Business Credit“If you have bad credit can you get a small business loan?”

If you’re asking this question perhaps you need to change it.  A better question for small business owners looking for loans when they have poor credit is:

“What should I do if I have poor credit and need a business loan?”

Now, we can answer the question with some clear steps and point you in the right direction.  The reality is that most cash lenders, banks and other lending institutions granting a loan or line of credit for cash rely on several factors to determine if a credit application is denied or approved.

In our research we discovered by speaking with direct lenders that more than 80% of business loan applications are denied.  The lenders tell us that the denials are not entirely due to poor personal credit of the business owner.  Based on what these lenders said I would venture to guess it’s about 50% of the declines.  The other 50% is due to factors other than just the personal credit score of the small business owner.

First we’ll look at what you do if your personal credit is poor and you need a business line of credit or a small business loan. In 2011 small business loans for those with bad credit can be nearly impossible to get – or so it seems.

Second, we’ll discuss the other factors that will stop many small business owners from being approved for a business loan or line of credit.  The positive about these other factors is you can make sure you do something about them before you apply for your next small business loan.

Small Business Owners’ Business Loan Requirements Even with Bad Credit

So what is considered bad personal credit these days? You need to pull your personal credit score – also called a FICO or BEACON score to know what category you fall into.  You can do this at Equifax.

According to Equifax this is what they considered poor, fair, good, very good and Excellent.

If your FICO score is 280 – 559 it’s considered poor personal credit.

If you FICO score is 560 – 659 it’s considered fair personal credit.

Good personal credit is a FICO score from 660 – 724.

Very good personal credit is 725 – 759 and excellent personal credit is 760 -850.

Also according to Equifax of the entire U.S. population with a credit profile 12% have poor personal credit, 21% have fair, 18% have good, 12% have very good and 37% have excellent.

Applying for a small business loan with poor credit

When you apply for a small business loan the lenders are going to pull your personal credit score to determine your creditworthiness as one of the factors in granting an approval or decline.  However, if you don’t have at least a 660 FICO score you shouldn’t even bother filling out the application.

Small business owners applying for loans with poor credit or fair credit according to Equifax are getting denied before the application moves to the next stage.  In most cases the applications are entered into a computer and the system checks your personal credit score instantly and if it doesn’t have at least the 660 it’s being denied right away.

Of course it depends on the lender and the type of small business loan or line of credit you are applying for as to what minimum FICO score they need.  A 660 FICO is the minimum for a few lenders, including a couple that grant SBA backed loans.  They go that low, but keep within SBA guidelines because they know they’ll be reimbursed the majority of the loan if the small business owner defaults.

Minimum FICO for small business owners to get a small business loan

Based on our experience we see most banks and cash lenders moving to the next phase of the loan application gold cardprocess if the application has at least a 720 FICO score.

If your score isn’t at least a 660 or 720 and you want to improve it.  Here are a few steps we’d recommend.

3 Steps to Improve Small Business Owner’s Poor Credit

First, start getting your monthly expenses under control.  No matter how much you work on improving your score, if you continue to make late payments your score won’t get to a “very good” or “excellent” level.

Second, pull your personal credit report and purchase a monitoring service to keep on eye on your score and activity.  You need to know what is affecting the score and what you can do to keep improving it.  As a small business owner you have to watch your personal credit score more than the average consumer.  Small business owners use their personal credit more often than the average consumer and will pay a lot more in interest with higher rates and more in insurance if they don’t keep their scores high.

Third, starting building your business credit profile and scores with the business credit bureaus.  You want to limit or if at all possible eliminate any business activity on your personal credit report.  If you have bad credit and are looking for small business loans you may not have any other options for getting financing then to separate your personal and business credit.

Small Business Loans you can get with Poor Credit

The types of loans you can get while you wait for your poor personal credit to improve are limited.  However, there are a few options.

First, make sure you are taking the steps to build your business credit, which will help long term with your personal FICO score and the business.  Second, follow the steps above to improve your personal credit score.

Some of the options while you are working on these areas are:

Bad Credit Small Business Loan Option #1

Credit CardLook to the 4 F’s in small business lending: founders, friends, family and fools.  In many cases you can get a loan from family and friends when you approach them with what you are putting together for your business.  They want to see you succeed and will help out when they can.

Fools are those who know you but aren’t sophisticated investors.  They give you money with the hope to get repaid. They don’t require a lot of paperwork and in many cases don’t ask for a lot.  The fools can be great to work with or they can be a disaster depending on if you pay them back before they need the money.

Poor Credit Small Business Loan Option #2

Another option is to look for a small loan from one of the Peer-to-peer lending networks.  Peer-to-peer lending helps those with poor personal credit looking for a small business loan by matching you with investors who are looking for decent rates of return on their money.  Your personal credit report is pulled and based on your score you will pay a higher interest rate for the lower your FICO score is.  This is a pretty good option if your personal credit score is bad and you need a small business loan fast.

Bad Credit Small Business Loan Option #3

If you are pretty savvy with social media and understand how to drive some traffic to a web page you may want to look into crowd funding.  Crowd funding is relatively new and doesn’t require pulling your personal credit or even to pay back the money you receive.  It sounds to good to be true I know.  I had to check it out myself and do a lot of research when I first heard of this.  It is real BUT – you have to know how to drive some traffic to your crowd funding page in a short period of time to get the money.  I won’t spend a lot of time here explaining this option so for further research visit one of our other posts on the subject.

Bad Credit Small Business Loan Option #4

Look into alternative financing options that don’t rely on personal credit scores only.  Some examples include: Equipment Financing, Merchant Account Cash Advance, Checking Account Cash Advance, and Factoring.  These options may pull a personal credit report in some cases but don’t rely on the score as much as a standard bank line of credit or small business loan from a bank.

Poor Credit Small Business Loan Option #5

Build corporate credit.  I have seen several small business owners with a FICO score in the “Very Poor” category (FICO below 559) build corporate credit in the business’ name and received hundreds of thousands of dollars in trade credit with vendors that would have turned them down had they applied personally.

This is a great option for anyone with poor credit that wants to get a small business loan or line of credit.  The cash loan or line of credit would have been used to buy something, so why not just buy the “something” with trade credit established in the business name and without the use of personal credit or a personal guarantee.

Yes, it would be nice to have someone loan you $100,000 or $1,000,000 in cash without a personal credit check or guarantee even though you destroyed your personal credit, but that’s just not reality.  For now, you need to work on improving the personal credit and at the same time take steps that will improve your personal credit and build your business.  Having credit in the business name by building corporate credit let’s you keep business credit from showing on your personal credit report and it gives you access to credit to use in the business.

Leveraging other people’s money is what credit is all about.  Trade credit or Corporate Credit is a great example of this.  Those with poor personal credit need to take advantage of corporate credit because the business loan options are limited to non-existent for them.

Other Factors in Getting a Small Business LoanPlatnium Card

There are several other factors in getting approved for a small business loan or line of credit other than just pulling a personal credit report.  If you have poor credit or bad credit and need the business loan or line of credit you can take the steps to improve your score to an acceptable level based on what the lenders want and make sure you have these areas in place at the same time.

Lenders and business credit bureaus can do over 2,000 automated and manual checks on the borrower and their business to determine if they will grant a small business loan.  With this many checks you can see the importance of getting the “other factors” in place.

Here are a few things you should be doing:

#1 – Make sure the business is in compliance with the lending markets.

#2 – Have all documents, licenses, applications and filings match with the same information.  Don’t place one business address on your credit application while writing down another address on your business license.

#3 – Be a real business.  Don’t answer your business phone “Hello” or have it ringing to your cell phone.  Lenders want to do business with real businesses, act like one – better yet “BE ONE”.

#4 – Don’t play the Corporate Credit game.  If you have poor personal credit and you start getting credit you may be lured into applying for all the credit you get obtain regardless if you need it or not.  Build enough corporate credit to build your profile and scores with the business credit bureaus and get credit from vendors you can use in your business to help it grow.

Four Steps to Building Corporate Credit for Small Business Owners with Poor Credit

•  Separate your business from your bad personal credit by forming a corporation or LLC and applying for an EIN.

•  Use your EIN to establish a business credit profile completely separate from your bad personal credit.

•  Build a strong business credit profile while repairing your poor personal credit.

•  Prepare separate financial statements for your business that does not commingle any of your personal finances.


Leave your comments, questions or share your experiences in the comments section below.

David Gass

David Gass

Business Coach | Entrepreneur at Jump Profit, Inc.
David Gass is a Business Coach in Boise, and Buying and Selling Websites Expert. David is a serial exit entrepreneur who works with other online entrepreneurs to help them grow and exit their businesses as well.
David Gass
David Gass
David Gass