Positive cash flow is something every business relies on to succeed. Whether you’re paying day to day expenses for your business or planning a large-scale investment, working capital is what makes it happen.
A business loan can come in handy for financing those needs. If you don’t have a perfect credit score, however, you may be wondering whether getting approved for a loan is possible.
While lenders weigh your credit history in the balance for business loan decisions, a low credit score doesn’t automatically put you out of the running. It’s possible to get a business loan even when you don’t have stellar credit. Here’s what you need to know.
Which Credit Scores do Lenders Consider for Business Loans?
That’s a good question and the answer depends largely on the lender.
Some business lenders may look at your personal credit scores for loan approvals while others check out your business credit scores. Some lenders may take both personal and business credit scores into account.
That’s important to know if you have a strong personal credit score but a low business credit score, or vice versa. Having a higher credit score on one side could balance out a lower one on the other.
Business Loans for Less Than Perfect Credit
Business credit scores and personal credit scores operate on a range and understanding where you fall on that range can help you choose a business loan option.
For example, the PAYDEX score issued by Dun and Bradstreet ranges from 0 to 100. A score of 80 to 100 signals to lenders that you’re a low risk and likely to pay your bills on time. A score of 50 to 79 is medium risk while anything below 50 is high risk.
With personal credit scores, such as the FICO score, the ranges work a little differently. FICO scores run from 300 to 850, with 850 being a perfect score. Fair credit is a score between 650 and 699 while a score below 650 would generally put you in the poor to bad credit range.
That raises a good question: Is there a minimum credit score that’s required to get a business loan? It depends on the lender and the type of loan you’re looking for.
If you’re looking for a Small Business Administration loan, for example, you’ll generally need to have a personal credit score in the 700 to 850 range. But, there are some online lenders that offer business loans with no minimum credit score requirement.
Some of the loan types you may qualify for with less than perfect credit include:
- Short term loans
- Long term loans
- Working capital loans
- Business lines of credit
- Inventory financing
- Purchase order financing
- Equipment financing
- Invoice factoring
- Merchant cash advances
Some of these business loans may be easier to qualify for with less than perfect credit than others.
Invoice factoring and inventory financing, for example, use your outstanding invoices or the inventory you plan to purchase as collateral for the loan. With merchant cash advances, your future debit and credit card sales act as collateral. In a purchase order financing arrangement, lenders are usually more interested in your customers’ credit scores than yours.
Essentially, a lender may be more willing to overlook a low credit score if they have some guarantee that you’ll be able to repay what you borrow. These types of financing can be good if you had a credit hiccup that caused your score to drop or you have a newer business and you’re still working on establishing credit history.
Applying for business loans with poor or bad credit
Before applying for any business loan, take time to check your personal and business credit reports and scores. This does two things.
First, it lets you see where you stand, credit-wise. That’s useful because you can compare your credit scores to the minimum credit scores required by different lenders to weed out the loans you’re least likely to qualify for.
Second, it gives you an opportunity to look for errors or inaccuracies on your credit report that could be dragging your score down. If you see an error, you have the right to dispute it and attempt to have it removed or corrected. Cleaning up credit report errors could give your score a boost.
Aside from reviewing your credit, remember to compare loan terms carefully. As a general rule, the lower your credit score, the higher the interest rate you’re likely to pay when you borrow so be sure to check out the rates. Also consider the loan fees and the repayment terms before you commit to a loan. You need to know beforehand how the true cost of borrowing adds up and what the payments are to make sure a business loan fits your budget.