If your business goals mean you need funding, you might worry that finding loans is impossible with a low credit score. You might also know funding options available to low-credit borrowers are so short-term that they’re prohibitively expensive. These are fair concerns, but in reality, there are long-term business loans for bad credit Learn all about them here.
Long-term business loans are any loans with longer repayment terms, typically ranging from three to 10 years. Other than the long repayment terms, they’re mostly like other installment loans, meaning only some long-term business loans will be available to you if your credit score is low.
On the commonly used FICO® Score☉ credit scale, a bad credit score is often below 670. You’ll sometimes see scores from 580 and 669 referred to as “fair” and scores from 300 to 579 called “poor” credit. These terms, though, can be misleading. To most lenders, fair credit scores are bad too – or, at the very least, they’re not considered to be good.
Below are three types of long-term business loans which might be available to those with bad credit, along with information on qualification criteria, advantages, and drawbacks.
You must have a minimum credit score of 650 to qualify for SBA Microloans. This makes SBA Microloans one of few government loans available if you have bad credit. Loan amounts can be a few thousand dollars to $50,000, with an average of $13,000. Your interest rate will be eight to 13 percent, and your repayment term may be up to six years.
Typically, your business must be new, or very small, to qualify for SBA Microloans. You can use your funds to cover working capital, supplies, inventory, fixtures, furniture, equipment, and machinery.
Common SBA Microloan qualification requirements:
SBA Microloan advantages:
SBA Microloan drawbacks:
Online alternative lenders have emerged in response to traditional banks’ risk-averse lending processes. Where traditional risk-averse lenders impose strict qualification criteria, online lenders cater to a broader range of borrowers. That means you typically don’t need great credit for these lenders to approve you. Repayment periods vary widely by lender, but almost always qualify as long-term.
You’ll typically need a certain amount of time in business, annual revenue, and time without bankruptcy filings to qualify for online alternative loans. In most cases, there are no limits on how you can use these loans once you’re approved.
Some common online alternative lender qualification requirements (may vary by lender):
Online alternative lender advantages:
Online alternative lender drawbacks:
Equipment financing describes any loans that you use solely to buy equipment. In a lending context, equipment may include machinery, desks, a vehicle fleet, or anything else you need for your operations. Some equipment loan providers offer funding to borrowers with credit scores as low as 550, making them a great option for those with bad credit.
Your equipment financing repayment term may be as long as 10 years. Additionally, some equipment loans are revolving business lines of credit rather than installment loans. Repayment terms are less pressing in that case since you would only pay for whatever portion of the loan you use for your equipment. Most equipment financing providers set criteria regarding minimum years in business and annual revenue amounts.
If you obtain an equipment loan to purchase equipment, the equipment remains yours once you repay the loan. However, if you fail to repay your equipment loan, the lender can seize your equipment as collateral.
Some equipment financing qualification requirements (may vary by lender):
Equipment financing advantages:
Equipment financing drawbacks:
Long-term loans can be great for your small business for some of the following reasons:
Let’s say you qualify for a year-long $100,000 loan with an eight percent interest rate. You’d pay $100,000 divided by12 months plus interest every month for that loan. That’s at least $8,333.33 per month. If you obtained that same loan amount with a 10-year repayment term, you’d pay $833.33 per month instead. That’s an order of magnitude less per month than with a shorter-term loan.
In most cases, long-term business loans have lower interest than other types of funding, such as credit cards and merchant cash advances. It’s true credit cards are more flexible and merchant cash advances are more hands-off, but the price you pay for them is almost always more costly than making steady, small loan repayments over a longer period.
Maybe your small business will need funding again in the future, but you’re currently unable to meet certain lenders’ credit score requirements. Long-term business loans for bad credit can help solve this problem. If you make all your payments on time, then over your loan’s lifetime, your credit score will generally gradually increase. As it does, you’ll likely be able to qualify for other types of funding.
Whenever you’re in the market for long-term business loans for bad credit, you’ll likely benefit from taking these steps as you search and apply:
No two lenders, especially non-government entities, are quite alike. Spend some time comparing and contrasting lenders and loan products. Qualification criteria and loan terms that work for you should be somewhere out there.
Many lenders will ask you to present a business plan alongside your application. This lengthy document explains your business concept, how you’ll fund and market your business, and why you expect it to succeed. Your business plan can help persuade certain lenders to approve you when your credit score is low enough that they might otherwise deny your application. Note that if you apply for funding through SmartBiz, a business plan is not required.
With equipment financing, down payments are standard practice. However, they’re less common with other loans – and you can use that to your advantage. Whenever you’re the first to suggest making a down payment, you might sway lenders who would otherwise shy away due to your credit score. A down payment of 10 to 20 percent of the loan’s total is generally a great starting point for negotiations.
Although most long-term business loans for bad credit require collateral, you only stand to benefit from offering it first. Your willingness to put your assets at risk can show certain lenders that you’re truly invested in repaying your loan. That resolve can put you over the line with lenders typically inclined to decline applicants with poor credit.
Where collateral puts specific assets at risk, personal guarantees give lenders the ability to seize any of your assets. This arrangement reduces the lender’s risk and makes them more likely to approve you for a loan if your credit is poor. You can indicate your willingness to sign one – even if not required – to make up for a poor credit score.
Paying your bills on time and using a secured or starter credit card can build your business credit. As your credit grows, you’ll qualify for more loans. These loans don’t necessarily have to be strict-criteria loans, such as SBA 7(a) loans. For example, if you get your credit from 600 to 630, an SBA Microloan – a more flexible government-backed option – is on the table.
Some lenders who might decline your application for a large loan might approve it if you ask for less. To lower your ideal loan amount, determine if you can use your existing cash for part of the initiative you need to fund. Then, consider lowering your target loan amount by that cash amount to see if it helps you get approved.
A friend or family member with a great credit history or substantial money in their bank account can co-sign your loan. This person then becomes responsible for your loan if you fail to repay it. Their excellent finances and credit – and their liability – can minimize risk for lenders, who may then approve you despite your credit score.
You can generally still find long-term business loans even if your credit is bad. In fact, SmartBiz® can help connect you with certain custom financing options that you may be able to qualify for with low credit. As you rebuild your credit score with your loan repayments, you may qualify for other SmartBiz options such as SBA loans and bank term loans. Check now to see whether you pre-qualify* for the capital you deserve regardless of your credit score.