Cash flow plays an important role in helping businesses maintain day-to-day operations, and cash flow loans can be an essential resource for businesses, especially those businesses that prefer to primarily qualify for financing based on their past and expected future revenue. Cash flow loans generally help businesses manage their operational costs, seize new opportunities, and bridge gaps in their cash flow.

What Is a Cash Flow Loan?

A cash flow loan is any loan meant to improve cash flow. Technically, there isn’t a specific “cash flow loan.” However, many cash flow loans refer to revenue-based financing, where the business owner doesn’t need collateral and qualifies primarily based on proof of past revenue and future revenue forecasts.

This means that if your business has a strong and consistent revenue stream, you might access this type of financing with lower credit scores and no collateral. However, each lender sets its own requirements, something to note when comparing cash flow loans.

What’s the difference between cash flow and asset-based lending?

Cash flow lending and asset-based lending differ mainly in the criteria used for qualification and the type of collateral required.

Cash flow lending focuses on the actual cash flow your business generates, using this as a basis to extend financing. Asset-based lending relies on assets like inventory, equipment, or real estate as collateral.

Essentially, if your business has sustainable and regular revenue but lacks substantial assets, cash flow financing could be the better option for your business.

How Cash Flow Loans Work

Lenders will look at your historical revenue and future revenue forecasts to determine your eligibility.

Repayments are made either through regular fixed payments or through a fixed percentage of your sales. Payments can be daily, weekly, or monthly, depending on the agreement. This structure may help you manage cash flow by aligning repayments with your revenue cycle.

For instance, revenue-based financing often involves lenders advancing funds that are repaid through a percentage of your future sales, allowing for flexible repayment aligned with your business’s cash inflows.

How to Use a Cash Flow Loan

Cash flow loans are versatile and can be used in various situations to support your business:

• Cover a cash flow gap: Smooth over periods of low revenue.
• Opportunities for revenue: Invest in new projects or ventures to increase income.
• Purchasing inventory: Buy the necessary stock to keep your business running.
• Fulfilling Purchase Orders: Ensure you have the resources to meet large orders.
• Maintaining seasonal operations: Manage expenses during off-peak times.
• Invest in Marketing: Fund marketing campaigns to drive sales.
• Unexpected Costs: Handle emergencies or unplanned expenses.

Cash Flow Loan Example

Imagine a small retail business experiencing a surge in demand during the holiday season. The business decides to take out a cash flow loan to purchase additional inventory. They borrow $50,000 at an annual interest rate of 12%. Over 12 months, fixed monthly payments should be around $4,441.

Note that the interest rate and terms can vary widely based on your lender, the term selected, and the financial health of your business.

Types of Business Cash Flow Loans

Below are some of the forms of cash flow loans available, along with their unique features and benefits to help you make more informed business financing decisions.

Short-Term Loans

Short-term loans are typically repaid within 6-18 months and can provide quick access to funds for immediate cash flow needs. They are ideal for covering temporary gaps or seizing short-term opportunities.

Bridge Loans

Bridge loans are short term funding options used to bridge the gap between financing needs. For example, they can help businesses cover expenses while waiting for long-term funding to come through.

Business-2-Business (B2B) Lending

B2B lending involves loans between businesses. It can be a good option for companies that have established relationships with their suppliers or other businesses. One company sells its products or services to another business, and they handle payments, terms, and financial agreements.

Unsecured Business Loans

Unsecured business loans do not require collateral, making them accessible for businesses that lack substantial assets. Qualification is primarily based on the business’s revenue and creditworthiness.

Other Types of Cash Flow Financing

Each type of financing offers unique benefits and is suited to different business needs. Here’s an in-depth look at some of the most common forms of cash flow financing:

Invoice Factoring

Invoice factoring involves selling your outstanding invoices to a factoring company at a discount. This process allows you to quickly receive cash instead of waiting for your customers to pay. In some cases, the factoring company will even take on the burden of collecting the payments directly from your customers.

Benefits:

• Quick cash flow improvement
• No need for collateral
• The factoring company may handle collections

Drawbacks:

• Higher cost due to factoring fees
• Potential impact on customer relationships, as they may interact with the factoring company

Revenue-Based Financing

Revenue-based financing involves receiving capital in exchange for a percentage of your business’s future revenue. Depending on the type of business you run, revenue-based financing payments can mimic traditional business loan agreements with fixed repayments on a specific schedule, OR they can be based on a fixed percentage of your daily sales receipts, allowing them to fluctuate with your business’s income.

Benefits:

• Payments align with your sales, reducing pressure during low-revenue periods
• No collateral required
• Suitable for businesses with fluctuating revenues

Drawbacks:

• Potentially higher overall repayment due to revenue percentage
• Can be relatively expensive if business revenue is consistently high

Business Line of Credit

A business line of credit provides access to a revolving credit limit, similar to a credit card. You can draw funds as needed up to the limit and only pay interest on the amount drawn.

Benefits:

• Flexible access to funds
• Pay interest only on the amount used
• Can be used for various business needs

Drawbacks:

• Variable interest rates can lead to higher costs
• Potential fees for maintaining the credit line

Cash Flow Loan Benefits and Drawbacks

Cash flow loans offer numerous benefits to businesses looking to maintain smooth operations and capitalize on opportunities without significant financial strain. However, they also come with some drawbacks that businesses need to consider.

Cash Flow Loan Benefits

• Personal credit may be less important: These loans focus on revenue and business credit rather than personal credit scores, making them more accessible to business owners with less-than-perfect credit histories.
• No collateral required: Businesses don’t need to risk assets or personal property to secure the loan.
• Quick access to funds: The application and approval process is often faster than traditional loans, providing rapid access to capital.
• Flexible use of funds: Funds can be used for various purposes, such as covering operational costs, purchasing inventory, investing in marketing, and handling unexpected expenses.
• Helps manage seasonal fluctuations: Loans used for cash flow may provide necessary funds during off-peak periods, ensuring continuous operation.
• Supports growth and expansion: These loans may help finance growth initiatives, such as launching new products or expanding facilities.

Cash Flow Loan Drawbacks

• Higher interest rates: These loans often come with higher interest rates than other types of financing due to the increased risk to the lender.
• Lower loan amounts: Cash flow loans may offer lower loan amounts compared to traditional secured loans.
• Stringent eligibility requirements: Proof of consistent revenue is required, making it difficult for newer businesses with fluctuating revenue to qualify.
• Potential for debt accumulation: Over-reliance on these loans can lead to debt, affecting financial health.

What Businesses Should Use a Cash Flow Loan

Cash flow loans can benefit various types of businesses, particularly those with consistent revenue streams.

Can a startup get a cash flow loan?

Yes, startups can qualify for cash flow loans, but it is rare and there are very specific conditions that must be met. Since startups typically have limited credit history and collateral, lenders focus on the business’s revenue streams.

Startups with strong, consistent revenue and solid future revenue forecasts often stand a better chance of securing a cash flow loan. These loans can help startups cover initial operational costs, invest in marketing, or expand their product lines.

However, the terms might be more stringent compared to established businesses, and interest rates could be higher to offset the lender’s risk. Also, many business lenders will still require startups to be in business for at least one year before becoming eligible for financing.

Can you get a cash flow loan with bad credit?

Possibly. Lenders look at your business’s ability to generate consistent income, which serves as a repayment guarantee. If you can demonstrate strong past revenue and promising future revenue forecasts, you might qualify for a cash flow loan despite a poor credit history.

This can be significant for businesses needing funds for operational expenses, inventory purchases, or unexpected costs, allowing them to stabilize and improve their financial health without the burden of credit requirements.

How do I Qualify for a Cash Flow Business Loan?

Qualifying for a cash flow business loan involves meeting specific criteria that demonstrate your business’s ability to generate consistent income. Lenders look for indicators of financial health and stability to ensure that the business can comfortably repay the loan.

Determining your business’s cash flow loan eligibility is the first step to getting a cash flow loan.

How to Get a Cash Flow Loan

1. Meet eligibility requirements, including:
   • Minimum revenue: Lenders require proof of consistent revenue, typically through financial statements, bank statements, or tax records.
   • Time in business: Some lenders prefer businesses operational for at least a year to 18 month as this demonstrates stability and resilience. However, it is important to note that many lenders require a minimum of two years of operational history.  Before applying, it’s important to ensure you meet that lender’s time in business requirements.
   • Personal credit score: While revenue is the primary focus, if you’re a small business owner you may be asked for your personal credit score. Good credit scores may improve your loan terms and interest rates.

2. Compare financing options and select the best fit
   • Identify your needs: Determine the specific purpose of the loan, such as covering operational costs, purchasing inventory, or investing in marketing.
   • Research loan types: Look into different cash flow financing options, including short-term loans, bridge loans, B2B lending, and unsecured business loans. Each type has its advantages and may suit different business needs.
   • Consider repayment terms: Evaluate the repayment terms and schedules to ensure they align with your cash flow patterns. Fixed repayments might be preferable for predictable cash flows, while revenue-based repayments could suit seasonal businesses.

3. Compare lenders
   • Interest rates and fees: Different lenders offer varying interest rates and fee structures. Compare these to find the most cost-effective option for your business.
   • Reputation and reviews: Research lenders’ reputations by reading reviews and testimonials from other businesses. Reliable lenders with positive feedback are more likely to provide a smooth borrowing experience.
   • Customer service: Consider the quality of customer service provided by the lender. Good customer service can be crucial if you encounter issues or have questions during the loan term.

4. Gather information/preparing your application
   • Financial statements: Prepare up-to-date financial statements, including profit and loss statements, balance sheets, and cash flow statements. These documents help demonstrate your business’s financial health.
   • Revenue documentation: Collect documentation that proves your business’s revenue, such as bank statements, sales records, and tax returns. Lenders may use this information to assess your eligibility and loan amount.
   • Business plan: Having a well-prepared business plan could be beneficial. It should outline your business goals, strategies, and how you plan to use the loan.

5. Research cash flow loan options
   • Online lenders: Explore online lending platforms, which often provide quick approvals and flexible terms. These lenders can be more accessible and faster than traditional banks.
   • Traditional banks: While they might have stricter requirements, traditional banks may offer competitive interest rates and personalized service.
   • Alternative financing: Look into alternative financing options, such as revenue-based financing and invoice factoring, which may be more suitable depending on your business model and needs.

Alternative Options to Cash Flow Loans

If cash flow loans aren’t the right fit, several alternative financing options might suit your needs better.

• Business credit cards: Business credit cards offer flexible access to funds for short-term needs and can earn you rewards. However, they come with high interest rates if balances aren’t paid off in full and often have lower credit limits than other types of financing.
• SBA loans: SBA loans generally provide lower interest rates and longer repayment terms, suitable for various business needs, but they can be more difficult to qualify for.
• Traditional term loans: Traditional term loans offer lump sums with fixed rates and predictable payments, ideal for large expenses. However, if you have a weaker credit score, this route may not be the best option.
• Equipment financing: Equipment financing helps you purchase or lease equipment, often using the equipment as collateral. It can be easier to qualify for but can have higher interest rates and is limited to equipment purchases.

Final Thoughts: Cash Flow Loans

Cash flow loans can be an excellent tool for businesses needing to manage their cash flow and take advantage of opportunities. However, it’s essential to understand the terms and conditions to ensure it’s the right fit for your business.

Cash Flow Loan FAQs

Are cash flow loans secured?

Cash flow loans are typically unsecured, meaning they do not require collateral. However, some types of cash flow loans may require collateral, so check with the lender before applying.

Is it hard to get a cash flow loan?

The level of difficulty of obtaining a cash flow loan depends on the business’s revenue and overall financial health. Businesses must also meet other requirements such as minimum time in business and minimum business and personal credit scores.

What are the interest rates on cash flow loans?

Interest rates on cash flow loans vary depending on the lender, business financials, and market conditions. It’s essential to shop around and compare rates from different lenders.

Unsecured business loans offer business owners the financing they need without requiring collateral. From purchasing inventory or equipment to hiring staff and acquiring a workspace, an unsecured business loan can facilitate growth and expansion for any small business. While unsecured business loans can be great for providing financing, many small businesses may benefit from an alternative option. In this guide, we’ll explore what unsecured business loans are, how they work, and how to get one.

What is an Unsecured Business Loan?

An unsecured business loan is a type of financing that doesn’t require collateral. While secured loans require borrowers to pledge assets such as real estate or equipment as security, unsecured loans are approved based on the creditworthiness of the borrower. For new business owners seeking their first loan, lenders typically evaluate the applicant’s personal credit score and business credit score. However, applicants with an established business and a strong business credit score could be evaluated on their business credit score alone. All other things being equal, a higher credit score generally improves the changes of getting approved for an unsecured business loan with better rates.

With unsecured business loans, borrowers face no threat to their assets. However, late payments or a default may hurt their credit score (personal or business, depending on which is applicable) and their ability to borrow in the future.

How Unsecured Business Loans Work

The disbursal and repayment process for any unsecured business loan depends on the type of loan you’ve applied for. In most cases, an unsecured business loan refers to a term loan. Term loans involve a lumpsum disbursal combined with fixed monthly payments for a predetermined repayment period. Loan amounts are generally lower for unsecured term loans compared to secured term loans, and terms can last as short as six months to years, depending on the lender you choose.

Parts of an Unsecured Business Loan

When evaluating an unsecured business loan, you should consider the different parts of the loan that impact the total length and cost. Parts of an unsecured business loan to review include:

Interest Rate: This is the percentage charged by the lender on the principal amount borrowed. Many unsecured business loans have a fixed rate, though keep in mind that a variable rate loan means the interest can change during the life of the loan.

Loan Term: The loan term, sometimes known as the repayment term, is the period over which the loan is to be repaid. Loan terms can be a short as months to as long as years. Longer terms often mean lower monthly payments but higher total interest payments.

Repayment Schedule: Repayment is the process of paying back the borrowed money to the lender. Repayment schedules could be daily, weekly, or monthly, depending on the lender.

Uses: Some lenders outline specific uses for the loan, such as equipment purchases or payroll financing. Make sure that the unsecured business loan can be used toward your specific needs.

Unsecured Business Loan Benefits

Unsecured business loans offer applicants some excellent benefits, including:

• No collateral required: Applicants won’t have to put up any assets to secure the loan, which can be beneficial if you don’t have valuable assets to use as collateral or if you’re uncomfortable with the risk.
• Quick access to funding: With no collateral required, the loan approval process is typically faster than with secured loans. Some applicants receive their funds within a day of being approved (though approval and disbursal timelines vary by lender).
• Accessible financing option: One advantage of unsecured business loans is that most applicants can usually find a lender that meets their needs.
• Versatility: Most small business loans can be used for anything from refinancing an existing loan to consolidating debt, expanding operations, buying more inventory, and covering operational expenses.

Unsecured Business Loan Drawbacks

Here are some drawbacks of unsecured business loans that business owners should be aware of:

• Higher interest rates: Because unsecured loans are riskier for lenders, they often come with higher interest rates than secured loans. On the flip side, secured loans can offer borrowers access to lower interest rates.
• Stricter eligibility requirements: To qualify for an unsecured business loan, you’ll need to have a strong credit history and a proven track record of revenue and profitability.
• Less desirable terms: Lenders may be less willing to issue large loan amounts since unsecured loans are riskier. Borrowers may be approved for a smaller loan and a shorter repayment period.

Secured vs Unsecured Business Loans

Business owners must determine which business loan best fits their needs. While a secured loan can sound risky, it could lead to better terms and rates. On the other hand, an unsecured loan may be a better fit for borrowers with great business or personal credit.

Who Offers Unsecured Business Loans?

Small businesses can get an unsecured business loan from a variety of sources, including banks, credit unions, and online lenders. Banks and credit unions usually offer the best rates and borrowing limits; however, the application and approval processes may be longer and more tedious. Online lenders can issue faster loans and may have fewer eligibility criteria but may have higher interest rates.

It’s a good idea for business owners to compare multiple different lenders before applying for a loan.

4 Steps to Get an Unsecured Business Loan

Getting an unsecured business loan doesn’t have to be complicated. Here’s a simple four-step process to help you secure business financing.

Check Your Business Credit Score

Before applying for a loan, it’s essential to know where you stand. Check your business credit score to see if you meet the lender’s minimum requirements. You can get a free copy of your business credit report through credit bureaus like Experian and Dun & Bradstreet. While specific credit score requirements vary from lender to lender, generally, a higher credit score will increase your chances of approval and may qualify you for better terms and lower interest rates.

Gather Required Documents

Most lenders will require documentation to verify your business’s financial health and creditworthiness. Commonly required documents include:

• Business agreements, licenses and permits (if applicable)
• Business tax returns
• Profit and loss statements
• Balance sheets
• Bank statements

Research Options

Once you know your credit score and have gathered your financial documents, it’s time to research your lending options. Compare interest rates, loan terms, and repayment options from different lenders to find the best fit for your business. Don’t forget to look for any fees and charges associated with the loan.

Submit Your Application

Once you’ve chosen a lender and loan, the next step is to submit your loan application. Be prepared to provide detailed information about your business, including its financial history, revenue, and the purpose of the loan. Most lenders accept applications online, but the exact process and information requested may vary. Contact your lender if you’re unsure about your application. After you’ve submitted your application, the lender will review it and let you know if you’ve been approved for a loan.

Unsecured Business Loan Alternatives

While unsecured business loans can be a great option for many businesses, they’re not the only solution. Here are some alternative financing options to consider.

Lines of Credit

A business line of credit works similarly to a credit card, allowing you to borrow up to a predetermined limit as needed. You only pay interest on the amount you borrow, making it a flexible financing solution. However, unlike a business credit card, you won’t earn rewards and may have to contend with minimum withdrawal amounts or penalties for non-use.

Invoice Factoring

If your business invoices customers for goods or services, you may be able to use those invoices to secure financing. Invoice factoring offers you financing upfront for your unpaid invoices, providing you with immediate cash flow. Invoice factoring is ideal for business owners dealing with slow-paying customers. However, business owners typically receive less than the total value of their invoices.

SBA Loans

The U.S. Small Business Administration (SBA) offers several loan programs designed to help small businesses access the funding they need. SBA loans often give borrowers more flexible underwriting criteria than traditional loans. The SBA Guarantee helps protect lenders and reduces their risk, which may translate into more attractive terms and rates for borrowers.

Business Credit Card

Similar to a line of credit, a business credit card allows you to use money as you need up to the credit limit. One benefit of business credit cards is that many offer rewards and perks to business owners. Keep in mind that business credit cards come with higher APRs, so this can become an expensive financing option if you don’t pay off your statement on time and in full.

Unsecured Business Loan FAQs

Can SBA loans be unsecured?

An SBA (7)a loan does not require collateral if you’re borrowing under $50,000. For loans ranging from $50,001 to $500,000, collateral is a requirement.

How do you qualify for an unsecured business loan?

To qualify for an unsecured business loan, you’ll need to meet the lender’s approval criteria. Usually, this requires a strong credit history, a proven track record of revenue and profitability, and a solid business plan. Lenders will also consider factors such as your business’s industry, the purpose of the loan, and your ability to repay the loan. For first-time borrowers, personal credit may make a difference. However, those with established business credit may not need to worry about their personal credit, provided their business accounts are in good standing.

What is a personal guarantee?

A personal guarantee is a promise by the business owner to personally repay the loan if the business is unable to do so. Personal guarantees are common for unsecured loans and provide an additional layer of security for the lender. Some small business lenders may include a personal guarantee in your loan contract.

Most of us have faced financial hardship at some point that resulted in some missed debt payments, defaults or charge-offs, and this has negatively impacted our credit scores. After all, life has its ups and downs, especially when it comes to our finances. For small business owners who find themselves in this situation, one of the questions they may be asking themselves is, “Can I apply for a business loan with bad credit?”

The simple answer is yes. There are plenty of lenders that offer business loan options for bad credit, and there are several types of financing that don’t emphasize FICO scores as much as cash flow history and strong sales. So, if you’re one of the thousands of small business owners wondering where to get business loans with bad credit, you might be relieved to know that you have several financing options.

Before you delve into answering the questions of how to get a business loan with bad credit, there are several factors you should educate yourself on, such as how can you improve your credit score and what you can afford to pay in terms of an interest rate on your loan, given that loans for businesses with bad credit often charge a rate that’s on the highest end of the APR spectrum. 

What is Bad Credit?

When looking into how to qualify for a business loan with bad credit, the first thing you need to know is that a low credit score depends on the type of lender you are considering. Traditional banks are still the most popular type of small business lender, but they typically want to see higher credit scores for financing products such as term loans and business lines of credit than an alternative or online lender. Generally, they consider a FICO score below 680 to be poor. Alternative lenders and credit unions, however, generally – but not in all cases – will accept scores within the 650 – 680 range, depending on the type of financing the small business owner is seeking.

There are online lenders that will accept a FICO score as low as 500 but will charge an inordinately high interest rate (cost of capital), depending on the type of financing you’re seeking.

How to Improve Your Business and Personal Credit Scores

Generally speaking, having to obtain a business loan with a poor credit score isn’t an ideal situation. If you can afford to wait several months for a loan and take that time to improve your FICO score, you could save a good chunk of money in terms of the cost of capital. Doing so is not as difficult as you might think. 

The two types of credit scores you will need to improve: your personal FICO score, and your business credit score, if you have one. Most lending institutions and credit bureaus such as Transunion, Equifax, and Experian are happy to give you advice on how to improve your personal credit score. For a business credit score, Dun & Bradstreet is the credit bureau looked at the most by lenders. 

The main factors that affect your FICO score and how to improve them are:

• Payment history. Nothing will drag your FICO score down more than having a history of delinquent payments on your debt. This includes monthly payments on things such as credit cards, car financing, and mortgage/rent. If you want to dramatically improve your credit score, make sure to make on-time payments for at least 6 months. The longer you make on-time payments, the better your score will be.
• Debt-to-credit ratio (aka credit utilization). Credit bureaus do not look favorably upon small business owners who have a low amount of available credit compared to the amount of credit available to them, as this tells them that you are having a hard time managing your debt. If you have the time and discipline to do so, try to pay down as much debt as you can over the course of 6-9 months to bring up that ratio. You may even want to consider applying for a new credit card to bring that ratio up. Increasing this ratio will do wonders for your credit score.
• Length of credit history. While this is a big factor in determining your FICO score, it’s not one that can quickly be fixed. This is the age of the debt accounts on your credit report. The longer you have open account, in good standing with your creditors – including your credit card companies, car financing company, and your mortgage holder – the higher your credit score. 

A business credit score incorporates most of the same factors as your personal FICO score such as your business’ loan and payment histories. There are a few differences, however. First, a business credit score will look at: 

• Industry risk. Your business credit score will incorporate how risky the industry in which your small business operates is. If it operates in one that has a high failure rate, such as the restaurant/food service industry, that could negatively impact your business credit score. In this case, having a strong business plan becomes even more important. 
• Good relations with your suppliers. There is a little-known action that many small business owners can take to improve their business credit score: getting trade references. If you have good relationships with your suppliers and have a history of on-time payments to them, they can send a note called a trade reference to the credit bureaus telling them such. Doing this can immediately improve your business credit score.

Where to get a Small Business Loan with Bad Credit

If you need capital now and can’t afford to wait 6-9 months to improve your credit score, there are lenders out there that are willing to lend the capital that you need. Traditional banks are more risk-averse and generally won’t approve loans to those with bad credit. The lenders that do, however, include:

• Online lenders. A quick Google search will lead you to a host of reputable online lenders that are willing to supply you with an array of financing options such as term loans and business lines of credit and require a FICO score as low as 500. While every lender has their own set of terms, the cost of capital for these forms of financing is typically extremely high, with some being above 30%.
• Alternative lenders. Alternative lenders that operate outside the sphere of traditional banks often allow loans to business owners with lesser credit scores than their banking counterparts. They often charge higher interest rates and will accept borrowers with fair-to-good credit scores in the 620-680 range, depending on the type of financing you are seeking. This is because they often emphasize annual revenue and cash flow history as well as credit score.
• Trade credit unions. Credit unions are owned by their members, and many of them will give loans to small businesses in their own industries, even to those with less-than-stellar credit scores. Many credit unions will also look favorably upon small businesses that employ unionized workers.
• The SBA. While the SBA 7(a) loan – which is the first loan that most people think of when they think of the SBA – often comes with strict requirements such as a high credit score, other SBA loans do not. SBA microloans and CDC/504 loans do give loans to small business owners with less-than-perfect credit scores through intermediary lenders, and these loans usually carry relatively low interest rates. The two catches for these loans are that they usually do not offer high loan amounts (the maximum for each is $50,000), and depending on the lending agent, these loans are sometimes restricted to minority- and women-owned small businesses, or businesses in underserved communities that are committed to additional hiring and renovating their storefronts.
  

Types of Financing for Bad Credit

Many people just think of bank loans when it comes to small business financing. There are, however, several types of financing that don’t place a heavy emphasis on credit score and can even offer small business owners a lower cost of capital than they might otherwise be able to get:

• Secured business loan. If you have poor credit, securing a business loan with collateral may decrease your cost of capital and could even increase the amount you are able to borrow for your small business. Any savings, real estate, investment accounts and any other personal items of high value can be used as collateral. While you do risk losing these things if you fail to pay back the loan, having enough collateral can even convince a traditional bank to give you a business loan, despite a poor credit score. 
• Revenue-based financing. Revenue-based financing is offered almost exclusively by alternative lenders and is a form of financing that can quickly offer a lump sum of cash in exchange for a portion of your small business’s future receipts. It’s technically not a loan and lenders often look more closely at your business’ sales history rather than its credit score.  
• Equipment financing. Most traditional banks and alternative lenders offer equipment financing – loans that enable small business owners to purchase vital pieces of equipment. This type of loan is often made to small business owners with less-than-stellar credit since the piece of equipment being purchased acts as collateral for the loan. Like most loans, however, the lower your credit score, the higher the interest rate, so it’s important to shop around to find the loan with the lowest cost of capital. 
• Invoice factoring. Invoice factoring gives small businesses a lump sum of cash for their outstanding invoices, and therefore, credit score usually isn’t a factor when lenders decide to approve this type of financing. Rather, the creditworthiness of the customers who owe you money is. Invoice factoring is offered by both traditional and alternative lenders. When using this type of financing, it’s important for small business owners to read the fine print to find out the length of the contract and whether they will be on the hook for a portion of outstanding invoices in case customers do not pay the amount due. 
• Secured business lines of credit. A business line of credit gives small business owners access to a predetermined amount of cash when they need it and only charges interest on the amount borrowed. If you have poor credit, there are lenders willing to give you access to a line of credit but with a very high interest rate and a limited credit amount. If you offer to secure the line of credit with collateral, however, this could dramatically lower your interest rate and increase your chances of being approved. As with any business line of credit, it’s important to read the fine print to understand the repayment terms and minimum borrowing amounts. 

What to do Before Applying

Even if you have a fair or poor FICO score, there are steps you should take before you complete a loan application to get a business loan or other type of financing for your small business to ensure you get the best possible interest rate or APR, as well as avoid hidden fees if possible. 

• Wait to improve your credit score. As stated, there are better situations than having to get a loan when you have a poor-to-fair credit score. If you’re not in a rush for a loan, consider taking the time needed to improve your score so that you can notch a better interest rate. 
• Check your credit report. Check for mistakes on your credit report with all of the three main credit bureaus – Transunion, Experian, and Equifax. While you probably generally know what’s dragging down your FICO score, there could be errors and/or false charges on your report that are bringing it down. According to a study by the Federal Trade Commission, 1 in 5 consumers (20%) have at least one error on their credit report. 
• Compare interest rates. Just because you have a low credit score doesn’t mean that different lenders won’t offer you different rates. While most lenders don’t disclose rates upfront, ask what the rate will be once you’re pre-approved. 
• Read the fine print. Depending on the lender, it’s crucial that you carefully read the terms of whatever piece of financing you’re taking on. Some lenders may want balloon payments or origination fees, while others may demand weekly instead of monthly payments. Find the repayment plan you’re most comfortable with. 
• Be comfortable with your lender. This may sound intuitive, but make sure that your lender has sufficient customer service available to you. While you can always walk into a traditional bank, most alternative lenders also provide readily-available, personalized customer service by phone as well. 
• See if you can renegotiate later. Bad credit takes a bit of time to fix, but it can be done. Ask your potential lender if you can renegotiate the terms of your loan down the road when your credit score does improve.

Additional Advice for Businesses with Bad Credit

Obtaining a small business loan with bad credit isn’t impossible, but it most likely will be costly. If you need a loan and you have poor credit:

Use the loan proceeds wisely. Make sure the loan proceeds will be used in such a way that will increase the revenue of your business. This includes the development, marketing and launch of a new product or service, or for the expansion of your business. 

Develop a plan B. No matter what your credit score is, the risk of taking out a loan or other type of financing is that you fall into hard times and can’t pay it back. To offset this risk, some of the ways you can develop a plan B is to build a cash reserve or make sure your lender will be available to refinance until you can get back on your feet. 

Don’t overextend. The idea of being able to obtain financing, even with bad credit, can be an exciting one. However, try to only borrow or use the amount of credit that you need and know you can afford to pay back. Finding your small business drowning in debt is obviously not a good place to be. 

In all, while bad credit is certainly an obstacle, there are still financing options for small business owners who are seeking to improve and expand their businesses and take advantage of unexpected growth opportunities. Carefully explore the options available to you and, at the same time, work on ways to improve your credit score.