How To Get A Bad Credit Business Loan

How To Get A Bad Credit Business Loan

Written by Veronica Ott
Fact-checked by Caitlin Wood
Last Updated November 12, 2021

At some point in a business’s life, it will need financing to grow, restructure, or develop. While adapting and changing is always good, the downside is you usually need good credit to get approved for a business loan, especially with banks and traditional lenders. If you don’t have the best credit, applying for a business loan can seem daunting and intimidating leaving you feeling discouraged. 

Fortunately, the road doesn’t end there. You do have options and you do have the opportunity to achieve your business goals. All you need to do is find a lender that will work around your credit issues. To learn more about bad credit business loans, how to obtain one and how you can improve your credit, continue reading below.

What Is Considered A Bad Credit Score? 

When you apply for a loan, lenders consider your credit score and your business’ credit score, but they also look at so much more. In terms of your personal credit score, the credit score range is between 300 and 900. In terms of business credit scores, the range is from 100 to 900. The lower you are on this scale, the worse your credit will be. 

There isn’t really a magic number that is considered to be bad credit because each lender has differing perspectives and requirements. For personal credit scores, a good rule of thumb is 650, anything lower than this number is generally perceived to be poor or bad credit. On the contrary, there isn’t really a benchmark for business credit scores as lenders consider much more than merely the credit score and each lender has different requirements. 

Types Of Bad Credit Business Loans

Unfortunately, with bad credit, you won’t have access to all of the different types of loans under the sun. Most lenders that work with borrowers with bad credit offer two types of loans: retail merchant advances and business term loans. Both of these loan types are approved based on monthly sales of your business as opposed to credit scores. Let’s explore what these are in-depth below. 

Retail Merchant Advances

The total amount of your loan is based on your monthly credit card sales. The loan is repaid daily based on a set percentage of your daily sales. As an example, you choose to borrow $5,000 and repay it with 10% of your daily sales. This type of business financing is one of the most flexible solutions available to business owners and can complement your business operations nicely. 

Business Term Loans

A business term loan is ideal if you’re looking to borrow more money for a larger project since retail merchant advances are typically for small amounts. The following are common requirements: have been operating for at least 6 months, Canada-based business, monthly credit card sales higher than $40,000, not a home-based business and not an e-commerce based business. These types of loans don’t require collateral and repayment terms can be flexible to suit your needs. However, interest and fees will be applicable to the loan.

How Will Your Bad Credit Affect Your Loan? 

If you have bad credit, you’ll be perceived as a high risk in the eyes of lenders. Interest rates are based on the amount of risk the lender is taking which means that the worse your credit is, the higher your interest rates will be on financing. 

Improving Your Chances

You might feel discouraged if you have bad credit, but there are things you can do to improve your chances of approval and to get better terms and conditions. Besides avoiding common business loan application mistakes, below is a list of things you can do to better your situation before applying. 

  • Collateral. Even though collateral isn’t a requirement for a bad credit business loan, using it can increase your chances of approval and help you secure a lower interest rate. Collateral provides lenders with security that they can take ownership of should you default on your loan.
  • Get a Guarantor. Also known as a co-signer, a guarantor is a person who agrees to repay your loan if you default. This is a lot to ask of someone, be sure that its someone you trust and has good personal finance practices.
  • Check Your Credit. It’s good practice to check your credit before applying because you’ll know exactly what the lender is seeing. In addition, it will give you the opportunity to do what you can to improve your credit before submitting an application. 

How Can You Improve Your Credit Score?

The great thing about bad credit is there is no such thing as forever credit. There are many things you can do before submitting an application to improve your credit score. Keep in mind that it can take several months for your actions to reflect on your credit score. Below are ways you can improve your credit score

  • Pay off other outstanding debts
  • Ensure that you pay all bills on time and in full
  • Keep your credit utilization ratio low by keeping balances below a certain amount or requesting higher credit limits on credit cards and revolving credit
  • Don’t apply for financing unless you absolutely need it and can afford it
  • Keep old accounts open even if you aren’t actively using them
  • Dispute errors on your credit report with the appropriate credit bureau

What Do Alternative Lenders Consider When You Apply For A Bad Credit Business Loan? 

Alternative lenders like Borrowell are an excellent option for individuals who need financing with bad credit. Because they work with bad credit, their requirements are significantly different from a bank or other traditional lenders. Let’s explore what alternative lenders consider in their applicants for business loans below. 

  • Employment. Alternative lenders will consider your employment history and where you’re currently working. If you have a strong employment history, it shows you can hold a job and use your earnings to repay their debt. 
  • Income and Expenses. If you’re a business or self-employed, lenders will request to see your income and expenses. They’re mainly concerned with the net income you produce because that’s what you’ll be using to repay their debt.

Business Goals Are Still Achievable With Bad Credit

It can be easy to get discouraged with bad credit, but the reality is you have options. The main objective for you will be finding a lender that is willing to work with your situation. Loans Canada can help match you with a lender who works with a wide variety of business owners regardless of their credit.

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Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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