Most small business loans require owners to personally guarantee repayment. So if you have bad personal credit, getting funding can be very difficult. Still, some alternative lending sources cater to startups and entrepreneurs with low credit scores if the business itself seems viable.
What Defines Bad Credit?
First, what constitutes “bad credit”? While definitions vary among lenders, FICO credit scores below 580 (on a 300-850 scale) signal significant risk. Issues like a history of missed payments, past bankruptcies or high debt levels vs. available income depress your personal credit standing.
How Personal and Business Credit Differ
Small business financing decisions do not depend exclusively on your personal creditworthiness. Lenders also look at your company’s fiscal health, growth potential and financial track record.
Still, most traditional banks remain hesitant about lending to any business when owners have low personal credit scores. They get nervous you will miss loan payments like other obligations.
But some alternative online lenders adopt more flexible approaches helping credit-challenged entrepreneurs access necessary startup or growth investment capital.
Where to Get Small Business Loans with Bad Personal Credit
The companies below focus on the business itself when underwriting rather than fixating on the applicant credit profile.
Online/Alternative Lenders
The best chances for securing small business loans despite poor personal credit come from alternative online lenders. They utilize much broader data, advanced metrics and risk assessment algorithms unconstrained by old-fashioned credit barriers.
- Kabbage
- BlueVine
- Fundbox
- LendingClub
Merchant Cash Advance
A merchant cash advance provides funding based mainly on credit card sales history. Daily future credit transactions get deducted directly until the advance repayments complete.
The flexible structure helps those with bad credit qualify more readily than traditional loans. Just beware of very high equivalent interest rates.
Peer-to-Peer Lending
P2P platforms like Lending Club and Prosper link individual investors looking to fund various loans with vetted borrowers of all credit ranges. Investors bid on each request choosing what appeals based on perceived risk-management and possible returns.
Grants
Federal and state government small business grants help companies grow and create jobs. Well-presented cases focusing on public service offerings rather than owner credit score can win approval.
Competitions through Small Business Innovation Research also reward entrepreneurs with growth-oriented, problem-solving initiatives.
Pros of Seeking Business Capital with Poor Personal Credit
- Get startup funding faster than saving up slowly
- Finance growth plans and important transitions
- Free up money tied to high-rate existing debts
- Build separate positive business credit history
- Improve personal credit using loan wisely
Cons of Small Business Lending Despite Bad Credit
- Very high equivalent interest rates
- Large origination fees
- Rejected by banks hesitant to take risks
- Must provide more company data showing sound financials
- Stress and burden if venture fails
What it Costs to Borrow for Your Business with Poor Credit
Beware sticker shock! Financing costs prove extremely expensive for borrowers with low credit scores viewed as high risk by lenders. Companies try offsetting likelihood of default by charging interest rates from 10% up to 40%.
Here is a table with sample pricing ranges:
| Loan Type | Rates | Origination Fees |
|---|---|---|
| Online Small Business Loan | 10% – 99% APR | 1% – 10% of capital borrowed |
| Merchant Cash Advance | 18% – 40% equivalent | $500 – $5000 |
| Peer-to-Peer Loan | 6% – 29% APR | 0% – 5% |
How to Improve Chances for Loan Approval
Even alternative lenders denying applicants happens. But you can optimize success with careful preparation:
Manage Personal Credit
Keep resolving overdue accounts and errors through dedicated improvements before applying. Higher scores never hurt!
Document Business Growth Prospects
Provide market research, financial statements, business plans, and other data proving why your company deserves financing to develop products, serve more customers, or hire talent.
Show Consistent Revenue
Underwriters want evidence you generate steady sales from business operations rather than relying solely on external financing. Highlight repeat business.
Explain Reasons Behind Any Past Struggles
If dismal periods occurred, demonstrate how you stabilized finances and turned things around through strategic changes.
Limit New Debt Leading Up to the Application
Avoid suddenly opening extra credit cards or taking on unnecessary obligations until after closing the financing deal.
Key Question – Should I Seek a Business Loan Despite Bad Personal Credit?
Answering this question means weighing short-term access to operating capital against long-run risks of burdensome repayment terms and very high carrying costs if the business falters.
You must sensibly assess your startup or company’s actual potential based on experience, competition, industry dynamics, and financial footing. No business succeeds automatically just because it secures financing.
If the lending enables calculated expansions likely to repay the capital from rising profits, the heavy interest rates may prove worthwhile. Or you could end up rapidly descending deeper into debt. Consider consulting a financial advisor to evaluate if it makes prudent strategic sense seeking outside business investment capital despite current poor personal credit.