Being able to raise working capital to stock up on inventory, buy equipment, or pay your employees is a must to keep things running smoothly when you own a small business. While bad credit can be an obstacle to getting a loan from a traditional bank, online lenders offer a way for getting the money your business needs quickly, even when your credit is far from perfect. These lenders look beyond your credit score and consider other factors, such as how long you’ve been in business and how much revenue you’re bringing in, when gauging your creditworthiness. But short- and long-term business loans are not your only choice when you need financing. I also looked at alternatives, such as invoice financing, inventory financing, and merchant cash advances.
The Simple Dollar’s Picks for Best Bad Credit Business Loans
- Best for New Businesses With No or Bad Credit: OnDeck
- Best for Small Businesses With Less than $100K in Annual Revenue: Kabbage
- Best for Established Businesses With Higher Revenues: Dealstruck
- Best for Invoice Financing: BlueVine
- Best for Inventory Loans: Fundation
- Best for Merchant Cash Advances: Capify
How I Picked the Best Bad Credit Business Loans
For this roundup of the best bad credit business loans, I looked at an exhaustive list of criteria to make my final selections. Here’s everything I took into consideration when deciding which lenders rose above the crowd.
- Funding amount: Small business owners tend to have very different borrowing needs than the average Joe. While you may not be able to borrow as much as you would with an SBA or bank loan, the lenders featured here offer loans in the six-figure range, which is helpful if you need capital for a large expense.
- Minimum credit requirements: The best lenders understand that your credit score alone isn’t necessarily a measure of your business’s ability to repay a loan. These lenders give you some leeway for approval that a traditional bank may not.
- Time in business/revenue requirements: Besides your credit score, online lenders are interested in how long your business has been established and its profitability.
- Funding speed/convenience: Online lenders are appealing because their loan application and funding process is faster than traditional banks. I narrowed my scope to include lenders that make it possible to obtain capital without a lengthy wait time.
- Website design: A clunky website can lead to frustration when you’re trying to pin down a loan for your business. The best lenders have user-friendly website designs that are transparent and easy to navigate.
- APR and fees: One trade-off of being able to get a small business loan when you have bad credit is that it often entails paying a higher interest rate or more in fees. The best lenders feature the most competitive rates and keep fees as low as possible.
- Repayment terms: Before you take on any loan, you need to understand how the payments add up and how long the repayment term is. The goal is finding a loan with terms that are suited towards your business structure.
- Reputation: When borrowing money, you should be concerned with how reputable the lender is. The online lending marketplace is fairly new, but the best lenders are the ones whose track records have proven them to be trustworthy.
The Best Bad Credit Business Loans
Small business term loans allow you to borrow a specific amount of money and repay it over a set period of time. These three online lenders offer term loans to newer and established businesses that lack a stellar credit rating.
Best for New Businesses With No Credit or Bad Credit
OnDeck earns high marks for convenience and speed, with borrowers able to get their hands on up to $500,000 in funding in as little as 24 hours. You can choose between short- and long-term loans, with repayment periods extending up to 36 months. Payments can be made daily or weekly, depending on what works best for your business.
A credit score of 500 is the minimum needed to qualify, assuming you’ve been in business for at least 9 months and you’re generating $75,000 or more in revenue annually. That makes it better suited to businesses that are still in the growing stage and maybe haven’t had as much time to build up their credit history. An OnDeck loan might be just what you need if you’re ready to take a newer business to the next level.
Who it’s good for: OnDeck loans are good for businesses that have bad credit or a thin credit file, but have the means to repay a loan quickly.
Who should look elsewhere: While OnDeck works with borrowers in more than 700 industries, certain business aren’t eligible for loans. Those include pawn shops, used car dealers, attorneys, travel agents, and gun sellers.
Best for Businesses With Less Than $100K in Annual Revenue
A working capital loan from Kabbage can put up to $100,000 in your PayPal or bank account almost immediately after you’re approved. There’s no minimum credit score needed. You just have to be in business for at least 12 months and have $50,000 in annual revenue. Kabbage term loans are worth a look if you run a small business, like a specialty boutique or a repair service, that has modest but steady revenues.
I spoke with a Kabbage customer service rep to clarify how its rates and fees work. It doesn’t charge a traditional APR. Instead, you repay either 1/6 or 1/12 of the loan amount each month, depending on your loan term. You also pay a monthly fee of 1.75% to 13% of the loan amount, based on approval.
With the six-month plan, the fee is higher the first two months, then it drops to 1% for the remainder of the loan term. With a 12-month loan, the fee is higher for the first six months and is reduced to 1% for the remaining six months. The lower the fee, the more money you’ll save.
If you borrow $60,000 for six months with a 3% fee, your regular payment would equal $10,000 per month. For the first two months, you’d pay an additional $1,800 per month for the fee. After that, the fee would decrease to $600 per month. Altogether, you’d pay a total of $6,000 in fees, which works out to an APR of 34.26%.
Who it’s good for: Kabbage’s flexible qualification requirements make it attractive to smaller businesses that aren’t generating a ton of revenue. It’s also suited towards business owners with credit scores below 500.
Who should look elsewhere: You’ll want to set your sights somewhere else if you need to borrow more than $100,000. Also, the effective APR can be high if you’re charged a higher monthly service fee.
Best for Established Business With Higher Revenues
If you’ve got at least two years of operating history under your belt and $150,000 or more in annual revenue, Dealstruck could be the lender for you. Borrowers who have a credit score of at least 600 can qualify and loan amounts go up to $500,000.
Dealstruck recently updated its repayment terms. Currently, term loans are available for 12, 24, or 36 months. There’s a 4.99% origination fee, which is something to keep in mind if you’re applying for a larger loan. If you were to take out a $500,000 loan, the origination fee would cost you $24,950, which is certainly not chump change. By comparison, OnDeck’s origination fee for a first time loan is 2.5-4%, which would cost between $12,500-$20,000. You should note that both Dealstruck and OnDeck deduct the origination fee upfront from the loan proceeds.
With a term loan from Dealstruck, you can pay the balance down over the course of 36 months. That can be helpful if you need a bigger loan and more time to pay it off, like with the purchase of a large piece of equipment. It also helps to simplify your budgeting and long-term forecasting when you have a fixed payment.
Who it’s good for: A Dealstruck loan makes sense if you want to stretch out repayment so the monthly payments are as low as possible and you meet the minimum in-business requirements.
Who should look elsewhere: While Dealstruck’s rates start at 9.99%, that rate applies to borrowers whose credit scores are 675 or better. A score of 600 will get you an APR somewhere in the neighborhood of 22.99% to 27.99%, so Dealstruck may not be for those who qualify for a lower APR elsewhere.
Bad Credit Business Term Loans At A Glance
|
Lender
|
Borrowing Limits
|
Credit Requirements
|
Annual Percentage Rate (APR)
|
Origination Fee
|
Repayment Terms
|
|---|---|---|---|---|---|
| OnDeck | $5,000 to $500,000 | One owner must have a 500+ credit score. At least 9 months in business and $75,000 in annual revenue. | Short-term loans: APRs starting at 9% Long-term loans: APRs starting at 5.99% |
1st loan: 2.5-4% of loan amount 2nd loan: 2.25-3% of loan amount 3rd+ loan: 0-3% of loan amount |
Short-term loans: 3 to 12 months Long-term loans: 15 to 36 months |
| Kabbage | $1,000 to $100,000 | No minimum credit score needed. At least one year in business and $50,000 annual revenue. | Borrowers repay 1/6 or 1/12 of the loan amount each month, based on the loan term. A fee ranging from 1.5% to 13% of the loan amount | None | 6 or 12 months (minimum loan amount of $15,000 required for 12-month term) |
| Dealstruck | $25,000 to $500,000 | 600+ minimum credit score. At least 1 year in business and $150,000 in annual revenue. | APRs starting at 9.99% for qualified borrowers. | 4.99% of loan amount | 12, 24, or 36 months |
The Best Alternative Financing for Businesses With Bad Credit
If you have outstanding invoices, inventory that you plan to purchase or daily credit card receipts, these alternative lenders may be able to help meet your funding needs. You can use your unpaid invoices, the value of your future inventory, or your credit card sales as collateral for financing, and not have to rely on your credit score alone.
Best for Invoice Financing
BlueVine is designed for businesses that need an advance of up to $500,000 on their outstanding invoices and can’t afford to wait for financing. One of its best features is the fact that it takes just minutes to apply and funding is available in as little as one day.
There’s no origination fee and you can advance as much as 85% of your outstanding invoices. You then pay BlueVine back over a period of 1 to 12 weeks, along with a weekly fee, equal to a percentage of the advance amount. The standard rate is 1% per week, but you’ll need to go through the quote process to find out if you qualify for a higher or lower rate.
So what kind of business should consider BlueVine? Invoice factoring can be a boon for service-based businesses that don’t have any inventory or cash receipts to borrow against. If you run a small marketing firm or you’re a website designer, for instance, invoice financing could fill temporary cash flow gaps.
Who it’s good for: BlueVine offers financing to borrowers who’ve been in business for at least three months, so this one’s ideal if you’ve got a newer business and you need fast financing.
Who should look elsewhere: BlueVine doesn’t work with small businesses in the medical or healthcare industries.
Best for Inventory Financing
Fundation offers conventional term loans to businesses that need to beef up their inventory. You can apply online in less than 10 minutes and have access to the funds within three days. You’ll be charged an origination fee if you get a loan from Fundation, which ranges from 2% to 5%. Your individual fee is based on your credit rating, time in business, annual revenue, and how much you plan to borrow.
Certain businesses may benefit more from Fundation’s financing than others. For example, let’s say you operate a seasonal business that earns most of its revenue during the summer months. You need a loan to purchase inventory for the coming season and you anticipate being able to pay it off in 12 months or less once the inventory sells.
In that scenario, getting an inventory loan through Fundation might make sense. The inventory serves as the collateral for the loan, and you’re not stuck paying for this season’s inventory two or three years into the future.
Who it’s good for: Fundation is a solid choice if you’re looking for convenient financing to purchase the inventory your business needs, particularly for seasonal businesses.
Who should look elsewhere: Fundation only works with businesses that have at least two years of business history, so if your business is newer than that, you won’t be able to get funding.
Best for Merchant Cash Advances
Out of all six lenders I’ve included, Capify has the most generous borrowing limits. You can get an advance as low as $5,000 or as high as $1,000,000 — if you’ve got the debit and credit card sales to back it up.
Capify charges a factor rate instead of an APR to assess fees and interest. This rate is expressed as a decimal point. I spoke with a Capify representative who advised that factor rates and repayment terms are customized to each borrower’s needs, so if you’re interested in getting an advance, you’ll have to go through the free quote process for more details.
If you run a business like a boutique or restaurant that does a high volume of credit card sales on a daily basis, a merchant cash advance from Capify may be more attractive than a term loan or invoice financing. You can pay the advance back from your daily receipts and the amount you pay can go up or down, based on your sales. If you find yourself in a lull, your payment adjusts accordingly so you’re not straining to keep up with what you owe.
Who it’s good for: A merchant cash advance from Capify is good for businesses that have steady credit and debit card receipts and need money to cover payroll, hire employees, or renovate their premises.
Who should look elsewhere: Repayment is made on a daily basis so if you don’t have daily cash flow, an advance from Capify probably won’t work for your business.
Bad Credit Business Alternative Financing At A Glance
|
Lender
|
Borrowing Limits
|
Credit Requirements
|
Rates and Fees
|
Repayment Terms
|
|---|---|---|---|---|
| BlueVine | $20,000 to $500,000 | 530+ credit score or higher. At least 3 months in business and a minimum of $10,000 in monthly revenue. | Borrowers pay a weekly fee, with a standard rate of 1% per week. | 1 to 12 weeks |
| Fundation | $20,000 to $500,000 | 600+ credit score or higher. At least 2 years in business and $100,000 in revenue. | APRs start at 7.99%. Origination fee ranges from 2% to 5%. |
1 to 4 years |
| Capify | $5,000 to $1,000,000 | 60+ days of credit card processing history. At least $5,000/month in credit card sales. | Borrowers are charged a factor rate, which is tailored to their specific needs. | Repayment terms are also determined on a case-by-case basis. |
Did You Know?
How do the interest and fees compare?
One of the most important things you can’t afford to overlook when choosing a bad credit business loan is cost. Invoice financing terms, for example, are going to be different from what you’d get with a term loan, but they may be more favorable for certain kinds of businesses than others.
In my line of work, I’m sometimes waiting 30 to 60 days for a client to pay an outstanding invoice. Fortunately, I have minimal operating expenses and other clients that pay more regularly. On the other hand, the wait time to get paid could be tough for those who run a service-based business with employees. Think cleaning companies, subcontractors, or caterers.
If they know that cash is on the way, however, they could borrow against their invoices to pay their workers, then when the client makes good on the invoice they can pay the finance company back. Stretching out repayment over 12 or 24 months with a term loan wouldn’t make sense in that scenario.
Watch out for potential pitfalls
Taking on a loan can help you grow your business or stay afloat when cash is tight, but it’s not without certain risks. There are two things in particular that you need to consider thoroughly before committing to a bad credit business loan.
- Cost: Borrowing money for your business when you have bad credit almost certainly means paying more in interest and fees than you would if you had good credit. If you’re taking on a six-figure loan, a higher APR can add thousands to your total payoff. That’s why it’s absolutely crucial to understand how the lender calculates the interest on your loan and how the fees break down. Essentially, you have to be sure any return on investment you get from having access to financing justifies the cost.
- Liability: Even when a lender isn’t asking for collateral, they may ask you for a personal guarantee or a blanket lien. Both can put your personal assets at risk if something goes awry and you’re not able to make good on what you borrowed. The lender could seek a judgment against your business and you personally, meaning they could attach your bank accounts or property to try and collect. If a lender’s asking for a personal guarantee or a blanket lien as a condition for borrowing money, you need to fully understand what that means before signing on the dotted line.
Improve your credit rating for better loan terms
Bad credit business loans can be very useful, but they can also be an expensive way to meet your financing needs. Working on raising your personal credit score and establishing a positive business credit history are wise moves if you want to expand your borrowing horizon.
Boost your personal credit score
- Pay bills on time. When a lender checks your personal credit score, it’s most often your FICO score they’re looking at. Thirty-five percent of your FICO score is based on your payment history, so paying on time is the best way to make your credit shine.
- Pay down balances. Thirty percent of your FICO score is based on your credit utilization. This refers to how much of your total available credit you’re using. To keep your score moving up instead of down, shoot for using 30% or less of your available credit.
- Keep old credit accounts open. The age of your credit history influences 15% of your credit score. Leaving older accounts open can work in your favor where your score is concerned.
- Utilize different types of credit. Ten percent of your FICO score is based on your credit mix. Revolving lines of credit (like credit cards) and installment loans are weighted differently, so using both is a good way to balance your score out.
- Minimize how often you apply for credit. Applications for new credit show up on your credit report and count towards 10% of your score. Each time you apply, a few points are shaved off, so forgo the temptation to open new accounts unless you absolutely need to.
Build good credit for your business
- Incorporate your business. When you’re running a business as a sole proprietor, there’s no dividing line between your personal and business assets, income, or credit. Incorporating allows you to establish a separate credit identity for your business, apart from your personal score.
- Establish vendor credit. One of the easiest ways to get credit in your business’s name is to set up vendor or trade accounts. You can then register with Dun & Bradstreet to create a business credit file. If you’re paying your invoices on time and keeping your tradeline balances low, those two things can work together to help your business credit rating.
- Get a business credit card. Business credit cards can be a great way to earn some money-saving rewards and build credit for your business. You’ll have to use your personal information to apply and offer a personal guarantee, but your account activity will show up on your business credit report. Again, paying on time and using 30% or less of your credit limit are the smartest ways to raise your business credit score.
The Bottom Line
Having bad credit doesn’t mean that a small business loan is out of your reach and working towards raising your personal and business credit score can put you in a stronger position to find lower rates in the future. OnDeck is a good place to start if you’re looking for term loans, but ultimately it’s going to depend on your business, so shop around and consider the alternatives. Also, it’s always a good idea to give the fine print a thorough read-through before you commit to anything. After all, the lender will be looking closely at your financials and business background, so it’s just as important that you perform your own due diligence to be sure that you’ve made the right choice for your business.
The post Best Bad Credit Business Loans for 2016 appeared first on The Simple Dollar.
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