Startup Loans for Bad Credit: Finance Your Business

March 6, 2024

Share this

Starting a business is an exciting and challenging endeavor, but it can be especially difficult for entrepreneurs with bad credit. Traditional lenders often require a strong personal credit score to approve small business loans, which can be a major hurdle for business owners with low FICO scores.

However, alternative financing options are available that cater specifically to startups and small businesses with poor credit. Small business owners just starting out should know that business financing is available to new businesses.

What is Bad Credit?

A poor credit score is typically a result of late payments, high credit utilization, or other negative factors on a business’s credit history. Credit scores are calculated by credit bureaus and used by lenders and alternative funders to determine creditworthiness.

A low credit score can make it difficult for entrepreneurs to secure business funding, as many underwriters may view them as high-risk borrowers. After all, business financing is effectively a bet: the lender or alternative financier is betting that your business will be able to repay its funding in addition to interest or fees (or factor rates, in the case of some forms of alternative financing). For financial institutions, extending funding to a business with a bad credit score means making a riskier bet.

Get Funded Now

Applying is free and will not affect your credit score

Business Credit Scores: An Overview

Business credit scores are numerical ratings that provides a snapshot of a company’s creditworthiness. Lenders that work with small business loans generally use business credit scores to evaluate the risk associated with extending credit to a company, which influences interest rates, loan terms, and credit limits.

Who Calculates Business Credit Scores?

Several credit bureaus and agencies calculate business credit scores, with the three most prominent being Dun & Bradstreet, Experian, and Equifax. Each agency’s proprietary scoring model may result in slight variations in a company’s credit score across the different bureaus.

Dun & Bradstreet

Dun & Bradstreet (D&B) is a leading credit reporting agency that calculates the Paydex score, which ranges from 0 to 100. The Paydex score primarily focuses on a company’s payment history, with higher scores indicating more timely payments. A score of 80 or above is generally considered a good credit rating for a business.


Experian is another major credit bureau that generates business credit scores. Their Intelliscore Plus model ranges from 1 to 100 and considers factors such as payment history, credit utilization, length of credit history, and public records (e.g., bankruptcies, liens, and judgments). Higher scores reflect a lower risk of defaulting on loan obligations.


Equifax’s business credit scoring model, the Small Business Credit Risk Score, ranges from 101 to 816. Like the other bureaus, Equifax considers payment history, credit utilization, and public records, but also considers the company’s size and age, among other factors. A higher score indicates a lower credit risk.

Factors Affecting Business Credit Scores

While each credit bureau uses a slightly different scoring model, several common factors influence business credit scores:

Payment History

Timely payments are crucial to maintaining a good business credit score. Late or missed payments can have a negative impact on your score, as they indicate a higher risk of default. Remember, a bank running a credit check wants to see that your business will likely repay the full loan. A long history of making payments goes a long way toward showing you will pay them back.

Credit Utilization

Credit utilization refers to the percentage of available credit a business uses. A lower credit utilization ratio is typically viewed more favorably, as it indicates that a business is managing its debts responsibly. In general, banks want to see that your business is using under 30% of available credit.

Length of Credit History

A longer credit history demonstrates a track record of managing credit and debt obligations. Funders may consider businesses with a shorter credit history riskier, which can negatively affect their credit scores.

This is where things get tricky for new businesses. By definition, startup business loans and alternative financing are for new businesses. If your company doesn’t have a long history, it can’t have a long history of making payments.

Public Records

Public records such as bankruptcies, tax liens, and judgments can significantly harm a business’s credit score. These records indicate financial distress and a higher likelihood of default.

Company Information

Factors such as the size and age of the company, industry, and geographic location can also impact a business’s credit score. Banks may perceive newer businesses or those operating in high-risk industries, like the cannabis industry, as more likely to default on their loan obligations.

Why Your Personal Credit Score Matters

When applying for a small business loan, lenders often consider your credit score as a key factor in determining your creditworthiness. A low personal credit score can signal to lenders that you may have difficulty managing debt and making timely payments, which can result in higher interest rates or loan application denials. To increase your chances of securing financing, improving your credit score and demonstrating responsible financial management are essential.

Financing Options for Startups with Bad Credit

Even though it can be difficult to get loan offers when you’re just starting out, startups have plenty of funding options. These include:

SBA Loans

The Small Business Administration (SBA) offers various business loan options that cater to startups and small businesses, including those with bad credit. SBA loans are partially guaranteed by the government, which reduces the risk for lenders and can result in more favorable terms and interest rates. While the minimum credit score requirement varies by lender and loan product, some SBA loans are available to borrowers with credit scores as low as 620.

There are three main types of SBA loans – the 7(a) Loan Program, the 504 Loan Program, and Microloans. For newer businesses, microloans are often the best option. They’re short-term loans available through non-profit local intermediary funders. They often include smaller loan amounts and may require personal guarantees. However, compared to the strenuous application process required for the larger 7(a) loans, they are much more reachable for newer companies.

Business Lines of Credit

A business line of credit is a flexible financing option allowing entrepreneurs to access funds up to a predetermined credit limit as needed. This type of financing is ideal for managing cash flow and covering short-term expenses, such as inventory or payroll.

Banks may require a high credit score and other strict eligibility requirements to receive a significant line of credit, which can be prohibitive for newer companies. However, credit unions, online lenders, and alternative lenders may offer business lines of credit to borrowers with lower credit scores.

Equipment Financing

Equipment financing allows business owners to purchase or lease equipment for their business, using the equipment itself as collateral. This type of financing can be a viable option for startups with bad credit, as lenders focus on the value of the equipment rather than the borrower’s credit score. Additionally, equipment financing can offer tax deductions and help preserve cash flow.


Crowdfunding is a popular method of raising capital through online crowdfunding platforms, where entrepreneurs pitch their business ideas to a large audience in hopes of securing funding from individual investors. This financing option is ideal for startups with bad credit, as it doesn’t rely on credit scores or collateral. Instead, crowdfunding success is typically based on the strength of your business plan, marketing efforts, and the appeal of your product or service. However, remember that crowdfunding can be time-consuming and may require giving up a portion of your equity or offering rewards to backers.

Alternative Financing:

Invoice Factoring

Invoice factoring involves selling your business’s outstanding invoices to a third party (factoring company) at a discount, in exchange for immediate cash. While not a loan, this financing option can be suitable for startups with bad credit, as the approval process is based on the creditworthiness of your clients, rather than your own credit. Invoice factoring can provide quick access to working capital and help manage cash flow, but it’s essential to consider the fees and potential impact on client relationships.

Merchant Cash Advances

A merchant cash advance (MCA) isn’t a loan and is thus not governed by the same rules and regulations. An MCA provides a lump sum of cash upfront in exchange for a percentage of future credit and debit card sales. MCAs are fast (you can receive funding by the next business day) and are available to nearly any type of business.

MCAs can be an attractive option for businesses with bad credit, as the approval process typically focuses on the company’s monthly revenue rather than the owner’s credit score. Some MCA providers don’t require a credit check at all, only an examination of bank statements. If your company is showing strong annual revenue just starting out, an MCA can be a great choice to fund whatever it is your business needs. However, it’s important to note that MCAs may have high factor rates.

Tips for Securing Startup Financing and Bad Credit Business Loans or Alternative Financing

  1. Improve your credit score: Take steps to improve your personal credit score, such as paying down debt, making timely payments, and correcting any errors on your credit report. When it comes to a bank, the higher credit score can result in better loan terms and lower interest rates.

  2. Create a solid business plan: Most lenders want to see a well-thought-out business plan outlining your growth strategy, projected revenue, and how you plan to use the loan funds. A strong business plan can help demonstrate your commitment and financial responsibility, increasing your chances of securing financing.

  3. Offer collateral: If possible, offer collateral (such as equipment or real estate) to secure your loan. This can help reduce the risk for lenders and may result in more favorable loan terms, even with bad credit. Don’t have real estate collateral? Remember, that’s okay too but you’ll want to consider an alternative funder rather than a business lender such as a bank.

  4. Consider a co-signer: If you have a trusted friend or family member with good credit, consider asking them to co-sign your loan. A co-signer with strong credit can help improve your chances of approval and may result in better loan terms.

  5. Shop around: Explore various loan options and compare interest rates, fees, and repayment terms to find the best financing solution for your business. Don’t hesitate to negotiate with lenders to secure the most favorable terms possible.

  6. Build your business credit: Establish a business credit profile by opening a business bank account, obtaining a business credit card, and ensuring your company is registered with major credit bureaus. Building your business credit can help improve your chances of securing financing in the future.

  7. Be patient: Many types of loans are only available to a small percentage of qualifying companies. Determine why you don’t qualify for the funding you’re looking for, and decide whether you’ll be eligible for that funding in the near future or if you should go with a different option sooner.

In conclusion, obtaining a small business startup loan with bad credit can be challenging, but it’s not impossible. By exploring alternative financing options and taking steps to improve your creditworthiness, you can increase your chances of securing the funding you need to grow your business.

*MCAs are legally distinct from loan products.

Leave a Reply

Your email address will not be published. Required fields are marked *

Leave a Reply

Your email address will not be published. Required fields are marked *