The Ultimate Guide to Business Lines of Credit for Bad Credit
Key Takeaways
- Business lines of credit for bad credit is possible for businesses that can’t qualify for traditional financing because of a bad credit background. 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 bases approval mostly on the business owner’s personal credit score, making it 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 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 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 Repayments are then made weekly or monthly until you’ve paid back the amount you’ve withdrawn in full.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 lines of credit are a revolving credit, which means every time you withdraw money and pay that money 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?
The simple answer is yes, but it depends where you apply. Compared to banks and traditional lenders, FinTech companies and alternative lenders are more willing to take on the risks associated with younger businesses. This includes having a poor credit score or a lack of credit history.
If you apply with an alternative lender, they will look at your business’ credit score first. If it’s not good, or you have an insufficient credit history because it’s still early in your operation, they’ll look at your personal score to further evaluate your qualification. If your personal credit score is also low, then you’ll be considered a high-risk borrower.
A poor personal credit score reflects a struggle to manage your personal finances which indicates you may struggle to manage your business’ finances. If you have a history of bankruptcy or loan default, your chances for qualification go down even further.
That said, lenders will take into consideration why you your personal score may be suffering. They understand it’s not always the result of mismanaged debts. Perhaps you suffered a medical illness that left you with big hospital bills or you went through a divorce that led to a lot of debt. If they consider your circumstance and are willing to approve you, just keep in mind there may be less flexibility in the financing terms they offer.
Four Factors to Consider When Applying for Bad Credit Line of Credit
That said, lenders will take into consideration why you your personal score may be suffering. They understand it’s not always the result of mismanaged debts. Perhaps you suffered a medical illness that left you with big hospital bills or you went through a divorce that led to a lot of debt. If they consider your circumstance and are willing to approve you, just keep in mind there may be less flexibility in the financing terms they offer.
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 when it comes to the annual revenue requirement of business loans. Most FinTech companies may grant a credit line to applicants with yearly revenue of $25,000 or more.
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 not-sufficient funds (NSF), 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.
3. Collateral
Some lenders may require business owners to present a personal- or business-owned asset to act 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. When you tie your loan up to a high-value asset, it shows lenders you have a greater incentive to pay off the loan.
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.
Top Tips to Improve Your Odds of Qualifying for a Bad Credit Business Line of Credit
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 period.
To get an idea of where you currently stand, check your credit report once in a while. The US government has mandated a law that entitles each citizen 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 ASAP.
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.
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 that signs an agreement that binds 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 be someone with an excellent credit score, has 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 as a highly qualified borrower.
4. Apply for a Realistic Loan Amount
When applying for a loan with bad credit, it’s especially important to provide a reasonable estimation for the amount you want to borrow. This means that when applying, the amount you’re looking to borrow should be backed up with your current financials.
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 in. 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.
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.
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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Best Places to Get a Business Line of Credit for Companies with Bad Credit
Banks are notoriously known to be risk-averse, and for them, small businesses with bad credit are extremely high risk. With that, it could be more challenging for small business owners to qualify for a loan from them.
As an alternative, companies often turn to online or FinTech lenders to give them the extra capital boost as they’re more likely to approve a loan regardless of the business’ credit standing. That said, here are the top lenders in the industry that can grant business lines of credit to a business with spotty credit history.
1. Fundbox
With Fundbox, eligible businesses can get up to $100,000 worth of available credit. The rates can be as low as $4.66% of the drawn amount, and the draw term can run from 12 to 24 months. The affordable terms that Fundbox offers make it an excellent financing company of choice for start-ups or small businesses with a poor credit rating.
To qualify for a business line of credit from Fundbox, your business must meet the following requirements:
- Must be US-based or operating select US territories
- At least $25,000 in annual revenue
- A personal credit score of at least 500
- At least three months’ worth of bank statements (two months if the business is using a Fundbox-supported accounting software)
Fundbox may also require you to make weekly payments for the amount you’ve drawn from the credit line. They automatically deduct this from your bank account every Wednesday. If you wish to pay your balance off earlier, you can freely do so as the financing institution doesn’t charge a prepayment fee for their borrowers. Plus, if you’re applying for a loan amount less than $50,000, the lenders will not require you to sign a personal guarantee.
Fundbox has an easy and convenient application process. You simply have to sign up to their platform, provide your details, and connect your bank account or accounting software to their platform. As soon as you complete the registration, their loan officers will immediately get to work and evaluate your eligibility. In some cases, approval can take minutes, and funds can be accessible 24 hours after approval.
Fundbox doesn’t charge a fee for maintenance, withdrawal, termination, and prepayment on their lines of credit, making it an affordable lender of choice for many small businesses.
2. Kabbage
If you’re looking to apply for a credit line that will allow access to larger amounts of capital, Kabbage should be on the top of your list. With Kabbage, the interest rates can go as low as 1.5% to 10%, depending on your business’ performance. Once approved, the lenders can grant you a credit line with a credit limit of $2,000 to $250,000, paid monthly for a term of six, 12, or 18 months. If you want to pay your balance earlier, you do so without having to worry about any prepayment penalties.
Kabbage doesn’t have a minimum credit score requirement but, your company has to be in operation for at least a year and must have at least $50,000 of annual revenue or a monthly revenue of $4,200 for the past three months.
Like Fundbox, Kabbage’s applicants can take advantage of a streamlined application process. All you have to do is to sign up and connect your business bank accounts or accounting software so that they can determine your business’ qualification. The entire process only takes up to 10 minutes, and you can get approval within minutes. Funds can be transferred to your account in a matter of one to three business days.
Another feature of Kabbage is that it allows businesses to access funds in areas that accept VISA. The lender can provide businesses with a Kabbage card, which they can use to withdraw the funds.
3. Headway Capital
Headway Capital is notable for many things. First, they only require limited documentation (only three months’ worth of bank statements) from the borrowers, thus expediting the application process. Second, they can set you up with a line of credit up to $100,000,which you can pay in weekly or monthly installments for a period of 12 to 24 months. Lastly, they don’t charge prepayment penalty fees, so their borrowers can choose to pay off the remaining loan balance earlier to save on interest rates.
If you’re interested in applying for a business line of credit from Headway Capital, here are the qualifications for their business line of credit for bad credit:
- Must be in the business for at least one year
- Annual revenue must be at least $50,000
- A personal credit score of at least 560
If you qualify and get the lender’s approval, they can grant you access to the credit line within 24 hours. /p>
However, the accessibility that Headway Capital offers does come with a significant downside. The credit line can come with a 40% to 80% APR, which most businesses may find too expensive. Depending on what state you operate in, Headway capital may also charge a 2% draw fee every time you access your credit line.
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Alternative Option: Business Credit Cards
If, for some reason, 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 in 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 it’s buying supplies for your business or paying for services, a credit card can come in handy in addressing 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.
Here are two of the best business credit cards available for business owners out there:
1. Capital One Spark Classic
To qualify for The Capital One Spark Classic business credit card, you(the business owner) must have a personal credit score of at least 580. It’s an unsecured business credit card, which means applicants don’t have to pledge collateral or provide deposit up front. It also carries no annual fee making it a good choice among business owners looking for affordable business financing.
Another advantage of the business credit card is that it lets you earn a 1% cashback on all purchases. The card also comes with zero-fraud liability that protects you and your employees if one of the cards gets lost or stolen.
2. Wells Fargo Secured Business Credit Card
If you want to opt for a secured business credit card, the Wells Fargo Secured Business Credit Card might be worth considering. If you apply for the credit card, you’ll be required to back the credit line with a security deposit. The card comes with a credit limit of up to $25,000.
With the Wells Fargo Secured Business Credit Card, you’ll have a choice between earning points or cashback. If you choose cashback, you’ll be earning 1.5% cashback on net purchases using the card. For the point-based system, you’ll get to snag 1,000 bonus points for every $1,000 you spend each month.
You will have to pay a $25 annual fee to use the card.
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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 on Business Line of Credit for Bad Credit
Having a low credit score definitely hurts your chances of qualifying for small business loans. But it doesn’t mean that it’s entirely impossible. There are plenty of available resources that business owners can take advantage of. Alternative lenders, for one, can be a great source for funding for businesses with poor credit ratings.
Headway Capital, Kabbage, and Fundbox are just three of the many available FinTech companies out there. While the terms may not be the most ideal, it’s among the best financing companies that can provide you with access to quick cash and boost your company’s cash flow. With the right credit line, not only will you be able to ensure a smooth business operation, but it will also give you the opportunity to build your credit score so you can negotiate or qualify for better loan terms in the future.
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