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Page written by Chris Godfrey. Last reviewed on October 9, 2024. Next review due October 1, 2026.
It doesn’t take much to see your personal credit score fall to 500 or even less. One financial misjudgment or a streak of bad luck can turn your good credit into bad credit and then you’re barred from many types of business loan. However, it doesn’t have to be like that. By preparing in advance and tailoring your loan request to match your financial situation, you may still be able to obtain the funds you need even with a credit score of 500 or below.
A personal credit score of 500 is a bad or ‘poor’ credit score. The term ‘bad credit’ refers to a history of not paying bills or loan repayments on time and the increased likelihood that the borrower will fail to make timely payments in the future. In practice, bad credit really means a poor credit score – the calculation that lenders use to determine the default risk of any borrower. Lenders may use your personal FICO score or your business’ credit score when considering your loan application. Some may use both. A FICO score of 300 to 579 is considered bad credit, 580 to 669 is fair credit and 670 and above is good credit. In some cases, lenders may deny loan applications for bad and fair FICO scores, forcing even moderate risk borrowers to seek loans from bad credit specialists.
Some lenders (especially for SBA loans) will place more importance on business credit scores than FICO. Business credit scores vary depending on the model being used, although a range of 1 to 100 is most common. Business credit scores below 50 are considered bad credit.
The truth is, with a personal credit score of 500, your access to business financing will be limited. Most main street banks and credit unions will deny your application with this type of score. However, you may have more success with online lenders, or you could apply for an SBA microloan. Note that alternative sources of financing, such as payday loans and pawn shops are not recommended, as the interest rates and fees will often be excessive, and you could become trapped in a cycle of debt. The best advice? If you don’t need the funds right now, you should wait, work to improve your credit score and apply for a loan when you’ve raised your FICO score above 600.
You can improve your chances of getting approved for a bad credit business loan by preparing in advance. Key tasks to take care of include:
It is common for mistakes to occur on credit reports – both business and personal. Even if you’ve seen your FICO score is 500, it is still worth checking all the information in your report. Errors could be driving down your score. Check both reports thoroughly to ensure the details they contain are all correct. If there are errors, get them fixed before applying for a loan.
Unfortunately, despite big promises from the many ‘fast credit repair’ businesses you may see online, there is no quick fix for a poor credit score. It takes time and good financial management to get a poor score back into the good category. Key actions to improve your credit score include:
Lenders will review your ‘income to debt ratio’ when considering your loan application. This means they won’t provide funds if they think you will be unable to pay them back because your total debts are too high. To improve your chances of success, don’t ask for a bigger loan than you can afford to repay. You can work this out by looking at your monthly cash surplus and calculating how much of that you can put aside for an additional loan repayment. Remember that you must always keep a contingency cash float to cover emergencies or unexpected costs, so you should never allocate all your surplus cash to cover extra loan payments.
As well as a compelling reason to take out a business loan (such as expanding operations or launching a new product), you could strengthen your application by offering collateral that is worth more than the sum you are trying to borrow. You could even offer physical collateral when the lender isn’t demanding it to show full confidence in your business.
You can boost your chances of securing finance at lower rate and with a higher loan amount or a lower deposit by adding a cosigner to the transaction – this is usually a colleague, relative, or friend who has good credit and/or collateral they are willing to put up against the debt. The cosigner agrees to guarantee the loan repayment in the event that you default.
Turning bad credit and loan denials into a positive situation can be challenging and you may find it beneficial to work with a loan officer to help steer you through the process. In such cases, it is important to be honest about your true financial position and to take positive steps towards improving your credit. If you’re not sure how to go about this, simply contact Swoop to confidentially discuss your funding needs with a bad credit loan expert.
It’s never easy to get a business loan with a FICO of 500. However, some financing options may still be open to borrowers with a bad credit. Note that credit checks are standard with most commercial financing, but depending on the type of loan you choose, you may not need to provide collateral:
This is the simplest form of bad credit loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Term loans can also be secured by adding a cosigner with good credit to the deal. This will also make the loan cheaper to maintain. Collateral may be required.
Withdraw as much as you want when you want from a loan facility up to the limit of your borrowing. You only pay interest on the sums you withdraw, not the whole credit line. This can make the borrowing significantly cheaper. Collateral may be required.
Borrow against the value of your unpaid invoices. The lender usually provides up to 95% of the invoice value within a few days or even hours of the bill being raised. Your invoices act as security for the loan, no added collateral required.
Secured business loans are usually easier for borrowers with bad credit to obtain. You provide hard assets, such as real estate, plant and machinery, or inventory as security for the loan. The lender holds a lien on the assets until the loan is paid back, then full ownership returns to you. Secured loans typically come with lower interest rates and fees than many other bad credit business loans.
Use your new equipment as you pay for it, while the lender maintains a lien on the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright. No added collateral required.
Merchant cash advances are for businesses that accept customer payments by credit and debit card. Borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Your sales act as security for the loan, no added collateral is required.
Revenue-based financing functions is similar to a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), businesses may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical. No added collateral is required.
Nonprofit and community-based lenders can provide SBA Microloans to business owners who may struggle to secure standard business financing. Available up to $50,000, SBA microloans come with relaxed qualifying rules and can usually be secured with FICO scores as low as 500, or even with no credit score at all.
Pros
Cons
Offering loan amounts for business borrowers with credit scores of 500 will typically be much lower than for borrowers with good credit. Often you may be limited to just a few thousand or even a few hundred dollars. However, adding a cosigner to the deal, or providing collateral to cover the loan amount may give you access to larger loans – up to $50,000 or more.
Lenders typically evaluate borrowers and set interest rates and fees for business loans based on a combination of borrower risk, credit history, length of time in business, loan amount and the type of industry you are in. The lower your credit score is, the higher your risk profile, which means that if your FICO is 500, you should expect to pay higher interest rates and fees unless you can provide collateral or add a cosigner to the deal.
Interest rates, fees and terms and conditions for bad credit business loans can vary significantly, so it makes sense to shop around before settling on a lender. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of bad credit loan deals from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for business owners who have never taken out a business loan before or who have very bad credit.
If you are unable to obtain a business loan, consider these alternative sources:
No matter if you have bad credit or no credit, working with business finance experts can make all the difference when applying for your loan. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality bad credit business loans from a choice of lenders. Don’t let a credit score of 500 slow your business down. Register with Swoop today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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