What Is a Bad Credit Score & Can You Get Bad Credit Business Loans?

What Is a Bad Credit Score & Can You Get Bad Credit Business Loans?

Similar to a personal credit score, a business credit score helps determine the creditworthiness of your company. Information on your business credit report is used to produce the score that helps lenders predict how likely you are to pay them back within the terms of your loan.

A higher credit score shows that your business has a good history of paying back your loans and bills on time. In contrast, a lower business credit score means your business isn’t as reliable in completing payments on time, which makes it more challenging for your business to secure the credit you need.

Business Credit Score Defined

While a personal credit score is measured by your FICO score and ranges from 300 to 850, your business credit score is based on payment history to creditors and ranges from 0 to 100. There are three major business credit bureaus that each have their own method of determining your company’s creditworthiness: Dun & Bradstreet, Equifax and Experian.

For simplicity’s sake, we’ll focus here on only one of the credit bureaus, Experian. Experian calculates your business credit score by collecting information that includes the following:

  • Credit information from suppliers and lenders you’ve worked with
  • Legal filings
  • Company background information (such as from public records and collection agencies)
  • Balances on outstanding loans
  • Payment habits
  • Any liens, judgments or bankruptcies against your business

All of that data is then compiled and delivered as a comprehensive business credit score report.

According to Experian’s methodology, the business credit score ranges are as follows:

  • 75 or above is considered “good” or “low-risk”
  • Between 26-50 is considered “medium-risk”
  • Between 1-10 is considered “high-risk”
  • A score of zero indicates bankruptcy

Making payments on time to creditors is the best way to build and raise your business credit score. However, if you’re in need of a loan now and don’t have time to build your credit score, there are options out there for you.

Can You Get Bad Credit Business Loans?

In short, the answer is yes; you can get bad credit business loans. Small businesses are often turned away by traditional lenders when they have a poor business credit score. To address this gap in the small business lending market, a new type of lending has emerged: alternative lending.

There are numerous alternative lenders that offer loan solutions for businesses with bad credit. Small businesses can apply for loans, lines of credit or cash advances all through alternative lenders. Alternative lenders can be more flexible with lending options for a wider range of clients, such as small businesses, startups, freelancers and entrepreneurs.

Understanding the Risks and Rewards of Alternative Lending

There are both positives and negatives to alternative lending. Thinking about your specific business and your needs for a business loan will help you determine how much of a risk (or reward) alternative lending is for you.

Let’s start with the pros:

  1. Easy access: Many small businesses are still trying to establish themselves and may have a poor credit history (or no credit history at all). Non-traditional lenders determine your creditworthiness based on more than just credit history, which can allow easier access to the funding you need to grow your business.
  2. Flexibility: Non-traditional lenders don’t often have as many regulations as banks. Because of this, alternative lenders can determine how much they lend you, repayment terms, etc.
  3. Quick: Lenders can often expedite lending money to your business, sometimes within 24 hours. The turnaround is most often much faster compared to a traditional lending institution.
  4. Interest-only payments: Some alternative lenders have interest-only payment terms, where you only pay interest expenses and won’t have to worry about repaying principal for a few years.

Now to explain the cons:

  1. Lack of regulatory oversight: While this is positive regarding flexibility, it can also increase the risk of fraud losses for lenders if strict procedures are not consistently followed.
  2. Term length: Many loans have shorter repayment terms, which may mean higher payments.
  3. Cost: Alternative funding sources are often more expensive than traditional loans due to higher rates and sometimes more fees. To mitigate the risk of working with businesses that have bad or no credit history, alternative lenders often have higher interest rates.

Tips to Raise Your Business Credit Score

Having a higher business credit score will help your business get financing more easily, find lower rates on insurance policies and increase your borrowing power overall. There are several ways you can go about raising your business’ credit score:

  1. Make payments early or on time: As mentioned, a business credit score is heavily based on payment history. Making payments to lenders on time or early will continue to boost your score over time.
  2. Keep your business information current: Ensure all of your information is current with all three credit bureaus, and that nothing is missing or incorrect on your reports.
  3. Borrow from lenders that report to credit bureaus: Not all lenders report to a business credit bureau. Confirm this with your current lender in an effort to boost your credit score.
  4. Establish trade lines with third-party vendors: Many vendors extend trade credit, meaning they allow you to pay days or weeks after you receive inventory. If you’ve established this type of relationship with a supplier, confirm with them to report your payments to a business credit bureau (if they don’t already). Your business credit score will likely get a boost from this type of transaction.

Building a strong credit history for your business is very beneficial to boosting your businesses’ credit score, increasing your borrowing limits (and options) while you qualify for lower interest rates. However, if your business credit score is bad, don’t fret! There are alternative funding options for you to establish and secure a strong future for your business moving forward.

Do you have tips to share when it comes to securing a business loan with bad credit? Let us know on Twitter @Revenued_com.

We're working on some pretty cool new pieces of content, including tools that will give you insight into your business finances.

Want to be the first to know when they launch?

Dig Deeper into Business Loans

Who Is Eligible for the Paycheck Protection Program (PPP)?

Note: Due to funding no longer being available through the US Small Business Administration (SBA) for the Paycheck Protection Program (PPP), Revenued is no longer accepting applications. To diminish the spread of COVID-19, U.S. companies were ordered to close down or severely limit operations. This severely impacted the lives and well-being of individuals and continues to […]

Are Overdraft Fees Deductible for a Business?

When it comes to filing your taxes, no business expense is too insignificant to consider. Even the smallest fees — such as overdraft fees — are important to reducing your overall tax burden...but they're often overlooked.

What Is Introductory APR?

An introductory annual percentage rate (APR) is a rate that credit card companies use to draw customers. The rate, also called a “teaser rate,” is usually in effect for a fixed number of months, beginning immediately after a new client opens an account. It is typically lower than the standard APR and is often as […]