Best Startup Loans for Businesses with Bad Credit

You’ve caught the startup spark and you’re ready to launch a successful small-business startup. But then reality hits: you have a lot of startup costs, and you need some cash. You’re not alone: 62% of businesses start with less than $50,000 in capital.²

And if you have poor credit, that adds to the stress of managing cash flow, with good reason. Getting quality startup business loans, SBA loans, or—heck—even personal loans with bad credit can be difficult. But if you meet essential business loan requirements, have a solid business plan, have great cash flow history or projected cash flow, and can prove you’ll be able to pay off your loans, you can get the financing you need.

We’ll dig into different loan options along with other ways to fund your startup.

Best overall: Lendio

If you can’t get financing from a traditional bank or credit union, try alternative lenders. Lendio is a great place to start because it’s a wizard at loan matchmaking. Lendio takes a few key pieces of information from your application to pair you with one of its 75+ lenders, including peer-to-peer lending sites, that are more likely to approve you for a small-business loan.

How’s that for avoiding rejection? From there, you can choose which loan option works best for you, and its representatives will help you along the way. Not-so-great credit? No sweat. Lendio works with business owners who have credit scores as low as 550.

However, Lendio’s options are best suited for borrowers who have significant cash flow and some small-business experience. To secure business funding, you have to have been in business for six months and make at least $10,000 in monthly revenue.

But the relationship won’t work for everybody. Here’s how you can see if you’d be a match:

Best for bad credit: OnDeck

If you’re looking for a business loan but are worried about bad credit, take a look at OnDeck. The minimum credit score it accepts is 500 (the lowest on our list of providers that check credit), so business owners with low credit scores have a chance to get the business funding they need. But loan companies aren’t in the business of risk-taking—at least not without compensation. So the lower your credit score, the higher the interest rate on your loan.

The good news is that OnDeck can help you build your business credit, and it offers discounts on fees when you get another loan through them. So business owners can save with each loan and get better interest rates as their credit improves.

The interest rates can be a touch high, but OnDeck’s loans offer much-needed financing that can make a difference in your business’s success. If you’re an established small business (with one or more years in business and $100,000 or more in revenue for the past 12 months), check out OnDeck.

Here’s how to determine if OnDeck is a good match for you:

Best for low-risk startup loans: BlueVine

BlueVine has created its niche by focusing on two types of financing: lines of credit and invoice factoring. A line of credit is similar to a credit card. You get an interest rate and a credit line, but you only have to pay interest on the funds you choose to use. This is great if you’re not sure how to anticipate your funding needs. And it’s a revolving line of credit, meaning when you repay, it replenishes. As an added bonus, BlueVine doesn’t penalize business owners for paying off the line of credit early.

Invoice factoring only works for businesses that have outstanding invoices with and are waiting for payment from other businesses (meaning you’re a B2B business). In other words, invoice factoring allows you to capitalize on cash flow without waiting for other businesses to pay up. With BlueVine, you also get to choose which invoices to fund, so you can fund those that will really help you out with your cash flow.

Furthermore, BlueVine doesn’t do long-term contracts, so you’re finished as soon as your customers pay up or as soon as you pay back the loan or interest (you still have to pay even if the customer never pays). Just know that if you fall behind on your loan payments, BlueVine will contact the companies on the invoices you use. They want their money, after all. So this could be a downside if you don’t want your clients knowing you’re receiving help from lenders.

Still, it’s a good option if you’re a business owner with poor to fair credit because BlueVine considers cash flow and the business strength of your customers over your own credit history. So you can use your customers’ credit-worthiness to get the loan.

But your credit still matters. Generally, BlueVine looks for borrowers with personal credit scores above 530 for invoice factoring and above 600 for business lines of credit.

Here’s how to determine if BlueVine is a good match for you:

Best for brand-new startups: Accion

Accion is a nonprofit with a mantra of inclusivity. They want more people to have access to affordable financial services. They also consider applications for smaller loans from businesses or business owners with no previous credit score, so it can be a nice way to build up credit. And they’re more than just a typical lender: they offer support, connections, and resources in addition to their loan services.

The team at Accion also want to get to know you, so don’t hesitate to share your business story. If you aren’t able to qualify for a loan, they’ll explain why and help you get in a position to reapply, which you can typically do within three to six months.

You do need a minimum credit score of 575 (550 in some states) and sufficient cash flow to pay the loan, and you’ll need to be current on all debts and bills.

But before you dive in on an application, know that startups require a few extra things. Accion will want to see that you’re receiving income from an outside source, so you may have to provide two recent pay stubs from this outside source. It also requires less than $500 in past-due debt, a partner referral (like SCORE or Small Business Development Centers), and a business plan with a 12-month cash flow projection. If you have all of that, Accion’s willing to work with you, as long as you’ve been in business for less than a year.

Here’s how to determine if Accion would be a good match for your small business:

Best for PayPal Users: PayPal Working Capital

PayPal Working Capital is really a great marketing tool for PayPal: it offers you affordable loan services while hooking you on its platform. This financing opportunity is definitely worth considering if you use PayPal to make sales. As a lender, PayPal offers you one affordable fixed fee, and it doesn’t perform a credit check, making this the most affordable option and the easiest to qualify for with bad credit—if you use PayPal, that is. Here’s what you need to qualify:

• Have a PayPal Premier or Business account for 3+ months
• Process at least $20,000 in annual PayPal sales (with Premier plan) or $15,000 in annual PayPal sales (with Business plan)
• Have no balance on a prior PayPal Working Capital loan

PayPal Working Capital will give you a loan up to 35% of your annual PayPal sales but no more than $125,000 on your first two loans. Once you’ve completed two loans, the loan limit is raised to $200,000.

After paying the one-time fee, you pay back the balance of the loan with each transaction of your business. So if you aren’t getting sales on a particular day, you don’t have to pay anything (although, to be in good standing, you’ll need to repay a minimum of 5%–10% of the loan every 90 days based on your loan terms).

If you make enough revenue through PayPal, this will be the most cost-effective loan option you can get.

Here’s how to determine if PayPal Working Capital is a match:

How to increase your credit score

If you have poor credit, it may be difficult to qualify for a business or personal loan. If you do qualify, you’re likely to have very high interest rates and may have to offer collateral to secure your loan. So it’s a good idea to build up your credit so you can qualify for more attractive lending options. You’ll want to have a good personal credit score and business credit score because they’ll likely be linked.

First off, you should make sure your business is building credit. Here’s what you need to do:

• Register your business as a legal entity like an LLC or S corp.
• Register for an EIN (employer identification number).
• Open a business bank account.
• Keep your business finances separate from personal finances.
• Apply for lower-stakes loans like business lines of credit or equipment loans.
• Establish a trade line with a business or vendor where you pay your invoices through credit. Just make sure the business or vendor reports to a major credit bureau.

And to increase a credit score, be sure to take these steps:

• Pay your bills on time.
• Manage your debt so you can prove you’re worthy of a loan.
• Have a good debt-to-credit ratio (meaning your debt is much lower than your credit limit).
• Spend only 30% of any credit limits.
• Don’t apply to loans you won’t qualify for.
• Build credit through microloans or secured credit cards.

Alternative ways to fund your business without loans

Personal and business credit cards

Credit cards are a good way to build credit without the stringent requirements of loans. However, it’s still difficult to get a credit card with bad credit. If you can’t qualify for a traditional credit card, you can apply for a secured credit card, where you make a security deposit that’s the same amount as your credit limit, so you’re essentially using your own money as collateral. You can also apply for a personal credit card to use for your business expenses, but make sure you use it for only business expenses.

Crowdfunding

There are many types of crowdfunding. Some are collective loans where you offer something in exchange, and others involve donations (though those are much harder to come by).

Equity crowdfunding is when people invest in your business in exchange for shares and equity.

Rewards-based crowdfunding, like campaigns on Kickstarter and Indiegogo, is best suited for creative pursuits. The most successful earners have a niche market and an audience to market to. But don’t have the “if I build it, they will come” mentality. Most of the time, it doesn’t pan out.

For donation-based crowdfunding, GoFundMe is a popular option. The most successful business campaigns usually go to businesses with a cause, and they don’t often produce a lot of cash.

Angel investors

While angel investors can provide much-needed income, they can also take a large stake in your company and potentially have more control than you’d like. Plus, it’s pretty difficult to qualify for an angel investor.³ But it can be a great option if you run in some very profitable circles.

Frequently asked questions

Can I get a business loan with a 500 credit score?

It is possible, but it will be difficult. You’ll have high interest rates, and you’ll often have to secure the loan with collateral. If you can’t qualify for a loan from one of our alternative lenders, your best bet is to apply for microloans and to build your credit so you can qualify for a better loan.

You can also apply for equipment loans where the equipment acts as collateral. If you’re looking to build your business credit, you may want to apply for a personal loan—just be sure to only use it for business expenses and keep a careful watch on your finances.

Is it hard to get a business loan with bad credit?

Again, it’s difficult, but it’s not impossible. It’s much easier to get a loan with bad credit if your business is more established and you have solid cash flow. As we mentioned above, if your credit is poor and you have unstable cash flow, the best thing to do is to start with microloans or equipment loans or to get funding through other ways, like credit cards, crowdfunding, or peer-to-peer lending.

The takeaway

We won’t skirt around the issue: having good credit is essential to getting great business loans and excellent interest rates. However, if you have a great business plan, have solid cash flow, and can pay off your loans, it may be worth the risk to get the money you need to take your business to the next level—and Lendio may be the place to start.

If you have a little bit of time before you need a lot of funding, you can improve your credit now and get better situated for financial borrowing. Any path you choose, there’s an option for you.

Do you have experience getting a loan with bad credit? Tell us about it in the comments!

Disclaimers

At Business.org, our research is meant to offer general product and service recommendations. We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Sources

1. U.S. Small Business Administration Office of Advocacy, “Small Business Facts”
2. U.S. Small Business Administration Office of Advocacy, “Annual Report of the Office of Economic Research, 2017”
3. U.S. Securities and Exchange Commission, “Investor Bulletin: Accredited Investors”