How to get a business line of credit if you have bad credit

By ,
Ask a Lender
November 22, 2017


Key Points

Business lines of credit for bad credit

  • Check your credit and dispute errors to boost your score
  • Offer collateral to improve your chances of getting approved
  • Nontraditional credit lines offered online require less documentation
  • Consider alternatives: invoice factoring, merchant cash advance or home equity line of credit

Is it possible to get a business line of credit (BLOC) if your credit is bad? It’s certainly not easy. BLOCs tend to be difficult to qualify for unless you have a decent credit score and your business has a proven track record. That said, there are steps you can take to maximize your chances of qualifying for a BLOC if your credit is bad. And if a BLOC is still not within your reach, there are a variety of financing alternatives available.

Check your credit

When seeking business financing, small-business owners should be aware that both their personal credit and their business’s credit may impact their chances of getting approved. This is especially true if you have a new business or your company doesn’t yet have a proven credit history. In these cases, lenders often look at the business owner’s personal credit history.

Check your personal credit report before applying for a business line of credit. If your personal credit is less than stellar, the best thing to help you qualify for a loan may be to improve your credit. Scour your credit reports and look for any errors. If you find any, dispute them.

FICO scores range from 300 to 850. Generally speaking, banks are reluctant to approve an application for a business loan or line of credit to borrowers with scores lower than 640. A score of 700 or more gives the borrower the best chances of approval.

Also, look for areas you can improve. For example, one major factor affecting your credit score is your debt-to-income ratio. For example, if you have a lot of credit card debt and are near your credit limits, it can have a severely negative impact on your credit score. Paying down a large chunk of the debt can give your score a boost.

Business credit should be dealt with similarly to personal credit. There are three main organizations that offer business credit reports: Dun & Bradstreet, Equifax and Experian. Additionally, FICO’s Small Business Scoring Service offers a credit score based on combined information from other credit reporting agencies. Because there are more channels involved in the credit-reporting process for small businesses, errors may be more common. Check for errors often and dispute them when they occur.

Generally, business credit scores range from 0 to 100. Most lenders consider a score of 75 or greater to be good.

Offer collateral

If you’re struggling to qualify for a business line of credit due to poor credit, one way to entice lenders is to offer collateral. Collateral is property that secures a loan. If you fail to repay the money you borrowed from the lender, the lender may take possession of the collateral and sell it to recoup the cost of the loan.

If your business is a startup or still relatively new, you may not have any collateral to offer a lender. But if you have been in business awhile, you may have collateral to offer a lender, including:

  • Inventory
  • Cash from savings or deposits
  • Equipment
  • Real estate
  • Vehicles

Go online

Traditional credit lines are typically offered by banks and can be difficult for businesses to qualify. They require a large amount of documentation, including tax returns, financial statements and bank account information.

Nontraditional credit lines, typically offered online and sometimes as credit cards, are a simpler alternative. Rather than basing qualification on heavy documentation, these credit lines are offered based on the borrower’s FICO credit score, although the FICO score needed to qualify typically isn’t much different than that needed for a traditional credit line. Also, be aware that because they require less documentation and therefore pose a greater risk to the lender, nontraditional credit lines often carry higher interest rates.

Find alternative financing

Traditional business loans and lines of credit can be difficult to qualify for if you have poor credit or if your business doesn’t have a proven track record. If you can’t qualify, but need financing, consider the alternatives. Be aware that these financing options likely carry higher interest rates and fees, costing you more in the long run.

  • Invoice factoring. Technically not a loan, invoice factoring allows a business to sell outstanding invoices to a third-party company, known as a factor, at a discounted rate in exchange for an upfront sum of money. Factors tend to look less at your credit than at the value of your invoices, so it can be a good option for businesses with poor credit.
  • Merchant cash advance. Merchant cash advances allow businesses — typically retailers and restaurants — to sell a lender a portion of their future credit- and debit-card sales in exchange for an upfront cash advance. Qualification is based on the volume of your credit card sales, with less emphasis put on your credit.
  • HELOC. A Home Equity Line of Credit (HELOC) allows you to use the equity in your home as collateral against a revolving credit line. You can typically use the proceeds for whatever you want — including business expenses. If you’re unable to pay back the money you’ve borrowed, you could lose your house.

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