5 Best Small Business Loans for Bad Credit 2020 - Why Only These 5 Are Recommended?

By Daniel Lewis
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Are you worried about your credit situation? You’re not alone. A bad credit score can seriously hurt a loan application and the credit score remains the dominant criteria for determining loan success.

After the 2008 financial crisis, the banks tightened up on their lending criteria, which made getting a loan far more difficult. Thankfully, there are still plenty of options available. There has been a recent proliferation of online lenders who have filled the void left by the banks’ withdrawal.

Finimpact’s Top 5 Small Business Loan Providers for Bad Credit 2020

Below are the five best online loan providers that you can use to gain access to badly needed capital. Before you take on a loan, it is best to understand how loans are calculated and what kind of loans are on offer.

Do not simply take the first lender you can find simply because you need the capital as soon as possible. Good businesses need to pay attention to finance, the lifeblood of the commercial enterprise.

A long, organic, and steady approach will always win out over a short term approach. which invariably comes with stiffer fees and penalties. The top 5 online lenders for 2020, in no particular order, are:

  1. Loanbuilder
  2. Kabbage
  3. Fundbox
  4. LendingClub
  5. OnDeck

With their reasonable credit requirements, LoanBuilder are perfect for businesses without a stellar credit rating. They have the lowest credit rating of all online loan providers, with the exception of platforms that do not even have a credit requirement. LoanBuilder is the new kid on the block, but one that is definitely making an impact, undercutting many alternative services with lower requirements for qualification. LoanBuilder is a PayPal subsidiary who are expanding into the loan market.

This is something of a natural evolution for the international payment processor. The criteria for a successful application is just a little lower than other online loan providers, which can make it attractive to many business owners. It is ideal for short-term loans and the rates are low with no origination fee, no prepayment fee, no stacking fee, and no other hidden fees.

To qualify for a LoanBuilder loan, you will need:

  • At least 9 months in business
  • A minimum credit score of 550
  • A minimum of $42,000 in annual revenue
Pros
  • Low requirements for qualification- very low credit requirements. 
  • No origination fee, prepayment fee, stacking fee, or other hidden fees
  • Can explore estimated offers without impacting credit score
  • Reputable lender – PayPal backed
Cons
  • Unclear fee structure – The APR rates are not advertised
  • Short one year repayment terms not suitable for certain business models.
Best For: New businesses with little experience looking for a low-fee short-term loan. Unclear fee structure may deter larger loan applicants.

With no minimum credit requirements, Kabbage is the perfect choice for new businesses. They are one of the quickest and easiest options for those with bad credit or for those with no credit history whatsoever. In addition, there are no origination fees when using the Kabbage loan option.

Kabbage offers only the business line of credit, not the term loan. The term loan is an upfront sum of money that is paid off in installments, while the business line of credit is cash that is drawn upon as needed. Kabbage offers lines of credit up to $250,000. This makes it perfect for young businesses looking for access to quick capital. It is one of the easier online providers to qualify for.

To attain a Kabbage line of credit, you will need:

  • $50,000 in annual revenue
  • At least 12 months in business
Pros
  • Very quick application
  • No minimum credit score
  • Low minimum requirements for qualification
  • No prepayment penalties or origination fees.
Cons
  • Complex fee structure in comparison to other platforms.
  • Higher rates compared to other online lenders
Best For: Businesses with little or no credit history who want fast access to capital. 

There are no minimum credit requirements with Fundbox, making them perfect for business with little or no credit. Also similar to Kabbage, Fundbox applications are processed very rapidly. Businesses without any credit are also unlikely to have massive amounts of annual revenue or to have been in business for long – but with Fundbox, neither of these is a concern.

Fundbox now offers both invoice financing and the line of credit, though it really specializes in invoice financing. Fundbox is special in that there are no minimum credit requirements for the purposes of qualification and there is no requirement to be in business for 12 months.

In order to qualify with Fundbox, you will need:

  • A business checking account with three months of activity
  • $50,000 in annual revenue
Pros
  • No minimum credit score
  • No 12 months in business condition
  • 100% of invoices paid upfront
  • The easiest online provider to get started with
Cons
  • If customer does not pay, Fundbox expects 100% repayment
  • No collection services for outstanding funds
  • Higher fees and less reputable than other online lenders
Best For: Businesses looking for immediate capital with little experience or credit history. Also useful for businesses looking for invoice financing in particular.

Lending Club is useful because, as there are so many loan providers on the market, you can get a loan even with a bad credit rating. In practice, it is a little more difficult to qualify for a Lending Club loan in comparison to the lenders above (LoanBuilder, Kabbage, and Fundbox). But it is relatively easy and streamlined. The minimum credit score of 580 is not very high and most businesses should be able to meet this criteria. In addition, the rates are typically lower on this much larger lending marketplace.

Lending Club is the world’s largest peer to peer platform, and it completely revolutionized the lending marketplace due to its new model of connecting borrowers and lenders using its proprietary algorithm. Loans up to $500,000 are available, though loans above $100,000 will need to be collateralized.

In order to qualify with this platform, you will need:

  • A minimum credit score of 580
  • At least 12 months in business & $50,000 in annual revenue
  • Collateral on loans above $100,000
Pros
  • Low APR: 6% – 30%
  • Very clear terms and conditions
  • Large loans available up to $500,000
Cons
  • Very tough on late payments
  • Applicants may need to supply tax information in certain instances
Best For: Businesses who want a mix of fast finance at a low rate of return and are prepared to risk stiff late payment penalties. 

OnDeck requirements are more difficult so satisfy for business owners with a poor credit rating. You need $100,000 in annual revenue as well as a credit score of 600 and above. You also need to be in business for a minimum of one year. But they are a good option for businesses with a moderate credit score who want access to capital at reasonable rates.

OnDeck is one of the most respected loan providers on the market, and offers better rates than other platforms. It also offers larger sums, up to $500,000, and provides both business lines of credit and term loans. They are one of the most professional loan providers with an excellent customer service department. However, OnDeck is a little tougher to satisfy for new businesses looking for a loan. They typically work with larger enterprises looking for larger amounts of capital and with steadier cash flows, though all businesses are welcome to apply.

In order to qualify with OnDeck, you will need:

  • A credit score of 600 and above
  • A minimum of $100,000 in annual revenue
  • At least one year in business
Pros
  • Very reputable lender
  • Ultra transparent terms and conditions
  • Fast and flexible funding
  • Brilliant customer service with swift response times
Cons
  • Rates a little stiffer
  • Contains origination fees
  • Weekly repayment system as opposed to monthly can be confusing
Best For: Ondeck is best for businesses with a longer credit history and a stronger financial position. A very professional lender. 

More lenders for bad credit are available on Finimpact: Lendza, Qualifunds, Credibly & Bluevine

Understanding Credit Score

Your credit score is a function of how well you can pay your bills. If you have a history of paying your bills on time, then your credit score will be high, all other things remaining equal.  The primary factors that affect your credit score include:

  • The total amount of outstanding debt
  • Types of accounts owned
  • The different types of credit you have taken out
  • The number of late/missed payments
  • The age of your accounts

The exact system of how a credit score is calculated has not been revealed, as this could lead to manipulation of the scoring system. The most common credit score system in the USA is known as FICO. With the FICO scoring methodology, a score above 580 is considered ‘Fair’, and this is sufficient for the majority of lenders. Some lenders will require a ‘Good’ rating, which is 670 and above.

If you are a member of a minority group, then you might be able to get a loan with a poor credit score. But for the most competitive loans options, such as the SBA 7(a) loan program, a strong credit score is a prerequisite as an absolute minimum to even be considered.

Proven Techniques to Raise Credit Score

Raising a credit score is actually not rocket science. But it does take time, consistency, and patience. You need to make a budget and plan so that all of your bills are paid off on time, every time. The more bills you can pay off on time, the better your credit score will be. The following are some strategies to improve your credit score.

  1. Consolidate all outstanding credit into one loan and pay it off as quickly as you can, but by making periodic payments.
  2. If you have no loans outstanding, you are better off taking out some kind of credit/loan to get a good credit score.
  3. Query your credit bureau for mistakes and download your credit score from the agencies for free.

Do not take out a lot of credit cards or loans in an attempt to artificially raise your credit ratio. The agencies certainly have this factored into their algorithms. It is more likely to backfire as it appears that you are having difficulty in managing your credit score by opening various accounts. This is why the best way to proceed is to take out the minimal number of loans and just to make periodic repayments over time. Remember, it can often take a year and longer to really see your credit score begins to rise, so you must have patience.

Unfortunately, pulling your credit report more than once can have an affect on your credit score. This effect might not be huge, but just remember to only pull your credit report once a year or so. Any evidence of bankruptcy of inability to pay off a loan can really hurt a credit score.

The two most important factors are that you get your outstanding debt as low as possible and continue to make payments on time for your outstanding loans. Payment history is the number one factor for credit reporting agencies. If you simply pay your bills and loans on time, your credit rating will rise.

What to Look For With an Online Loan Provider

What you need to look for with an online loan provider will depend on what you are looking for. You need to ask yourself some important questions including:

  • What loan amount am I looking for?
  • How fast do I need this loan?
  • What is the total Annual Percentage Rate (‘APR’)?
  • What are the minimum requirements for qualification?
  • Are there any hidden fees and penalties for this loan?

As a rule of thumb, the better your situation, the better the kind of loan you will qualify for. Larger providers such as OnDeck and LendingClub will require you to have a higher credit rating (typically 600 and above, with a typical average of 680 for each applicant). You will also need to be in business for 12 months or longer and have $100,000 or so in annual revenue. But this does come with the huge benefit of security (your funds are safe with these enterprises) and a lower APR rate, which will ultimately save you money.

If you do not meet these requirements, you can select from Kabbage, Fundbox, or LoanBuilder. The loan amounts are smaller and tend to be for a shorter term, but they could be exactly what your business needs.

Tips When Applying for an Online Loan With Poor Credit

When applying for a loan application, there are some things you may want to complete, in order of precedence:

  1. Get all your financial statements in order beforehand.
  2. Use financial software to assist with financial reports – this can really save time and money.
  3. Attempt to raise your credit score beforehand using the techniques described above.
  4. Be patient and don’t rush the decision. You could be paying off the loan for the next 5 years, so take your time.
  5. Pick the right loan option for your business model.

Above all, read the terms and conditions of each provider before you rush headlong into the process. Time is money, and you should not waste it with a careless application. In truth, it has gotten a little difficult to get the types of loans that are needed to run a business through the traditional banking model.

This fact has been reflected in numerous studies, including research carried out by Finimpact. Our survey results are covered in our SMR survey results.

Only 7% of small business owners say that getting a loan is easy, and 49% described the process as either hard or very hard. At 35%, the biggest difficulty faced by small business owners is reported to be financial access. While online lenders have made it easier to gain access, you still need to choose the right one and have your affairs in order to qualify. Money is never free and always comes with terms and conditions.

Summary

If you do have bad credit, typically described as credit under 580 as per the FICO credit scoring system, you still have plenty of options. Most of the top lenders listed above will accept applications below this credit score. When you do get a loan, you just have to remember to pay it back on time to reap the benefits of positive credit karma. There is now a loan available for all types of business models.

FAQ

Can I Get a Business Loan With Bad Credit?

You can get a business loan with poor or non-existent credit. The issue is that you won’t get a good loan with bad credit. Though it will depend on many other factors (collateral, total loan amount, loan term length, etc ), the lower your credit score the higher the interest rate and penalties. But you certainly can get a loan from an online lender with bad credit. LoanBuilder has a minimum credit score of 550. Kabbage has no minimum credit requirements.

What Is the Minimum Credit Score Required for a Small Business Loan?

It depends on what kind of loan you are looking for. For an SBA loan, you will need at least 680 to qualify. For a line of credit or term loan, you can use Kabbage, which has no minimum credit requirements. For most online lenders you will need a credit score in the region of 540 – 560. They will then look at other factors such as how much revenue you are taking in. This is how Kabbage and other algorithmic operations function, placing a higher emphasis on sales as opposed to credit score. For a term loan with a bank, your minimum would want to be in the region of 660.

What Online Lender Is the Easiest to Get a Loan Through, Even With Bad Credit?

All of the online lenders are easy to get a loan through, and it would be a little unfair to say that one is better than another. After all, waiting an extra 12 hours for funds to come through is really not the end of the world, and the pre-qualification for all lenders is usually done within 10 minutes via an algorithm. Kabbage is arguably the easiest to get a loan with, as it is purely automated and lightning-quick. It has no minimum credit requirements. All you have to do is prove that you have made $4200 each month for the past 3 months and have been in business for a year. To do this, you need to connect your online accounting software including such as Intuit QuickBooks or Patriot Software.

What Is the Minimum Credit Score for a Sba Loan Application?

Officially, the minimum credit score for an SBA (7)(a) is 640. Realistically, you need a credit score of 680 and above, as this is where approval rates tend to incline sharply. Bear in mind that banks review each application individually, more so than online lenders which tend to rely heavily on algorithms. So if you have a large revenue, collateral, strong collateral reserves etc, then you can pass the process with a lower credit score.

Are Credit Cards a Good Way to Raise Credit Score?

In a nutshell, yes. The credit card is one of the best ways to raise a credit score. Just pay off your bills on time each and every month. You will then avoid any interest or charges aside from minor maintenance fees. The repayments are reported to the credit rating agencies. Credit cards, plural, are possibly not such a good idea. Just get a credit card and pay it back on time. Within 12 months, your credit score will get better. Within 3 years, it will get a lot better. You cannot hack a credit score. You can only remain sensible and practical.

How Quickly Can I Raise My Credit Score?

This depends on why it is low in the first place. If it is low because you do not have any credit score at all or short credit history, then you can raise it a lot within 6 months. If it is low because of a lot of outstanding debt, then it will take longer. Worst-case scenario, as always, is the situation for those who failed to make their payments on time. Just break it down as simply as possible – payback existing debt as much as possible and/or take out a credit card and make payments every month. Your credit score will rise naturally as long as you make payments. It is this simple.

How Does the Event Affect the Time Taken to Raise a Credit Score?

Typically, the time it takes to raise a credit score is as follows:

  • Bankruptcy: 6+ years.
  • Home foreclosure: 3 years.
  • Missed payment: 18 months.
  • Late mortgage payment: 9 months.
  • Closing credit card account: 3 months.
  • Maxed credit card: 3 months.
  • Applying for a new credit card: 3 months.

What Is the Single Best Way to Raise My Credit Score?

The quickest way is to get a credit card and repay debts on time, especially if you are just starting out. You want to utilize about 10% – 30% of your total available credit. Increase your credit rating and your credit score will increase. It is better to use one credit card account for a long time, as the rating agencies take the length of credit history into account.

Can I Reconsolidate a Loan to Raise My Credit Score?

This is quite a difficult question to answer in isolation. As a general rule of thumb, refinancing existing debt results in a minor drop in your credit score. This is because you are closing an old account (affecting the length of credit history) and there will be hard pulls on your credit score. However, the refinancing of existing debt with more favorable conditions might enable you to make debts each and every month. Overall, this will result in a definite increase in your credit score. Failing to make payments on time is the number one reason why scores are low – that is the major thing to keep in mind. Just get a credit card, use it, and make payments each month with a direct debit. Within 2 or 3 years, you can have an impressive credit score.

Daniel Lewis
Daniel Lewis
Daniel Lewis is an MBA accredited investment professional who wants to assist small business owners to gain access to finance. After going through many channels for funding, Lewis has found that getting the first loan right is vitally important for future success.