Business loans for bad credit: 5 Lending Options to Consider

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We have become a credit-driven society – making business loans for bad credit a challenge to find. Small business owners as well as consumers are adversely impacted by low credit scores.

The Small Business Administration (SBA) provides small-business loans with its 7(a) loan program administered through banks. But you need good business and personal credit to qualify. Most banks will require a personal credit score of at least 680.

Statistics from the National Small Business Association show that 73% of small firms used some type of financing for their business- so it's normal to need extra funds to run your business from time-to-time.

Whether you need funds to hire new employees, expand your business, purchase inventory, invest in new equipment, strengthen your businesses's financial foundation or open a new storefront to increase sales using your own funds from savings may not be an option. Even if you have credit cards, it's not a good idea to create credit card debt for business expansion.

Small businesses borrow for four principal reasons.

  • Start a Business
  • Purchase Inventory
  • Expand a Business
  • Strengthen your business' financial foundation

When you need business loans for bad credit where do you go? 

Before applying for any business loan, take time to check your personal and business credit reports and scores to know where you stand but more importantly, check for errors.

Errors and inaccuracies can decrease your personal and business credit scores. Dispute any error and request it be removed (best option) or corrected (2nd best option). Cleaning up credit report errors could give your score a boost.

Option 1: Lenders specializing in business loans for bad credit

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Kabbage Business Line of Credit.

  • Credit score required: At least 350.
  • Revenue required: $50,000 annual revenue or $4,200 per month over the last three months.
  • Loan amounts: $2000 up to $250,000.
  • Loan Term (Months): 6 – 12 months.
  • APR (Fixed APR): 20% – 99%.
  • Pre-payment Penalty: There are no prepayment fees.
  • Application process: Qualify in 10 minutes.
  • Funds available: Few minutes to several days.
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LoanBuilder Business Loan.

  • Credit score required: Business owner must have a FICO score of at least 550.
  • Business must have been in business for at least 9 months and have an annual revenue of at least $42,000.
  • Loan amounts: $5,000 up to $500,000.
  • Loan Term (Months): Loan durations range up to 52 weeks.
  • Pre-payment Penalty: There are no prepayment fees.
  • Application process: Checking your rate won't affect your credit score.
  • Paypal Account: You DO NOT need a Paypal. All that is required is a business checking account, to receive the funds and deduct weekly payments.
  • Funds available: Funding as fast as the next business day.
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Kapitus Business Loans.

  • Credit score required: 650 Minimum FICO Score.
  • Must have at least $150,000 in annual revenue.
  • Loan amounts: Various.
  • Payments: Flexible payment terms. Payment frequency can be based on existing cash flow or you can pay back larger amounts without prepayment penalties.
  • Funds available: As fast as next business day after approval.

Option 2: Merchant cash advance

A merchant cash advance can help a business raise capital immediately but typically have higher interest rates. Funding can be provided within a few days regardless of credit history. Merchant cash advances are meant to be temporary cash-flow solutions as opposed to long-term financing like business loans or a business line of credit.

Cash advances must be repaid through daily or weekly withdrawals from the business, calculated as a percentage of total daily sales. The lender assigns a factor fee at the time of approval. That fee dictates the total amount to be repaid, and payments remain in place until the original lump sum is fully repaid.

Option 3: Invoice financing

Outstanding invoices can be used for funding your business, this is known as factoring. 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 percent) until the invoice is paid. A factoring fee is charged, plus interest charged on the cash advance. This type of financing is costly and the fees can quickly add up quickly.

Option 4: Inventory financing

A lender may be willing to overlook bad credit if they have some guarantee that you’ll be able to repay what you borrow. Inventory financing is a form of asset-based lending that allows businesses to use inventory as collateral to obtain a revolving line of credit.

Option 5: Purchase order financing

Purchase order financing is an arrangement where a third party agrees to give a supplier enough money to fund a customer’s purchase order. This helps a small business that lacks cash flow get access to the inventory to complete customer orders. The purchase order financing company will pay your supplier to manufacture and deliver the goods to the customer. When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. After subtracting their fees, the company then sends the balance of the invoice to your business.

Applying for business loans for bad credit

The lending options for business loans with bad credit are likely going to cost you more. To combat this in the future, use business loans for bad credit to improve your credit history. Part of your business’s financial health depends on your personal as well as business credit scores. These scores give lenders, vendors, insurance companies, and other entities an idea of how responsibly you use credit.

Strong credit scores increases your chances of qualifying for financing and landing the best rates.

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