The reason: Traditional banks have always had tight credit requirements for small business owners, and a less-than-perfect credit score generally precluded entrepreneurs from qualifying.
Thankfully, though, times have changed in the world of business lending. Alternative, non-bank lenders have entered the market, willing to work with borrowers with poor credit.
What are the best loan options for entrepreneurs with bad credit? Here are your three top options.
1. Short-term loans
If you’re looking for bad credit business loans that come with a structure you’re familiar with, short-term loans might fit the bill.
Short-term loans are structured like the traditional term loans you know well: You receive a lump sum loan that you’ll pay back with fixed payments over a predetermined amount of time. They’re almost exactly like what traditional bank lenders offer — with a few key differences.
2. A business line of credit
While traditional banks are known for their business lines of credit, alternative lenders offer smaller, shorter and more accessible lines of credit, as well.
With a line of credit, you’re approved for a pool of funds that you can tap into whenever you need them for your business. You’ll pay interest only on the funds you draw, and once you’ve repaid that laon in full, your credit line will get refilled to its original amount.
3. Invoice financing
Invoice financing helps business owners free up capital when pesky unpaid invoices are slowing their cash flow. If it fits your unique funding needs, invoice financing is another top option for business owners with bad credit.
This option involves a self-collateralizing loan, meaning that the outstanding invoice itselfacts as collateral for the financing.
This is great news for bad credit borrowers. Invoice financing companies are more likely to work with borrowers with bad credit because the value of the invoice acts as a security blanket. If, in the worst-case scenario, you can’t make your repayments, the financing company can simply collect on the invoice to recoup its losses.
Lenders offering invoice financing can help you turn your invoices into immediate cash, and will often work with borrowers with credit scores in the 500s.
An alternative option: business credit cards
While you might not normally consider business credit cards when you need business financing, they’re worth adding to your list.
It’s best to use these credit cards for your monthly expenses and working capital needs, since, basically, they’re revolving lines of credit with high interest. However, there are definitely some advantages to seeing a business credit card, instead, as a kind of small business loan.