How to Get a Small Business Loan with Below-Average Credit

How to Get a Small Business Loan with Below-Average Credit

Entrepreneurship is on the rise nationwide, particularly for minority business owners. The number of Black owned businesses is currently at more than 30% above pre pandemic levels, with women business owners in the lead. 

However, Black business owners are the most likely to tap into their personal finances to fund their business in times of distress. Further, 46% of Black business owners reported concerns about personal credit scores affecting their business.

Below average credit doesn’t have to be the end of the road for small businesses receiving financing. Community development lenders like CommunityWorks focus less on the number of the score and more on history of use. Even with a below average credit score, there are options on qualifying for business loans.

What Is a Below-Average Credit Score?

According to popular credit scoring models like the Fair Isaac Corporation (FICO) score, a below-average credit score ranges from 300 to 629 — on a scale of 300 to 850. However, individual small business lenders may have different guidelines for what defines a below-average credit score.

How to Get a Small Business Loan with Bad Credit

You can get a small business loan even with below-average credit. Simply follow the tips below.

Check Your Personal and Business Credit 

Knowing your score and the info in your credit report can help you better understand how lenders will assess your loan application. 

Build Up Your Credit

If possible, find ways to build up your credit before applying for a business loan. The Consumer Fianance website has a helpful resource on disputing things that could be negatively impacting your credit score.

Additionally, pay down debts to lessen your credit utilization and continue making payments on time. In case you don’t have a credit history, open a credit account and begin making regular payments. Organizations like Self-Help Credit Union have secured products to help build credit.

Prepare Your Small Business for Due Diligence

All lenders, even more flexible lenders like CommunityWorks, must conduct an extensive assessment of your business before extending a loan. This usually involves reviewing your personal and business bank account statements, tax returns, and a list of business assets and liabilities.

CommunityWorks and other lenders will almost always ask for a business plan or business canvas – and many (like CommunityWorks) might also help you create one. With below-average credit, you can improve your chances of approval by creating a comprehensive and optimized business plan.

You may need to provide copies of applicable business licenses, legal documents, and an Employer Identification Number (EIN). What’s more, some lenders like to ask for a description of how you will use the loan. So, it’s recommended to prepare a short pitch beforehand.  

Find out what CommunityWorks requires.

Offer Collateral

If you have bad credit, consider providing collateral even if the lender doesn’t require it. This can reduce the risk to the lender, increasing your likelihood of securing significant funding.

CommunityWorks prefers collateral to always be involved – and it’s required with larger loans.

Suitable forms of collateral may include hard assets like commercial property, equipment, inventory, or fixtures. You can also use future earnings like unpaid invoices as collateral.

Shop Around and Compare Lenders

We’d love for you to apply with us at CommunityWorks, but if you plan on opening a business in a state outside of South Carolina, be sure to carefully evaluate your options and avoid predatory lenders.

To choose a favorable lending program with below-average credit, consider the following factors:

  • Loan Offerings: Select a loan amount that suits your immediate needs.
  • Interest Rates: Though bad credit loans tend to have higher interest rates, compare the rates and choose a loan option that offers the most affordable rates.
  • Lender Reputation: Research and read online reviews to see which lenders are dependable—and which to avoid.
  • Underwriting and Funding Speed: Compare lenders and find one that provides a turnaround time that meets your needs.

Take Your Venture to the Next Level with the Right Small Business Loan

Getting a business loan with below-average credit isn’t easy, but you can increase your chances of approval by being well-prepared with the tips above. Remember to repay your loan on time to improve your credit score.   

If you need funding, take a look through our small business lending products and consider applying with us today!