Short-Term Business Loans for Bad Credit: Here Are Your Options
If your business needs a quick influx of cash, you might naturally think about a short-term loan. Although the interest rates for short-term loans are typically higher than long-term loans, they are are generally cheaper than other quick financing methods like merchant cash advances or invoice financing.
Short-term loans are quicker and easier to get than long-term loans. On the downside, though, are the higher interest rates and the requirement to pay off the loan much more quickly. Most short-term loans range in length from three to 18 months (excluding Business Expansion Loan) and can range in amount from $2,500 to $400,000.
Unlike long-term loans, which are typically repaid monthly in interest and principal, payments with short-term loans are usually due weekly, sometimes even daily. And the interest rates on short-term loans are usually significantly higher than rates on long-term loans.
Some of the reasons a business owner might take out a short-term loan include for buying inventory, hiring employees during a busy season, buying equipment, opening a new location or working through a financial emergency.
Although some banks offer short-term loans, many come from alternative lenders. Those are primarily online-based lenders who have lower requirements for loan approval, but also tend to charge higher interest rates than banks. For business owners with bad credit, online lenders may be their best bet for getting a loan. That’s because while banks generally want a personal credit score of 680 or above, two years of business history and annual revenues of $100,000 or more, an alternative lender may only require a credit score of 500 or above, six months to a year of business history and $100,000 in annual revenue.
How bad credit affects your likelihood of qualifying for a short-term loan
When lenders consider giving a loan to a business, the business owner’s personal credit score is a major consideration for approval. Traditional lenders in particular put a lot of weight on a credit score for small business owners. That’s because they consider personal credit history the best sign of how well business owners pay back their debts. Online lenders, however, focus less on credit score, particularly if a business has strong revenues.
Before you apply for a loan, you should look at your credit history and find out your FICO score. You can get a free report from the three major credit bureaus once a year. The general FICO credit score ranges are:
- Exceptional (800 and above)
- Very good (740 to 799)
- Good (670 to 739)
- Fair (580 to 669)
- Poor (579 and lower)
If you have bad or poor credit (579 and lower), you will probably need to consider a loan from an alternative lender. But first see if you can boost your credit score before you apply for a loan. Look at your credit reports and try to fix any derogatory or incorrect items in your control. You can dispute any items you think are incorrect, although that doesn’t mean the credit bureau will agree. Here are some steps you can take on your own to improve your credit score:
Reduce the amount of debt you owe. If you can afford it, put more money toward your balances on the cards with the highest interest rates while still making the minimum payments due on the rest.
Pay your bills on time. This is the biggest factor in determining your credit score. Make sure set up payment reminders. Ask for help. If you’re having trouble staying current on a bill or collection, contact your creditors to see if you can negotiate any changes and/or meet with a credit counselor.
Keep your balances low. Try not to carry too high on balance on any of your cards. Ideally, you shouldn’t use more than 30 percent of the available credit on any card.
Don’t apply for too many cards. When you apply for most credit cards, your credit is pulled, and each pull can “ding” your credit score.
Alternative funding options for bad credit
Short-term loans from alternative lenders are not the only funding options for business owners with bad credit. Here’s a look at three other types of funding.
Merchant cash advance — A merchant cash advance isn’t a loan, but an upfront sum of cash which is paid back through a percentage of future credit card sales. The interest is calculated by a factor rate, which can be converted to an APR, and repayment is usually taken daily or weekly. Because these advances usually must be paid off quickly, and payments are often taken daily, they can be quite expensive, in the window of an APR of 70 to 200%.
Invoice financing — Invoice financing uses unpaid invoices as collateral to secure a cash advance, usually a percentage of the total invoice or invoices, but not the whole amount. The fees typically are 2 to 4 percent of the advance amount. The business owner is responsible for paying back the advance, even if the customer whose invoice they borrowed against becomes delinquent.
Business line of credit — With a line of credit, a business owner can draw from a line of up to an approved amount. Borrowers only pay interest on the amount they draw from the line and usually the lines are revolving, meaning that as soon as the borrowers pay back a portion of what they’ve borrowed, it’s available to draw from again.
Best short-term lenders for bad credit
If you have bad credit and have decided a short-term loan makes the most sense for your business, here are some of the best lenders who approve loans for business owners with bad credit.
|Lender||Loan Amount||Loan Term||APR Range||Time to Funding|
|OnDeck Capital||Up to $500,000||3 to 12 months||As low as 9% simple interest.||As soon as 24 hours|
|The Business Backer||Up to $200,000||4 to 18 months||Average monthly rate is 2.2% with 25.8% annualized interest rate||A few business days|
|Credibly||Up to $400,000||3 to 18* months||Factor rates start at 1.09%||As soon as 24 hours|
|Expansion Capital||$5,000 to $500,000||3 to 12 months||Simple interest rate starting with a minimum 3.5%||As soon as two business days|
Rates as of February 11, 2019 *(excluding Business Expansion Loan)
OnDeck Capital offers short- and long-term loans as well as business lines of credit to small business owners. The company has provided funding in businesses in over 700 industries.
Where OnDeck Capital stands out
OnDeck Capital offers a high potential borrowing limit of $500,000 for short-term loans. The potential for funding in as little as 24 hours is also on the quick side in the industry.
Where OnDeck Capital falls short
Although OnDeck Capital advertises a simple interest rate (meaning an interest rate that doesn’t include fees) as low as 9%, its average AIR (annual interest rate, including fees) is high at 42.5%. OnDeck Capital also requires a personal guarantee and charges a loan origination fee of 2.5 to 4% on the first loan.
Additional benefits of OnDeck Capital
The application process is very simple and the company only requires a credit score of 500 or better.
The Business Backer
The Business Backer serves small- and medium-sized businesses and offers a wide variety of financing products, including merchant cash advances, business lines of credit, SBA loans, equipment financing, commercial real estate financing, invoice factoring and term loans.
Where The Business Backer stands out
The company offers up to 18-month short-term loans, which is longer than many other online lenders. Although its interest rates are still much higher than a longer-term loan from a bank, the average monthly rate of 2.2% simple interest (25.8% annualized interest rate) is competitive compared with other online lenders.
Where The Business Backer falls short
The Business Backer requires $180,000 in annual revenue, higher than most online lenders’ requirement of $100,000 and a minimum 550 credit score, versus 500 for some lenders. The $200,000 loan limit is also on the low side.
Additional benefits of The Business Backer
The Business Backer doesn’t charge a prepayment penalty for paying off a loan early and in fact a 35 percent discount on unpaid interest costs for customers in good standing who pay their loan off early.
Credibly offers working capital loans, business expansion loans and merchant cash advances. The company’s short-term loans are from six to 18 (excluding Business Expansion Loan) months for up to $400,000 and it uses a factor rate to charge interest.
Where Credibly stands out
Credibly only requires six months of business operation to be approved for a short-term loan and offers up to a 18 (excluding Business Expansion Loan) month term for its loan, versus some online lenders who only offer up to 12 months.
Where Credibly falls short
Credibly charges a 2.5% origination fee and requires a minimum of $15,000 average monthly bank deposits to be approved. Meeting that monthly minimum could be a challenge for seasonal businesses that may have a hard time hitting that $15,000 mark in slower months.
Additional benefits of Credibly
Credibly requires just a 500 minimum credit score for approval.
Expansion Capital offers just one loan, a three to 12-month term expansion capital loan and is particularly friendly toward businesses with bad credit or tax issues.
Where Expansion Capital stands out
The minimum requirements to be approved for a loan are very attainable: six months in business, a credit score of 500 or better and $100,000 in annual revenue. Expansion Capital also offers both a low ($5,000) and high ($500,000) borrowing range to meet a wide amount of small business needs.
Where Expansion Capital falls short
The short-term loans are very short, with 12 months as the longest length.
Additional benefits of Expansion Capital
Having an open bankruptcy or a tax lien of up to $175,000 won’t disqualify you from being approved.
The bottom line
For a business owner who needs cash quickly, a short-term loan may make sense, particularly for business owners with bad credit who may find it hard to get a traditional loan. It’s important to know the full cost of the loan, along with interest plus fees, so you know how much you can afford to borrow.