Tips to Secure Business Loan While Having Bad Credit

. 7 min read
Tips to Secure Business Loan While Having Bad Credit

Every business owner has to reach out for funding for their business at some point in time and if you have bad personal credit then it’s a task to get a loan. A business loan is a loan secured by a person or firm to start a business, expand operations, or obtain emergency cash for day-to-day business operations.

However, a business loan for an existing company is not dependent on the entrepreneur or board members; a business loan to establish a new company is contingent on the owner or group that is launching the firm. This is because, as a new firm, it will have no credit history. If the borrower has a poor credit score, the loan application may be turned down.

Business loans for firms that have been operating for a while, conversely, will be based on the company itself, since it will have a credit score, and will not be based on the entrepreneur or board members in any way.

The real kicker is that having poor credit does not exclude you from getting business loans. It will not be simple, and the fight will almost certainly be tough, but it is doable. Moreover, fortunately, an increasing number of alternative loan options for businesses in this scenario continues to develop.

What is a Bad Credit Score?

A credit score is between 300 and 850, which is based on the information in your credit report. It's beneficial for lenders, who need to determine your likelihood of repaying money borrowed. Although there are many credit scoring methods with varying ranges, a credit score of 700 or above is usually regarded to be good, while one of 800 or more is considered outstanding.

FICO score table scores range from 300 to 850; a poor credit score is between 300 and 650. In a stricter sense, the passing grade is 580–669, while the failing grade is 300–579.

VantageScore®, created by the three major credit agencies (Experian, TransUnion, and Equifax), has a scale that ranges from 300 to 850. Although these criteria may change for each score, 601 to 660 is fair, from 500 to 600 is bad, and from 300 to 499 is extremely poor.

A poor credit score may lead to the following major challenges:

  • Loans and lines of credit may be rejected in certain cases. Mortgages, auto loans, personal loans, private student loans, certain federal student loans for parents and graduate students, and credit cards are examples of these.
  • Concerns can arise during a background check for employment. During a background check on you, employers may be permitted to see a restricted portion of your credit report. They may want to check facts on your application or assess your money management skills if you're looking for a position in finance. They will not be able to view your credit score, but actions that contribute to a low score (such as missing payments) will be shown on your credit report.

5 Tips to Get Business Loan While Having Bad Credit

Due to a business owner’s poor credit score, securing a business loan may be tough. This doesn’t mean you should give up! Even if your company has a poor credit rating, you still have some financing alternatives. Even if you have poor credit, there are some suggestions below that may help you obtain money or improve your credit score.

1. Know Where You Stand With Your Credit

You've probably already done this as part of your efforts to raise your score, but it's always good to know where you stand. Once a year, you are entitled to get one free credit report, which is an excellent starting point for researching both your personal and corporate credit score.

Supplemental scores that may provide you with an estimate of your current status can be obtained if you have already received your yearly report. To prevent having to provide credit card information or stating that a hard credit inquiry would be performed, make careful to skip any choices that include this information.

"Credit Report" text on paper sheet with magnifying glass on chart and dice on wooden table

2. Resolve Credit Report Inaccuracies

To begin, determine if there is a mistake on your credit report that has to be corrected, which is critical work. It may feel as if you're fighting an uphill battle with a low credit score. However, your credit score may be too low. According to a Federal Trade Commission (FTC) survey, at least one in every five individuals has a credit report mistake.

Bear in mind that credit report mistakes may result in a decrease in your credit score. Additionally, by correcting these mistakes, your credit score may be lowered. If there are any mistakes, whether they are identity-, account-, or balance-related, you must correct them.

3. Make Sure You Have Collateral

You may put up collateral as security for your loan, which will reduce the lender’s risk. The following are examples of collateral:

  • Customer invoices that have not been paid
  • Financing for capital equipment
  • Personal assets are assets that are owned by the individual
  • Accounts for cash or savings
  • Accounts for putting money aside

However, this does increase the risk on your end, particularly if your company has a long period of decline in profitability. Resultantly, only provide collateral that you are okay with losing if things go wrong and you have to repay the loans.

4. Request a Lower Funding Amount

Requesting the appropriate amount of money, backed by your corporate strategy and existing financial resources, will improve your chances of a loan. It will also make your reimbursement simpler. You shouldn’t have more debt than you need, and you don't want to pay off a huge debt.

Review your company strategy, P&L statement, balance sheet, and financial projection before submitting your application. Determine if there are places where overhead may be minimised, variable expenses reduced, or extra income generated. Make numerous predictions to identify the best, worst, and most real possibilities of a loan you need to make it possible to take things south.

Then apply for that realistic amount. You are better able to repay your existing loan and ask for additional funding if things go well and you need more to expand.

5. Find A Guarantor for Your Loan

You may use a friend or family member as a guarantor for the loan. This individual must satisfy the eligibility requirements set out by the lender. The personal property and credit history of the guarantor will be considered by the lender in determining whether or not to give you money. Someone close to them, such as a friend or family, should be notified of their decision. Because being a co-signer on a loan will appear on their credit report, they may have a more difficult time borrowing money in the future. If you are unable to fulfil your responsibilities, they should be aware of the degree to which you are responsible for your actions.

"GUARANTOR" title on business document

Wrapping Up

Everyone understands that money is the most essential item to start or maintain any business; however, not everyone has sufficient funding to fulfil their business requirements. At some time, most companies need external funding; whether it's a debt or another thing. But, it may be a tough job to get funding for your company if you have bad credit. Here, we also emphasised what bad credit is and the challenges faced by business owners if they have bad credit. This article has provided some suggestions to assist you in getting a business loan, even if you have bad credit.

Also read:

1) What is a business loan? How to apply for a business loan?
2) Home Loan: Steps to apply, Best Interest Rates on Home Loans & more
3) What is Business Loan? A Complete Guide.
4) How To Get Small Business Loan From Government?

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Q. What are some best business loans to go for in India?

Ans. The best business loans to go for in India are MUDRA low-credit loans, CGTMSE collateral-free loans, National Small Industries Corporation Subsidy for raw material and marketing help, and Credit Link Capital Subsidy Scheme for Technology Upgradation.

Q. What types of business loans are available for bad credit?

Ans. The business loans available for bad credit are traditional bank loans, microloan, fintech lenders, merchant cash advance, business credit cards, home equity line of credit, and revenue-based loans.

Q. What is the business loan eligibility?

Ans. Anyone who runs a reputable company and has excellent turnover may be granted a business loan. Some of the considered parameters are:

  • Public limited or public limited ownership, partnership
  • The sales of the company
  • The company's profit
  • Business cash flow
  • Business tracking

Q. How to Evaluate Loans?

Ans. The ideal business loan for every company depends on the demand of the company, tactical and strategic business requirements, the amount of the loan, the rates of interest, processing fees, and pre-paid fees.

Q. What is credit repair?

Ans. Credit repair means rebuilding it to a level where you can qualify for credit. Credit reparation services are often needed for people to enhance their credit score and cancel their credit health harm in the past due to incorrect financial conduct.