Getting approved for a business loan may not be impossible if you have bad credit—but there will likely be more hurdles to jump through to secure funding. Lenders look at credit scores because it helps them decide how responsible you are when it comes to making timely payments. A higher score helps you qualify for better rates and more flexible terms.
Why Does Your Credit Score Matter for a Business Loan?
If the business is brand new and starting with sole proprietorship, your personal credit score will be evaluated during the loan application process. Lenders do this to assess the risk of lending to you such as how timely your payments are, how many open credit lines you have, and the length of your credit lines.
What Is Considered Bad Credit in Business Lending?
Each credit bureau has a specific definition of what is considered bad credit. It also generally varies depending on the loan product.
| Bureau | Score Name | Scale | Starting ‘Bad” Scale |
|---|---|---|---|
| D&B | PAYDEX | 1-100 | 1-49 |
| Experian | Intelliscore | 1-100 | 1-49 |
| Equifax | Credit Risk | 101-992 | 101-550 |
| FICO | SBSS | 0-300 | 0-140 |
How to Boost Your Chances for a Business Loan with Bad Credit
Though some lenders may turn you away for having bad credit, others will take a risk on you if you boost your attractiveness as a borrower.
You can improve your chances of being approved for a business loan by:
- Doing your research to find a lender that serves your credit profile and offers your desired amount
- Adding a co-signer
- Offering collateral
- Showing proof of a healthy cash flow
- Applying for exactly the amount you need with a clear “use of funds”
- Improving your credit score
How to Improve Your Bad Credit Score?
Improving your credit score is a practice that will take time. It’s important to be patient during the entire process.
Step 1: Separate your business credit and personal credit by taking out business lines of credit. This helps keep business and personal expenses separate.
Step 2: Take on a mix of credit with credit cards, loans, or other products.
Step 3: Take charge of your credit report and dispute any errors. It’s recommended to review your credit report every year as discrepancies do occur occasionally.
Step 4: Avoid maxing out credit lines. Experian suggests keeping your credit utilization on business credit cards and other lines of credit below 30%.
Step 5: Make timely payments. While this process is slow, it will also help you gradually build your credit score
Frequently Asked Questions
Why is your credit score important for a business loan?
Lenders look at credit scores because it gives them an idea on how timely your payments are, how many open credit lines you have, and the length of your credit lines.
What is considered bad credit for a business loan?
Each credit bureau has a different definition of what is considered bad credit.
| Bureau | Score Name | Scale | Starting ‘Bad” Scale |
|---|---|---|---|
| D&B | PAYDEX | 1-100 | 1-49 |
| Experian | Intelliscore | 1-100 | 1-49 |
| Equifax | Credit Risk | 101-992 | 101-550 |
| FICO | SBSS | 0-300 | 0-140 |
How do you improve approval odds for a business loan with bad credit?
Some lenders will take the risk and approve you for a business loan if you have a co-signer, a clear use of funds, offer collateral, show proof of healthy cash flow, and are actively improving your credit score.
How do you improve your credit score?
Improve your chances of securing a business loan by separating business and personal credit needs, open a mix of credit forms such as cards, loans, and products, regularly check your credit report for discrepancies, keep your credit lines below 30% in usage, and make timely payments.