How to Get a Retail Business Loan With Bad Credit

Updated November 23, 2021

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Poor credit history or a bad credit score, commonly classified as a FICO score between 350 and 500, can limit the traditional funding options available for business owners like retail business loans or other business financings. However, it doesn’t mean there are no funding options—merely that alternative funding options may need to be considered.

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While most lenders use the personal credit score of a small business owner to assess the risk of lending a small business loan, alternative business funding methods use other factors like the business’s annual revenue and time in business to predict how likely the borrower will be able to pay the loan off. While it does exist, business credit score is seldom used for small businesses. Therefore, most traditional financial institutions rely heavily on a minimum credit score and a personal guarantee to offer a loan.

We will continue to stress that bad credit business loans will almost always carry a higher interest rate and have higher loan payments.

What are the Financing Options for Bad Credit Business Loans?

A “bad credit business loan” is generally granted by an alternative lender or online lender that specializes in lending to small businesses and sometimes even startups. These are loans that traditional lenders will not make.

So if your credit report is less than perfect, rest assured that you still have business borrowing options. A poor credit score (or low credit score) will disqualify you from some lenders. However, with a bad credit business loan, you can expect to pay higher fees and interest rates, and you are likely to have stricter repayment terms.

These financing options let retailers with bad credit access money for cash flow or working capital. Business lending is significantly different from a traditional personal loan or traditional bank loan. Business lenders focus on the ability to repay a loan and rarely focus on credit score requirements.

Retail Merchant Cash Advance

Merchant Cash Advance (MCA) is an alternative business funding model. The business is loaned an upfront amount of cash in exchange for a set percentage of the credit transactions until the loan amount is repaid in full. An MCA can be used as a working capital loan but is not suitable for all types of businesses. 

MCAs are often a short-term loan option period of 12 months or less until full repayment. This can be a drag on future cashflow so small business owners should consider this. 

This type of bad credit loan suits retailers with bad credit because the loan depends on active revenue. Borrowers will need to submit bank account information such as bank statements for 2-3 years, give access to their credit card sales history and credit card merchant account.

The application process generally takes less than 24 hours, you wont need to submit a business plan and it’s much less complicated than a typical business loan application. 

Unlike traditional funding methods, MCA’s are unregulated and unsecured, so business owners looking at this type of financing should do their research to ensure the cost of capital is reasonable and that the company giving the quick cash is ethical. MCA repayment terms are based on a concept called factor rate, not the interest rate.

Summary

  • Short term (less than 12 months)

  • Ideal for satisfying a need for quick cash flow

  • Suitable for businesses that rely on debit/credit transactions

Retail Business Line of Credit

Unlike a traditional one-time loan, a business line of credit (LOC) is a revolving loan that becomes available to be borrowed after repayment. 

For example: if a retail business receives a $20,000 line of credit, uses $10,000 for cash flow or inventory, and then pays back $5000 on the principal amount above the interest that accrues after the first three months, that $5000 is now available for borrowing again in addition to the $10,000 remaining on the unspent loan 

A benefit of a line of credit is that the business only pays interest on the loan amount used rather than the entire loan amount. 

This type of loan provides quick cash and allows for a seasonal business to ride between large amounts of revenue and scarce periods. The LOC can be paid back when income is high and drawn from when it’s needed. 

The lender often requires a solid capital history, good earnings, and regular payments, usually provided by cash flow statements.

Summary

  • Long-term repayment

  • Allows quick access to cash 

  • Only repay interest on the amount used

Retail Invoice Factoring

Another alternative business funding model is retail invoice factoring, or the process where a business receives a cash advance based on funds they have already earned and have not yet collected. 

This method relies on the creditworthiness of the business’ customers rather than a business owner’s credit score.

A financier uses the accounts receivables of a business as the basis to provide a cash advance of between 70-90% of the total amount within the account, purchasing the unpaid invoices. 

When customers pay, the factoring company receives the balance of the invoice amount plus a factoring fee; customers pay, and the remaining percent from the invoice is given to the business. 

Invoice factoring is not a loan since you’re selling the invoices to another company for a lump sum payment.

Retail business owners should be cautious about invoice factoring companies and consider how much of that invoice will be going to the factoring fee, which can be anywhere from 1-5% of the total invoice amount. 

Summary

  • Not a loan, instead the business is selling their invoices for a lump sum

  • Suitable for time-sensitive cash needs

  • Factoring fees vary between financiers 

Conclusion

Retail financing options are available in a wide variety of options for business owners with bad credit, whether you need to purchase inventory or are just investigating finances for small businesses. Alternative business funding like MCAs, LOCs, and invoice factoring can allow a business with bad credit to get a retail business loan provided they can prove a stable revenue stream. 

Consider the options available for your business and speak with multiple financiers before settling on one option. Always ask for full disclosure before signing and understand all the terms before you borrow.

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