter and more accessible lines of credit, as well.
With a line of credit, you’re approved for a pool of funds that you can tap into whenever you need them for your business. You’ll pay interest only on the funds you draw, and once you’ve repaid that laon in full, your credit line will get refilled to its original amount.
Business lines of credit are great financing tools for business owners in need of flexible financing. They’re a particularly good option for entrepreneurs who struggle with irregular cash flow: when you enter a slower month, you can draw from your line of credit to keep your cash flow from slipping into the red.
Minimum requirements typically include having at least six months of business under your belt and $50,000 in annual revenue. Plus, you can get approved in as little as one day.
3. Invoice financing
Invoice financing helps business owners free up capital when pesky unpaid invoices are slowing their cash flow. If it fits your unique funding needs, invoice financing is another top option for business owners with bad credit.
This option involves a self-collateralizing loan, meaning that the outstanding invoice itself acts as collateral for the financing.
This is great news for bad credit borrowers. Invoice financing companies are more likely to work with borrowers with bad credit because the value of the invoice acts as a security blanket. If, in the worst-case scenario, you can’t make your repayments, the financing company can simply collect on the invoice to recoup its losses.
Lenders offering invoice financing can help you turn your invoices into immediate cash, and will often work with borrowers with credit scores in the 500s.
An alternative option: business credit cards
While you might not normally consider business credit cards when you need business financing, they’re worth adding to your list.
It’s best to use these credit cards for your monthly expenses and working capital needs, since, basically, they’re revolving lines of credit with high interest. However, there are definitely some advantages to seeing a business credit card, instead, as a kind of small business loan.
Business credit cards can be a great substitute for traditional loans when you need financing quickly, you need need flexibility in how much you borrow or you don’t have collateral to offer against the capital.
Plus, using a business credit card with a 0 percent introductory APR period is essentially like taking out a free loan: You can borrow up to your credit limit without paying interest on the balance you carry over. Just don’t forget to pay down your balance once your introductory period is up!
When it comes to financing options for bad credit borrowers, there are a handful of cards that work for lower credit scores.
The best part about using a credit card to handle small-scale business capital needs is the potential to build your credit score with good borrowing behavior. Paying your balance on time and in full every month will gradually build your score, helping you qualify for better business financing products in the future.
What to watch out for with bad-credit business loans
There are more financing options available to borrowers with struggling credit today than ever before. All things considered, this is to the benefit of entrepreneurs growing their businesses.
However, owners with bad credit need to know that accessible financing comes at a cost. These bad-credit business loans can be augmented by a load of interest that’s way too expensive for any small business to handle comfortably.
So, if you can stand to wait for the financing, you’re best off taking some time to build your credit score and holding out for the best rates your business can qualify for.