Getting a Business Line of Credit with Bad Credit
Getting a loan with bad personal credit can pose a challenge for small business owners who have new or small businesses, or who haven’t had time to build up their business credit. When business owners have low or no business credit, lenders will use the owner’s personal credit score to assess creditworthiness.
A less-than-stellar personal or business credit score can follow a business owner around for years and can seriously limit the number of funding options available.
There are business credit lines available that can both jumpstart a business and actually help get a business’ credit back on track.
What is a bad personal credit score?
Personal credit scores, like the ones generated by FICO, focus heavily on an individual’s payment history and credit utilization. Credit age, credit mix, and credit inquiries also come into play, though they carry less weight for score calculations.
According to the FICO® credit scoring system, a score between 300 and 600 is considered a bad score. Here’s a deeper look at FICO-defined credit scores:
- Excellent Credit: above 750 +
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
Business owners may find it difficult to overcome poor personal credit when applying for new loans or credit lines. Lenders may see someone with poor credit as a higher risk and be more reluctant to extend credit. If a business owner is able to qualify for a loan, they pay a higher interest rate.
Business credit scores consider payment history, credit age, debt usage, company size, and overall industry risk. Most business credit scoring models range from 0 to 100, with a higher score indicating lower risk. Checking a business credit score can give an idea of how likely a business will qualify for a loan.
What is a good business credit score? It depends on the scoring model and the lender. For Dun and Bradstreet Paydex, a score of 80 or higher out of 100 indicates on-time payment history, while Experience Intelliscore Plus views applicants with scores of 76 or higher out of 100 as a low risk. FICO SBSS uses a 300-point scale, with 160 to 180 points the typical minimum cutoff for a non-SBA loan and 140 points the minimum for an SBA loan.
Why do credit scores drop?
Credit scores are not static, and they can change from month to month. There are many reasons why a credit score might drop, resulting in bad business credit. The impact on a business’ credit score can depend on what caused the loss of points.
- Missing or late payments: As mentioned, payment history weighs heavily in both business and personal credit scoring. Paying late or not at all can suggest to lenders that a business might be struggling to meet obligations and thus, is a riskier investment.
- Closing credit card accounts: By closing accounts, a business owner effectively shrinks their credit utilization ratio which could lower their score.
- Excessively shopping for credit (applying for too many cards): There’s nothing wrong with shopping around for a credit card that fits a business. However, opening multiple credit cards within a short time period could give lenders the idea that the business is struggling to meet expenses and is desperate to borrow.
- Filing bankruptcy: While bankruptcy can help eliminate or restructure debts, it can also severely damage a business’ credit. Business owners may find it difficult to get approved for new loans or credit lines in the first year or two following a bankruptcy filing.
- Foreclosure: This is not as damaging as bankruptcy, but it could suggest to lenders that the business owner is less than reliable when it comes to repaying what they borrow.
Getting business funds with a bad credit score
A business owner with either a bad personal or business credit score can obtain a business loan but may have fewer options for borrowing, compared to someone with good credit.
It might be necessary to seek out lenders that specifically offer business loans for bad credit. These lenders understand the risks involved in lending to borrowers with less-than-perfect credit scores. They can offer secured or unsecured business term loans and working capital loans to higher-risk borrowers.
As a condition of extending the loan, lenders may charge a higher interest rate. A higher APR for a bad credit business loan or line of credit is meant to offset the possibility of a borrower defaulting on the debt.
That’s important to keep in mind, as a higher APR increases the cost of borrowing. A borrower with bad credit may also pay more in fees, as lenders may charge higher origination fees for bad credit business loans.
Options to get a business line of credit with bad credit
Bad credit can make it harder to get a line of credit for a business. Researching different financing avenues can help business owners find the right loan from the right lender to grow their operations.
Make use of online lenders
In addition to traditional banks, options for business funding include nonbank lenders and banks that operate online. Unlike banks that base what they’ll lend almost exclusively on a business’ credit rating, online lenders can look at multiple types of data, including social media engagement and online ratings to gauge overall creditworthiness.
Oftentimes, these types of funding are particularly beneficial for getting cash quickly, especially if a business owner needs to purchase inventory or hire seasonal help. Same day approval may be available, and funds could be received the next day or within a few business days.
Consider using credit cards
Typically, credit cards are much easier to obtain than bank loans. So they’re a viable alternative to getting a loan with bad credit but also tend to come with high interest rates.
There are both government and private grant programs for small businesses. Of course, there’s fierce competition for this type of funding, but it may be worth a shot. Many of these programs focus on particular industries or geographic areas or offer funding options for minority small business owners.
There are other options that might be worth exploring, such as free office space, and business plan assistance, that can help reduce the cost of starting a business.
Look into merchant cash advances
This type of lending is growing in popularity thanks, in large part, to the current difficulties in getting a loan with bad credit. Merchant cash advances provide businesses with funds in exchange for a share of future sales. This is particularly common in retail, restaurant, and service businesses that typically don’t qualify for bank loans.
Interest rates can be very high with merchant cash advances, so they’re usually thought of as a short-term solution.
Community development financial institutions (CDFIs)
Community development financial institutions (CDFIs) help individuals, organizations, and businesses that have traditionally been underserved by the lending community get the funding they need. CDFIs operate in rural and urban areas, serving a wide range of populations within those communities that may face challenges in obtaining mainstream financing.
Business owners with bad credit may turn to a CDFI for funding as credit scores tend to pose less of a barrier to getting a loan. CDFI lenders use a holistic approach and want to help business owners get funded, regardless of credit scores.
A CDFI loan could also be a good fit for business owners with bad credit from a cost perspective. These loans typically have lower interest rates than traditional funding options, which could make them a more affordable option.
How to improve a business credit score
If your business credit score isn’t as high as you would like, there are steps that can be taken to try to improve it. Implementing some of these strategies could help to raise a business’ score over time so that getting approved for business financing becomes less of a hassle.
- Monitoring a credit score: One of the simplest ways to improve a credit score is to know what’s affecting it. Checking business credit scores regularly can give the business owner an idea of what’s dragging down their score so that they can take action to address it.
- Pay down existing debts: High debt usage could hurt a business’ score, even if they’re consistently paying their bills one time. Paying down some of what the business owes could help to reverse a downward trend in that score.
- Maintain a low utilization ratio: Having a larger amount of available credit shows lenders that a business owner is not maxed out on their business credit cards. Paying credit card purchases in full each month is a simple way to keep utilization ratio low.
- Establish the business over a period of time: It can take time to build up a good credit score. As a business owner works on growing their business, they can also work on developing habits that can lead to good credit, such as paying bills on time.
How does a business line of credit impact a credit score?
Having one or more credit lines for your business can impact your credit scores in a few different ways.
First, there’s the initial impact associated with applying for a new line of credit. If the lender is checking personal credit scores, that can result in a hard inquiry on an individual’s credit report. New inquiries can trim a few points off a score each time they show up.
Once an individual opens a line of credit, their payment history can affect their score. Paying on time can help a business credit score while paying late or missing payments can hurt it.
Having multiple credit lines open could affect a score negatively if a business owner is paying late or has applied for them all within a short time span. Business owners may also see a credit score drop if they’re maxing out multiple credit lines all at once.
Financing your small business
A bad credit score may seem less than ideal but it’s not an absolute roadblock to getting financing for a business. There are options for getting a business line of credit even with bad credit and, if a business owner qualifies, making on-time payments could help raise a business’ credit score over time. Reviewing a business’ individual situation can also help a business owner to decide whether exploring small business loans is a possibility.