Getting a business loan with bad credit can be a challenge, especially when it comes to traditional bank loans. If you know where to look, it is possible to get a business loan even if your business credit needs work, but often these types of business loans are expensive. Always make sure you understand the terms and are willing to accept them.

Types of Business Loans for Bad Credit

Different types of loans come with different costs, restrictions, and requirements. Understanding your options is the first step to making the right choice for your business. Below are some of the types of business loans that may be available with less-than-stellar business credit. If your company is in a precarious position, however, it is best to consult with a credit repair specialist before incurring high interest debt.

Business Credit Lines

With a business line of credit, you can use the funds when needed and draw money with more flexibility than a regular loan. These loans usually require strong revenue and have fees associated with them. Banks want to know if the business has the ability to pay back the line. The bank would look at length of time in business and tax returns. This would help them analyze profits. The business owner’s income and personal credit scores may also be included in what is considered profits.

Use Case for Business Credit Lines

Business lines of credit are used by companies that may have large expenses before getting paid by their client/customer. For example, a construction company that does government contracts and may need to lean on the line of credit when the funds are not yet received from the government. The line gives them the flexibility to cover expenses or payroll when needed and pay it back as soon as funds are received.

Pros: Flexibility to access cash when you need it and only pay interest on what you use.

Cons: Strong revenue required to qualify, along with years in business. These lines usually include extra fees.

Term Loans

A term loan is a lump sum of cash that must be paid back over a set time, plus interest and fees. These include short-term loans and long-term loans. Short-term loans usually need to be paid back quickly and have higher interest rates. They also have more frequent payment schedules. Long-term loans are used when companies need to pay over time for large upfront costs.

Use Case for Short-Term Loans

Short-term loans are often used when unplanned circumstances arise and cash is needed in order to keep a business running. One common use for short-term loans is restaurants that have equipment failure. The equipment is essential for their operations, but they may not have the working capital on hand to replace it.

Pros: Funds are available very quickly.

Cons: Must be paid back quickly. Rates are high. If they are not paid on time, they will roll over at a much more expensive rate and incur additional fees.

Use Case for Long-Term Loans

Long-term loans are often used in the real estate investment industry to purchase land or for property development.

Pros: Payments are predictable and allow for more time to work on projects that may not show returns quickly.

Cons: Since the payments are over a long term, interest rates become costly.

SBA Loans

Small Business Administration (SBA) loans are guaranteed by the government. They usually have longer payback timeframes and can offer lower interest rates but have a harder application process than conventional business loans. A personal guarantee will be necessary.

Use Cases for SBA Loans

SBA loans are good for start-ups with a lack of credit and history. They are also useful for minority-owned businesses where special programs are available to support the business’ growth.

Pros: More time to pay back than other loans, low interest rates, guarantee by the government makes lenders more willing to extend credit.

Cons: Application process is cumbersome and lengthy. SBA loans can be difficult to get and require a personal guarantee. They may also require collateral.

Commercial Real Estate Loans

Commercial real estate loans are used for property acquisition or for the purpose of development and construction of real estate. It may be very difficult to qualify for a commercial real estate loan if your credit is poor. The collateral of the property becomes an important part of the qualification. If you need to use a hard money lender there are high risks involved like balloon payments, high interest rates and fees, pre-payment penalties, and more.

Use Case for Commercial Real Estate Loans

Real estate investment and development firms often use these loans to purchase commercial real estate, such as office buildings, warehouses, retail spaces, multi-family units, etc.

Pros: Allows businesses to leverage existing capital for larger loans. Interest payments are often tax deductible, reducing cost. Potential income generation also can reduce overall cost.

Cons: Without good business credit, loans will be risky and expensive. Commercial real estate loans come with the risk of property depreciation, have strict qualification requirements, longer terms, and prepayment penalties.

Merchant Cash Advances

With merchant cash advances, funds are given to the business and collected daily from credit card sales or directly from the business’s bank account.

Use Case for Merchant Cash Advances

Restaurants use merchant cash advances for short term cash flow challenges, to meet payroll, or take care of unexpected expenses.

Pros: Quick access to capital. No collateral required, poor credit history is acceptable, repayment can fluctuate based on credit card sales and revenue, minimal paperwork involved.

Cons: VERY EXPENSIVE!

Business Credit Cards

With revolving credit card debt, limits can be reduced and accounts closed at any time. If approved, fees and interest rates may be high.

Use Case for Business Credit Cards

Companies that have many salespeople often use business credit cards to track expenses and limit spending.

Pros: Quick access to money, expense tracking, possible lower initial rates upon opening, perks such as mileage and points.

Cons: Credit limit reductions or account closures depending on credit and financial environment, high interest rates if balances are left high over time.

Invoice Factoring or Invoice Financing

Invoice factoring allows your business to borrow money based on open unpaid invoices by selling the invoices to a factoring company at a discount. This can be costly, and you will no longer have control over how the funds are collected from your customers.

Invoice financing is the same as invoice factoring except you still own the invoice and have control over collecting from your customers.

Use Case for Invoice Factoring/Financing

A small business that has products sold at a major department store and does not get paid immediately for this merchandise may use this type of funding to continue operations while waiting for payment. Department stores are notorious for taking extended periods on paying open invoices.

Pros: Immediate cash

Cons: You will be paid less than the invoice amount (usually 80 – 90%). With invoice factoring, you’ll have no control over how the funds are collected from your customer/clients.

Microloans

Microloans are usually for amounts no more than $50,000. These loans are extended by nonprofits and usually given to startups or disadvantaged community businesses. They may be low cost, but often have cumbersome loan qualifications.

Use Case for a Microloan

A small retailer that does not have the funds for a startup may use a microloan to access financing to help grow a business in a low-income area.

Pros: Terms are more flexible than other loans, smaller and shorter repayment periods.

Cons: Small amounts of capital, interest rates vary and could be higher than other loans.

Getting the Most Out of Your Loan

As you may have gathered by now, the better your business credit, the better your options for business loans.

Choosing the right type of business loan for your needs is an important first step, but it is only the beginning. Determining how much debt you can afford, vetting lenders, getting the application right, and having a plan for paying back debt are all crucial. Make sure any new debt you take on fits into your strategy for repairing your business credit. For the best results, talk to a credit repair expert today.