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How to Get a Business Loan with Bad Credit or No Collateral

Updated 26.03.24 5 minutes read
Business PlansCommercial

Business loans are often required to launch or grow a business or to get through a difficult time. However, they are not always easy to obtain. Often, banks will expect businesses and their owners to have exceptional credit or to be able to offer collateral to secure the loan. The unfortunate reality is many businesses that need or desire business loans won’t always meet these criteria. Luckily, there are other ways to obtain a business loan – or alternative types of business financing – with bad credit or no collateral.

If you need funding for your business now, below are some of the most popular alternative financing options or methods of securing a bank loan.

Short-Term Solutions and Alternatives:

Find a cosigner – The main priority of a bank is managing risk and making loans they are confident will be repaid timely. If they are not satisfied with your business or personal credit and you have no collateral, one alternative they often accept is to have a qualified cosigner. A cosigner is typically an individual or a more established business that will vouch for you by way of putting themselves on the line for the responsibility of repaying your business loan if you are unable to.

Merchant cash advances – This type of funding is popular for retail businesses that have a lot of credit card transactions. This operates less as a loan and more as a cash advance from a merchant service provider or credit card company. Your business will receive an upfront lump sum in exchange for an agreed-upon percentage of all future credit card sales until the advance is repaid.

Invoice Financing – This type of financing is also commonly referred to as accounts receivable financing. It is most appropriate for businesses that offer payment terms on invoices of 60 days or more. It essentially allows you to borrow money now against invoices due in the future. It is a short-term solution to improve total cash flow.

Equipment Financing – If the reason for seeking a business loan is specifically to purchase equipment, equipment financing is a common alternative. Traditional bank loans require you to have collateral when applying. Equipment financing is given with the agreement that the equipment purchased becomes the collateral.

Line of Credit – A line of credit is a hybrid between a credit card and a business loan. You will be approved for a certain limit and you may then withdraw funds up to that amount. You will make monthly payments and as the balance is paid down the available credit increases. If you are approved with less-than-stellar credit, your initial credit limit will likely be very small. However, once established, if you stay on top of your minimum payments, it can increase over time.

Consider Your Terms Carefully! Before rushing into any type of financing, make sure you are fully aware of the repayment terms and understand the implications they will have on your business. This is especially true for the alternative options listed here. They will often carry higher interest rates and have shorter repayment periods than a traditional bank loan. They may also have additional fees and steep penalties for late payments.

Long-Term Strategies:

If you are searching for how to obtain a loan with bad credit or no collateral, it is likely you have an immediate need. However, if possible, you may want to consider delaying your pursuit of financing now and taking steps to improve your chances of getting a traditional loan later.

Focus on improving business and personal credit – When applying for a business loan, both your personal and business credit is typically considered. Establishing or rebuilding credit can be a long process. The instruments above may help you in this pursuit if managed appropriately. However, due to less favorable terms than may be harder to pay back. If you are able to forgo financing that may be difficult to pay back now, it can increase your chances of getting a traditional bank loan later.

Build a relationship with a local bank – Open a bank account under your business EIN at a local bank and use it responsibly. Not only will this help build your business credit, but it will also help you form a relationship with a bank which – unlike large, national chains – is more likely to make lending decisions at a local level, from people that actually know you and your business.

Apply when you’ve been in business longer – If you’re just starting out and have been in business less than 6 months, it can be very difficult to get a loan under even the best of circumstances. If it is feasible under your business model, try to start very lean (in terms of expenses) while gradually building up your customer base. Make sure to manage your cash effectively. After 6 months to a year of operating a stable business, even if it is small, it is easier to get approved for a loan.

Although alternative financing options may not be as advantageous as a traditional bank loan, the important thing is to remember that there are several options available to you. If you’ve made financial missteps in the past and don’t have collateral that will satisfy traditional lenders, these other options can help you rebuild your credit and establish your business. This will put you in a position to be eligible for a bank loan in the future.