Borrowing funds for your business with bad credit might initially sound tough. Traditional lenders often think that low credit scores mean higher risks. And this is one of the reasons they offer you worse deals or just reject your applications altogether.
Don’t worry though; it doesn’t mean all’s lost. Bad credit gives you a lot of other alternatives. You could have that financing you want or need, even though that would come with greater business loan interest rates.
In this blog post, we’re going to talk about what you can anticipate when trying to secure a business loan with not-so-great credit, all about interest rates for borrowers with lower credit scores, and some other funding options to keep in mind.
Understanding Business Loan Interest Rates for Bad Credit
Business loan interest rates are determined by the level of risk for the lender. When someone has a less-than-stellar credit score, it typically means they are seen as higher-risk borrowers. This could be due to past instances of late payments, significant debt, or other financial obstacles they have faced.
Average Interest Rates for Bad Credit
- Traditional Bank Loans: Rarely an option, but when approved, the rates will range from 10% to 25% or higher.
- Alternative Lenders: More lenient, but rates range from 15% to 60%, depending on the lender and loan type.
- Merchant Cash Advances: These aren’t technically loans but have effective interest rates that often go over 100% APR (Annual Percentage Rate).
Do not be afraid of bad credit because business loan interest rates will be higher. But if you take your time to find out your options, you will make a smart decision, which considers the cost and what you need.
Factors That Influence Interest Rates for Bad Credit
There are several factors that determine the interest rate you will get:
- Business Credit Score: The lower your scores, the higher your business loan interest rates. For business loans, the lender will sometimes look at both personal and business credit scores.
- Loan Type: Secured loans (also known as collateralized) are usually cheaper than an unsecured loan.
- Loan Amount and Term: Generally, smaller, short-term loans have higher business loans interest rates.
- Business Performance: Stable revenue and positive cash flow can work to dilute the negative effects of bad credit.
- Collateral: Offering assets to secure the loan reduces lender risk and can lower your business loan interest rates.
Options for Business Loans with Bad Credit
Bad credit borrowers often need to think outside the box. Here are some options worth exploring:
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Microloans
Microloans are small funds, often capped in total amount at $50,000. They are mostly suitable for small businesses unable to meet the requirements or cannot access traditional financing, normally provided by nonprofit or community lenders.
Interest rates: Between 8% to 13%. Even bad creditors often find favorable interest rates to avail themselves of the loan.
Best For: Especially recommended for startup companies or small-scale firms seeking a small pool of money.
Example: A restaurant owner with a credit score of 580 received a $20,000 microloan to buy new kitchen equipment.
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Online Lenders
Online lenders are more liberal with their credit requirements and have faster approval processes. They consider other factors than credit scores, such as business performance.
Interest Rates: Usually between 15% and 60%.
Best For: Businesses with steady income but bad credit scores.
Example: An e-lender approved a loan of $50,000 with a retailer whose credit score stands at 600, supported by the latter’s annual $200,000 revenue.
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Invoice Financing
Invoice financing is useful if your business issues invoices. In this type, you borrow against the value of unpaid invoices. The value of the invoice is advanced percentage (usually 80–90%) by a lender and the full amount from the invoice is collected when an invoice is paid.
Interest Rates: Effective rates are between 13% and 40%.
Best For: Companies with outstanding invoices and poor cash flow.
Example: A logistic firm with a credit rating of 550 utilized invoice financing to pay operational expenses pending receipt of payments from clients.
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Merchant Cash Advances (MCAs)
MCAs provide an advance on your future sales. These advances are usually repaid by taking a percentage of your daily credit card transactions.
Interest Rates: Effective APRs can be as high as over 100%, making this one of the priciest options available.
Best For: Those high credit card sales merchants which need cash quickly
Pro Tip: This sort of funding is quick, yet incredibly expensive. Use as an absolute last resort only.
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Secured Loans
Secured loans require collateral, such as real estate, equipment, or inventory, to back the loan. This reduces the lender’s risk and can lead to lower business loan interest rates.
Interest Rates: Often 10% to 25%, even for borrowers with bad credit.
Best For: Businesses with valuable assets and bad credit.
Example: A construction company with a credit score of 590 had its equipment placed as collateral for a $75,000 loan at a rate of 12% in interest.
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Business Lines of Credit
For smaller funding, lines of credit designed specifically for bad credit are feasible.
Interest Rates: They usually come with APR ranging between 20% and 30%.
Best For: The use of business lines of credit comes in handy for covering minimal expenses or building credit.
Example: A small boutique used a business credit card to pay for marketing, paying off the balance every month to avoid high business loan interest rates.
Tips on Getting Better Interest Rates with Bad Credit
Although your credit score may limit your options, there are ways to improve your chances of securing better rates:
- Improve Your Credit Score Before Applying- Pay down debts, resolve errors on your credit report, and avoid new credit inquiries to boost your score.
- Offer Collateral- Secured loans often come with significantly lower interest rates.
- Build a Strong Business Plan- Presenting a solid plan with detailed financial projections can reassure lenders of your repayment ability.
- Demonstrate Steady Income- Even if your credit is bad, consistent income can balance out lender fears and result in better terms.
- Negotiate Other Loan Terms- If the interest rate is non-negotiable, ask for reduced fees, flexible repayment options, or other benefits.
Conclusion
Bad credit doesn’t have to close the door on business loans, but it does require creativity and careful planning. While business loan interest rates are on the higher side, it might be helpful to look around for alternative lenders and loan types that could help you with your business.
The real trick is to compare these options, understand the true cost of the loan, and look for ways to build your financial profile over time. Persistence and a proactive approach can get you the funding that you need to grow the business.