Having poor credit will limit your chances of getting a good loan and, for some lenders, is enough reason to reject your application. This guide will show you how to navigate the loan process to increase your chances. We will also recommend our best business loans for bad credit and offer tips on how to boost your credit score over time.
Understanding Bad Credit and Its Impact on Loan Eligibility
First off, a lender will consider you a high-risk transaction if you have bad credit. That is why it is unsurprising that the Federal Reserve Small Business Lending Study reported such poor financials as the core reason why business loans were denied in 2024.
One of the biggest impacts you’ll get from poor credit is the limitation in securing a business loan from traditional banks. These banks typically have the lowest interest rates, but they also have the hardest cut-offs.
Even when you get approval, you can expect a higher interest rate when it comes to securing business loans with bad credit. Lenders will also cap the total capital.
Note that if you are just starting as a small business owner, most loans will consider your personal FICO credit score over the business.
Short-term Business Loans: Quick Funding Solutions
Short-term business loans are the way to go if you have immediate needs or want to grab a fleeting business opportunity. They aren’t like long-term options, which are ideal for investments like real estate.
Some notable characteristics of short-term business loans are as follows:
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Fast Approval Speed:
These business loans typically get approval within 24 – 48 hours. Long-term options, on the other hand, can take weeks.
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Higher Interest:
You will have to expect higher interest rates when taking a short-term loan. Typically, the shorter the repayment period, the higher the interest.
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Flexible Conditions:
Some lenders for short business loans do not have high credit score requirements. As such, you can get a loan with bad credit.
Bridging cash flow (to keep operations ongoing) is a challenge we see often when it comes to small businesses. Short-term loans allow you to address it more efficiently. Even better, most lenders will provide the loan without collateral.
You can also take out a business loan to secure your equity when bootstrapping or for equipment financing. It is much safer than getting an investor.
Business Lines of Credit: Flexible Financial Management
Both business loans and a business line of credit provide capital (funds), but their structures are different. Business loans have a fixed loan term and a lump sum, but business lines of credit use a revolving credit, much like business credit cards. Because of that, you will only have to repay the amount you used and not the entire amount available.
We recommend a business line of credit for bills during a slow month. These could be for payroll or operating expenses, as the credit will serve you better than business loans.
Note that, like a business loan, poor credit will affect your chances of getting a business line of credit. If you run a young business, your personal credit score will matter more. But if your company is established, the business credit score will be used for your application.
Comparing Traditional Lenders and Alternative Financiers
One thing is common among traditional lenders and alternative financiers, and that is their use of the 5 C’s of credit. You can expect them to check your character, capacity, capital, collateral, and conditions. However, traditional lenders like banks are more stringent in these aspects, especially when you want to take out loans for bad credit.
Our top lenders when it comes to getting business loans for bad credit are as follows:
Spotloan
With Spotloan, you can customize your business loan by entering the loan amounts and how much you want to pay every two weeks. The approval takes less than a day, and once you accept, the lender will fund you before the end of the day.
Spotloans work best when you have immediate needs in your business. For example, you could use it for an immediate utility or equipment repair. We wouldn’t recommend this option or other loans like Spotloan if you have long-term financing needs. But for emergencies, they are ideal.
Pros
- You can complete the application online.
- Spotloan accepts bad credit
Cons
- The option is expensive for long-term solutions.
Uprova
Uprova offers quick personal loans you can use to fix emergencies in your small business administration. Like Spotloan, the application takes place online, with approval typically coming within a day.
You can get Uprova loans and other loan options like it with good, fair, and bad credit, which makes it a notable choice for your business. Even better, Uprova will offer you the opportunity to improve your personal credit scores.
Pros
- You can take out a loan of up to $5,000 with bad credit
- There are no repayment fees or surprise terms
Cons
- You can still incur overdraft fees from your financial institution if you miss payments
Speedy Cash
Speedy Cash offers both online and store services, which make it our top recommendation for physical cash loans. For this option, you can get installment loans and lines of credit. However, note that you’ll have to provide your banking information, a government-issued identification, and proof of income. These are common in loan options like Speedy Cash, and nothing new in the industry.
Pros
- You can get up to $5,000 in an installment loan
- The option is ideal for everyday utilities
Cons
- The amount varies by state
Lake Lending
Little Lake Lending offers more than just business loans for bad credit. They also provide avenues for you to reduce your principal balance besides your repayment plan. One such is the Big Fish Rewards program that allows you to earn points when you make on-time payments or answer surveys. Subsequently, you can redeem these points for reductions in your loan amounts. As such, loans like Little Lake Lending are ideal when you want to get as much reduction in your repayment as possible.
Pros
- There are no early prepayment penalties
- Loans are approved within minutes
Cons
- You can only get up to $2,500, which may not be ideal if you want larger loan amounts
CreditCube
With CreditCube, you can get up to $5,000 without worrying about poor credit. The platform offers low-interest loans, quick loans, and short-term loans. And all these come with zero overdraft fees.
CreditCube allows you to repay your loans over a period of a few months. However, note that to qualify for this option, you’ll need a regular, proven source of income.
Pros
- The loyalty program offers up to a 66% discount on fees
- You’ll get bonus points when you fully repay your loan
Cons
- There are no direct business loans
Boosting Credit Scores Over Time: Tips and Tricks
One way to boost your credit scores is to automate your reputation with the credit bureaus. That means using software-driven systems for your accounts.
Other tips and tricks include the following:
- Repay your business loans early, even if you borrowed with poor credit.
- Ensure you use lenders that report to credit bureaus.
- Keep your business credit card balances between 25% and 30% of your total limit.
- Increase your limits periodically, like every 6 months.
- Use lenders that are in the SBA-guaranteed loan program
- Get a DUNS number.
The Relationship Between Credit Scores and Interest Rates
First off, credit scores and interest rates have an inverse proportionality. In other words, those with high credit scores get lower interest rates and vice versa.
If you have a high score, the lender will view that as lower risk. As such, they will require a smaller premium (interest) on the loan amount. But if you have bad credit, you’ll have a high interest rate, as the lender will view the transaction as riskier.
Often, you’ll get single-digit interest rates with good credit scores. For bad credit, the rates can go up to 25%.
Deciding Between Short-term and Mid-term Repayment Plans
Mid-term loans can have lower monthly payments, but they aren’t always the best fit. Pick them only when your annual revenue can effortlessly carry them, or if you want to invest in more permanent assets for your business. They also work on a large-scale business plan, like opening a new branch.
Short-term business loans are ideal when you need funding immediately, like getting an inventory you’ll sell within 90 days. You’ll also find more lenders willing to transact with bad credit.
Another reason you should pick short-term business loans is if you have an instant ROI. That way, your investment will quickly pay for itself and pay off the loan.
Alternative Funding Options: Grants and Crowdfunding
Grants and crowdfunding allow you to secure funding without monthly interest or a fixed repayment schedule. They don’t require a credit score, but they do have their unique requirements.
For grants, you’ll need a compelling story in your application. Crowdfunding requires even more, as you’ll have to invest in marketing.
Note that, unlike short-term business loans, grants and crowdfunding are slow funding options.
Conclusion and Final Tips
The best business loans for bad credit typically come from alternative lenders, as banks typically require good credit scores. You can get short-term options for quick business financing. However, ensure you pay off your loans on time to boost your credit scores. You can also get a co-signer with good credit to boost your chances of securing long-term business loans.
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