How to Get a Startup Business Loan With Bad Credit: A Step-by-Step Guide

It's definitely harder to start a business with bad credit, especially if you plan on borrowing money, but it doesn't make it impossible. There are many different bad credit small business loans and startup loans available to entrepreneurs who have a limited credit history or even bad credit. To find them, you just need to know where to look, how to prepare to apply, and how to decide which lenders are actually worth working with.

Here's a look at the bad credit small business loan and startup loan process step by step. We'll look at everything from understanding what's on your credit report to finding the right lenders, comparing your options, and protecting yourself from financing options that could actually do more harm than good.

Step 1: Check your credit report

Before you do anything else, you first step should be to pull your credit reports from all three major bureaus (Equifax, Experian, and TransUnion). You have access to one free report from each bureau annually through AnnualCreditReport.com, which is the only government-approved site.

Once you get your reports, look over them carefully; errors are more common than people realize. Some examples of errors include paid debts that still show as open, accounts that actually belongs to someone else, or late payments that your actually made on time.

If you find any errors, dispute them with both the creditor and the bureau. Getting even one big error corrected can raise your score quite a bit.

Step 2: Build or repair your credit

Building good credit is a long process, but you might not be able to wait a year (or more) to see your credit score improve before launching your business. Thankfully, even a few months of effort can help, so it's worth doing what you can.

A few things that can boost your score relatively quickly include:

• Paying down revolving balances. Credit utilization (how much of your available revolving credit you're using at any given time) is one of the biggest factors in your score. Getting utilization below 30%, at most, can improve your score within a billing cycle or two.

• Getting current on anything past due. Having just one single account in collections or past due can be doing serious damage to your credit score. Getting that balance paid and up-to-date won't erase the late payment reports, but it'll help by showing that you're now paid up and on-time.

• Not closing old accounts. Closing an old account will shorten your average history and reduce your available credit, which can raise your utilization ratio. Both of these have the potential to lower your score.

• Becoming an authorized user. If you have a family member or trusted friend with strong credit, see if they'd be willing to add you as an authorized user on one of their credit accounts. If they do, their healthy account history can show up on your credit report and help your score, without you needing to personally open any additional accounts.

Business and personal credit are different, but you may need to qualify for a bad credit small business loan or startup loan with both. Open a business bank account, get an EIN, and start working with vendors who report to business credit bureaus. Business credit is a separate profile from personal credit, and some lenders focus on business credit score when evaluating bad credit small business loans and startup loans.

Step 3: Build a business plan

When your credit score is working against you, your business plan has to work harder. Lenders evaluating bad credit small business loans and startup loans are taking on more risk, so a detailed, credible business plan is one of the ways you demonstrate that the risk is worth taking.

A solid business plan should include things like:

• A description of what the business does and how it makes money

• Your target market and why customers will buy from you

• A realistic financial projection, including annual revenue, expenses, and cash flow for at least the first 12 to 24 months

• A specific, detailed explanation of how you'll use the loan funds

• Your repayment plan, or how you'll make the payments and where the money will come from

A repayment plan is especially important for bad credit small business loans and startup loans. Lenders want to see that you've thought through not just the opportunity (cash), but the obligation (repayment). Be specific and conservative, and don't project revenue that requires everything to go right from day one.

Step 4: Gather documents

Pull all of your documentation together before you start applying, to save both time and effort.

The documents most lenders will want to see include your:

• Personal and business tax returns — typically the last one or two years.

• Personal and business bank statements — usually three to six months' worth.

• Business formation documents — LLC operating agreements, articles of incorporation, or sole proprietor documentation.

• Your business plan and financial projections.

• Personal identification, Social Security number, and EIN.

• A list of collateral if you're offering any assets to secure the loan.

Some lenders (including online lenders and microlenders) require less documentation than traditional banks and credit unions. But having everything ready still speeds up the process and reduces back-and-forth.

Step 5: Know your options

Not all lenders will touch bad credit small business loans and startup loans, and the ones that do aren't all equal. Here's where to look:

1. SBA microloans

The SBA's microloan program provides loans up to $50,000 through nonprofit intermediary lenders. Microloans through the U.S. Small Business Administration (SBA) loan program have more flexible credit requirements than traditional bank loans, and many of the nonprofits that administer them specifically serve entrepreneurs with limited or imperfect credit histories. Many programs also include business counseling and technical assistance. This is one of the better starting points for bad credit small business loans and startup loans — or even with no credit at all.

2. Online and alternative lenders

Online lenders and alternative financing companies often have more flexible underwriting requirements on startup funding than traditional banks. They look at factors like cash flow, revenue trends, and your business's overall health rather than relying just on a credit score.

For startups that aren't yet earning revenue but need access to capital, your borrowing options are more limited. Even still, some online lenders will consider lending to you if you have a strong business plan and especially if you have personal assets that can act as collateral.

It's important to note that rates on bad credit business loans through alternative lenders are often higher than what you'd find at a bank. To be fair, you're paying for the flexibility and access, so that's not unexpected. Just make sure you're comparing loan options on an APR basis, not just the advertised rate, so you understand the real annual cost.

3. Equipment financing

If you need money to buy equipment, equipment loans can be a great (and more accessible) option than a general startup business loan. With these loans, the equipment serves as collateral to secure the debt, which reduces the lender's risk. That can make approval simpler even with a lower credit score.

4. Microloans from CDFIs and nonprofits

Community Development Financial Institutions (CDFIs) and nonprofit lenders specifically serve borrowers who don't qualify for traditional financing, including startups with bad credit. Loan amounts tend to be smaller, and the process may include more involvement from the lender in terms of business coaching, but that support can be genuinely valuable for new entrepreneurs.

5. Business credit cards

Business credit cards aren't a loan, but they can give you quick access to working capital when you need it most. For new businesses with imperfect credit, a secured business credit card with a cash deposit may be necessary. These aren't ideal for big purchases or to use long-term, but for day-to-day operating expenses, they can fill the gap while you build your credit history.

Step 6: Compare options

When looking at bad credit small business loans and startup loans, it's easy to just focus on what you can qualify for rather than what you should take. But there are a few things to compare before you choose:

• Complete APR. A loan's annual percentage rate (APR) includes fees and other expenses, so it does a better job at showing you the true annual cost of borrowing that money than the interest rate alone. For example, a loan with a 12% interest rate and high origination fees can easily cost more than a 15% rate loan with no fees.

• Repayment terms. Choosing a shorter loan term means you'll be on the hook for bigger monthly payments than you would with a longer term for the same loan amount. That said, a longer repayment term often means paying more total interest in the long run. Just be sure that whatever you choose fits both your cash flow and your long-term goals.

• Prepayment penalties. Can you pay your loan off early without a penalty? This matters if your business does better than projected.

Step 7: Watch out for predatory Funding

If you're struggling to qualify for conventional financing, it's even easier to become a target for predatory alternative funders. Merchant cash advances, high-fee short-term loans, and some online products have overall APRs that would shock borrowers if they were advertised clearly.

Some red flags to watch for when shopping for bad credit small business loans and startup loans include:

• Factor rates instead of interest rates. A merchant cash advance might advertise a "1.3 factor rate," which sounds like no big deal but actually means you might be paying back more than what you borrowed. Instead, calculate your effective APR before agreeing to anything.

• Pressure to sign fast. Legitimate lenders give you time to read your agreement and compare options before signing. A alternative lender might push you to sign the same day should be treated with real skepticism.

• Automatic daily or weekly repayments. Some bad credit business loans automatically schedule repayments from your bank account on a daily or weekly basis, which can affect the cash flow for your new business.

• Vague or confusing disclosures. If the lender can't clearly explain your APR, the total cost, and the repayment schedule, it might be betterl to simply walk away. You have the right to understand what you're agreeing to.

• Guaranteed approval. No legitimate lender guarantees approval without reviewing your application. "Guaranteed approval" is almost always a sign of a predatory product.

Final thoughts

It's definitely easier to get a loan with good credit than it is to get bad credit small business loans and startup loans... but trying to borrow with bad credit isn't impossible. If you want to get approved for one of these loans, first find out where your credit stands. Then make improvements where you can, build a strong business plan, and find the right lenders (SBA microlenders, CDFIs, online lenders, or equipment financing companies) for your specific situation and credit profile.

There are bad credit small business loans and startup loans if you have trouble getting approved for a more traditional business loan. Just be sure to take your time comparing options, and be skeptical of any offer that seems too easy or too fast if you want to avoid any predatory offers and lenders that may be out there.