The Ultimate Guide to Business Lines of Credit for Bad Credit
Key Takeaways
Getting a business line of credit with bad credit is possible for businesses that can’t qualify for traditional business loans because of their bad credit history. With one, they can cover business expenses such as inventory reordering, buying office supplies, fulfilling large customer orders, or creating a safety net for emergencies.
When applying for a business line of credit for bad credit, lenders typically consider three factors: revenue, cash flow, collateral, and debt obligation. Demonstrating that you’re doing good in these areas will improve your chances of approval.
If you can’t qualify for a business line of credit, business credit cards are worth considering. Business credit card providers approve them mostly based on the business owner’s personal credit score, making them an easier financing option to qualify for.
When it comes to securing a loan, small business owners may find it challenging to receive approval from banks and traditional lenders. That challenge becomes even greater if the business has a poor credit score or insufficient credit history.
Fortunately, alternative lenders are more willing to work with small businesses, even those with less than stellar credit. There are a number of business financing options these lenders can offer, but if you’re a small business owner struggling with bad credit, a business line of credit for business with bad credit may be your best bet.
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What is a Business Line of Credit?
A business line of credit is a flexible financing resource from which businesses can withdraw funds, up to a predetermined amount (the credit limit). Lenders will analyze the borrower’s credit and financial reports to determine what credit limit they are willing to offer.
This type of bad credit business loan has a withdrawal period – the length of time the borrower has access to the financing – and it can last up to 10 years. Spending is flexible as you (the borrower) can put the funding towards any business-related initiative. Repayments are then made weekly or monthly until you’ve paid back the amount you’ve withdrawn in full.
Business credit lines for bad credit are revolving credit, which means that every time you withdraw money and pay it back, the credit is restored, and you have ongoing access to it.
Is It Possible to Get a Line of Credit with a Bad Credit Score?
Yes, it’s possible to get a business line of credit with bad credit but it can be challenging.
Traditionally, banks favor applicants with strong credit scores, but alternative lenders or online lenders might be more flexible. Alternative lenders may place more emphasis on your business's potential, including your future cash flow and well-defined plans for profitability.
Alternative lenders might also consider your personal and business credit scores. A low personal credit score can raise concerns about your ability to manage financing effectively. If you have a history of bankruptcy or loan defaults, it can further decrease your chances of approval. That being said, some lenders are understanding of situations that might have led to a low credit score, such as medical bills or unexpected life events.
But even if you do get approved, expect the terms to be less favorable. This could mean higher interest rates, a lower credit limit than you requested, or stricter repayment conditions compared to borrowers with good credit.
Four Factors to Consider When Applying for Bad Credit Business Loans
Here are a few factors lenders consider when you apply for a bad credit business loan:
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1. Annual Revenue
A company’s annual revenue is the total amount of earnings the company generates in a given year. Lenders look at the company’s annual revenue to see if the business earns enough to pay the money they’ve withdrawn back in full.
Generally, business owners can get a credit limit equivalent to 8% to 12% of their annual revenue. Companies that can show a higher revenue to lenders typically have better chances of qualifying for a credit line with better terms (i.e., extended repayment period, lower interest rate, higher credit limit, etc.).
Unlike traditional lenders, alternative lenders are more flexible regarding the annual revenue requirement for business loans. Most FinTech companies may grant a credit line to applicants with yearly revenue of $25,000 or more.
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2. Cash Flow
Again, the lender’s primary concern when granting a line of credit, or any financing, is the business’s ability to pay the loan back. That said, the lenders may examine your cash flow to see how you manage the money that comes in and out of the company. They will want to know whether you can afford the regular payments for the credit line. To do that, you may have to provide a copy of your business’ bank and cash flow statements for the past three months.
If your business has a history of insufficient funds, it might be worth considering delaying your loan application until you can demonstrate a more stable cash flow. Businesses with a poor cash flow are less likely to get approval from any lenders.
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3. Collateral
Some lenders may require business owners to present a personal or business-owned asset as security for the financing. For the lenders, the collateral will mitigate the risk they face when handing out a business loan to a high-risk borrower. It will give the lenders an assurance that they will be able to recoup their losses in case the business goes under and becomes unable to pay off the loan balance.
Pledging a highly valued asset like real estate or equipment significantly improves your odds of qualifying for a business line of credit if you have bad credit. Tieing your loan to a high-value asset shows lenders you have a greater incentive to pay off the loan.
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4. Debt Obligation
Businesses with existing business loan obligations (i.e., a mortgage) may have a hard time qualifying for a bad credit business line of credit. Why? Because now the lender has competition for who gets paid first should your business go bankrupt.
With business loans, the first lien position lender gets paid first. Any amount left after the first position lender has been paid goes to the second position lender. In other words, if the lender that granted the business line of credit is in the second position, they would have lesser chances of getting paid, especially if the borrower owes a considerable sum to the first position lender.
How to Get a Business Line of Credit With Bad Credit
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1. Know Your Current Credit Standing
When you’re in the market for a line of credit, one of the most important things that you should consider is your credit score. It will help you determine what line of credit you need and can afford. Poor credit scores usually translate to higher interest rates, lower funding, or shorter repayment periods.
Check your credit report to get an idea of where you currently stand. The US government has mandated a law that entitles each citizen to one free credit check a year, so take advantage of that. If you’re actively working to grow your credit score, you’ll likely want to check it more often, in which case you may have to pay a small fee for any additional credit report requests.
Nevertheless, checking your credit report every now and then will help you spot any errors that may be dragging your score down. If you see a mistake, call the bureau immediately so they can correspond with the vendor or lender and restore the accuracy of your credit report as soon as possible.
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2. Sign a Personal Guarantee
A personal guarantee is a person’s legal promise to repay the debt the lenders issued to the company they own or co-own. Basically, it mandates that if the business becomes unable to make the required repayments, the owner(s) will take on the debt and pay it using their personal assets.
Providing a personal guarantee when applying for a line of credit with bad credit provides credit issuers with an extra layer of protection. It ensures that they will still get paid even if the business goes bankrupt. With the additional assurance, lenders may also be more likely to extend a better loan term and interest rates to applying companies.
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3. Add a Co-Signer
Young businesses without an established credit history can opt to include a co-signer in their application process to increase their chances for approval. A co-signer is another person who signs an agreement binding them to the loan that the business owner (you) took out. In case you default, they become solely responsible for paying the loan amount back. Your co-signer could be a co-worker, parent, friend, or spouse.
Ideally, the co-signer should have an excellent credit score, a low debt-to-income ratio, and a solid income. Lenders tend to favor applications where two people are responsible for paying the loan back, with at least one of them considered a highly qualified borrower.
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4. Apply for a Realistic Loan Amount
When applying for a loan with bad credit, it’s especially important to provide a reasonable estimation of the amount you want to borrow. This means that your current financials should support the amount you’re looking to borrow.
When you apply for the right amount, it will be easier for you to pay it off. The last thing you want is to be burdened with a massive debt you can’t manage.
Before applying, revisit your profit and loss statements, balance sheets, and financial forecasts. Try to see areas in your business where you can cut some costs. You should be able to generate at least three forecasts – actual-, worst-, and best-case scenarios. If your budget allows it, work with an accountant to help you with your forecasts. They can help you arrange your financials so you can come up with realistic numbers that you can then present to the lenders.
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5. Find the Right Lender
As mentioned, it’s still possible to qualify for a loan even with bad credit. But to increase your odds, you have to find the right lender who will accommodate your needs and current situation.
While it may be harder to qualify from traditional lenders (i.e., banks), small businesses may have more luck qualifying from alternative financing institutions. Some may accept applications with credit scores as low as 500 and with a revenue of $25,000 per year.
Finding a lender can be as easy as doing a quick Google search. You can also ask people in your network – friends, other business owners, etc. – if they have recommendations. When shopping for a lender, don’t hesitate to ask them about the loan terms, repayment structure, and fees. Be truthful about the information you provide to avoid problems in the future. Compare their offers to those of other lenders and see which one best fits your business needs.
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Alternative Bad Credit Business Loan Options
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Equipment Financing
Equipment financing is a loan or lease that allows you to acquire essential equipment without a large upfront cost. It’s similar to car financing but for business equipment like machinery, medical equipment, or even office furniture.
There are two main types of equipment financing:
Loan: You borrow the money to purchase the equipment directly from a lender and then repay the loan with interest over a set period.
Lease: You essentially rent the equipment from a lender for a specific term. At the end of the lease, you may have the option to purchase the equipment for a residual cost.
Equipment financing can be attractive for businesses with bad credit in a couple of ways. First, some lenders may place more weight on the value and condition of the equipment itself when evaluating the loan application. This can be helpful if the business has a solid track record of managing its finances. Second, using equipment financing can help a business build its credit history by making on-time lease or loan payments.
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Invoice Financing
Invoice financing is a way to get cash quickly on unpaid invoices from your customers. Here’s how it works: you sell your outstanding invoices to a financing company at a discount. The financing company then gives you a percentage of the invoice value upfront, typically around 70% to 90%. Once the customer pays the invoice, the financing company collects the full amount and remits the remaining balance to you, minus any fees.
This financing option can be appealing to businesses with bad credit because it focuses on the creditworthiness of the customer who owes the money rather than the business itself. As long as your customers have a good track record of paying their bills, the lender is more likely to approve the invoice, regardless of your business’ credit history.
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Business Credit Cards
If you don’t qualify for a bad credit business line of credit, you might also consider applying for a business credit card.
Business credit cards work on the same principle as lines of credit. When a lender approves you for one, you’ll be given a card you can use for every business transaction. Whether you’re buying supplies for your business or paying for services, a credit card can help address your company’s short-term needs.
The biggest benefit of business credit cards is that almost all start-ups can qualify for one. As long as the business has a decent personal credit score, obtaining one for their business is highly possible. Not only that but once you have the card, you can then work towards building and improving your credit so that you can qualify for more comprehensive loans in the future.
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Merchant Cash Advances
Merchant cash advances (MCAs) are a financing option for businesses, particularly those that accept credit card payments. They work like this: a business receives a lump sum of cash upfront from an MCA lender. In exchange, the business agrees to repay the advance with a percentage of its future sales, typically collected automatically from its daily card transactions.
One advantage of MCAs is that they can be easier to obtain for businesses with bad credit compared to traditional bank loans. This is because MCA lenders typically base their approval on a business’s recent sales history rather than its credit score. So, for relatively new businesses or those with past credit issues, an MCA may be a more attainable source of funding. However, to offset the risk MCA lenders are taking on, merchant cash advances typically come with higher fees and interest rates than other small business loans.
Ready to apply for a Business Lines of Credit?
Is a Business Line of Credit for Bad Credit Right for You?
Ultimately, the decision about whether a business line of credit for bad credit is right for your business depends on its current situation.
But, in general, a line of credit can be helpful in the following cases:
You need continuous access to extra cash to address immediate needs.
You need more control over the amount you will use.
Your business often experiences cash flow shortages, especially during slow seasons.
You need to build or improve your credit score to qualify for comprehensive business loans in the future.
Ready to apply for a Business Lines of Credit?
Is a Business Line of Credit for Bad Credit Right for You?
Ultimately, the decision of whether a business line of credit for bad credit is right for your business depends on the situation your business is currently in.
But, in general, a line of credit can be helpful in the following cases:
- You need continuous access to extra cash to address immediate needs.
- You need more control over the amount you will use.
- Your business often experiences cash flow shortages, especially during slow seasons.
- You need to build or improve your credit score to qualify for comprehensive business loans in the future.
Final Thoughts
Getting a business line of credit with bad credit can be a hurdle, but it's definitely possible. By understanding the different lenders out there, building a solid business plan, and exploring all your options, you can increase your chances of securing the financing you need. Remember, a business line of credit can be a powerful tool for managing short-term needs and helping your business grow.
If you're ready to explore your financing options, SMB Compass is here to help! We can guide you through your choices and find the perfect fit for your needs. Just contact us today to learn more!
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Common Questions. Straight Answers.
Getting a business line of credit with bad credit is possible, though it might be more difficult. Alternative lenders often consider factors beyond credit score, such as revenue and cash flow. Secured lines of credit, where you offer collateral, can also help. Other options include having a co-signer with good credit or working on credit repair. Remember to explain your situation and compare bad credit business loan options from various lenders.