If your business goals mean you need funding, you might worry that finding loans is impossible with a low credit score. You might also know funding options available to low-credit borrowers are so short-term that they’re prohibitively expensive. These are fair concerns, but in reality, there are long-term business loans for bad credit Learn all about them here.
What are long-term business loans?
Long-term business loans are any loans with longer repayment terms, typically ranging from three to 10 years. Other than the long repayment terms, they’re mostly like other installment loans, meaning only some long-term business loans will be available to you if your credit score is low.
What is considered bad credit?
On the commonly used FICO® Score☉ credit scale, a bad credit score is often below 670. You’ll sometimes see scores from 580 and 669 referred to as “fair” and scores from 300 to 579 called “poor” credit. These terms, though, can be misleading. To most lenders, fair credit scores are bad too – or, at the very least, they’re not considered to be good.
Long term business loans for bad credit
Below are three types of long-term business loans which might be available to those with bad credit, along with information on qualification criteria, advantages, and drawbacks.
1. SBA Microloan
You must have a minimum credit score of 650 to qualify for SBA Microloans. This makes SBA Microloans one of few government loans available if you have bad credit. Loan amounts can be a few thousand dollars to $50,000, with an average of $13,000. Your interest rate will be eight to 13 percent, and your repayment term may be up to six years.
Typically, your business must be new, or very small, to qualify for SBA Microloans. You can use your funds to cover working capital, supplies, inventory, fixtures, furniture, equipment, and machinery.
Common SBA Microloan qualification requirements:
- Credit score of at least 650
- Collateral or personal guarantee
- Business based in the U.S.
SBA Microloan advantages:
- Only government funding available for poor credit scores
- Small loan amounts ensure reasonable monthly payments
- Available even if your business is new
- Relatively flexible use of proceeds
SBA Microloan drawbacks:
- Requires personal guarantee or collateral
- Might be a poor fit for larger funding needs
2. Online alternative lenders
Online alternative lenders have emerged in response to traditional banks’ risk-averse lending processes. Where traditional risk-averse lenders impose strict qualification criteria, online lenders cater to a broader range of borrowers. That means you typically don’t need great credit for these lenders to approve you. Repayment periods vary widely by lender, but almost always qualify as long-term.
You’ll typically need a certain amount of time in business, annual revenue, and time without bankruptcy filings to qualify for online alternative loans. In most cases, there are no limits on how you can use these loans once you’re approved.
Some common online alternative lender qualification requirements (may vary by lender):
- Credit score in the 600s
- Five to seven years of no bankruptcy history
- At least two years in business
- Business lien and personal guarantee
Online alternative lender advantages:
- Quick funding disbursement
- Lower qualification criteria
- High loan amounts
Online alternative lender drawbacks:
- Typically not available in all 50 states
- Requirement of business lien and personal guarantee
- APR significantly higher than SBA 7(a) loans and bank term loans
3. Equipment financing
Equipment financing describes any loans that you use solely to buy equipment. In a lending context, equipment may include machinery, desks, a vehicle fleet, or anything else you need for your operations. Some equipment loan providers offer funding to borrowers with credit scores as low as 550, making them a great option for those with bad credit.
Your equipment financing repayment term may be as long as 10 years. Additionally, some equipment loans are revolving business lines of credit rather than installment loans. Repayment terms are less pressing in that case since you would only pay for whatever portion of the loan you use for your equipment. Most equipment financing providers set criteria regarding minimum years in business and annual revenue amounts.
If you obtain an equipment loan to purchase equipment, the equipment remains yours once you repay the loan. However, if you fail to repay your equipment loan, the lender can seize your equipment as collateral.
Some equipment financing qualification requirements (may vary by lender):
- Credit score of at least 550
- At least two years in business
- A certain minimum revenue amount that varies by lender
- A down payment of 10 to 20 percent
Equipment financing advantages:
- Designed to fully cover equipment costs
- Often quicker and easier to obtain than traditional financing
- Lower collateral requirements since equipment is collateral
- Loan term based on presumed equipment lifetime
Equipment financing drawbacks:
- High interest rates with certain lenders
- Funds only valid for equipment purchases
- Potential for equipment seizure if you default on your payments
Benefits of a long term business loan
Long-term loans can be great for your small business for some of the following reasons:
Lower monthly payments
Let’s say you qualify for a year-long $100,000 loan with an eight percent interest rate. You’d pay $100,000 divided by12 months plus interest every month for that loan. That’s at least $8,333.33 per month. If you obtained that same loan amount with a 10-year repayment term, you’d pay $833.33 per month instead. That’s an order of magnitude less per month than with a shorter-term loan.
Lower interest rates
In most cases, long-term business loans have lower interest than other types of funding, such as credit cards and merchant cash advances. It’s true credit cards are more flexible and merchant cash advances are more hands-off, but the price you pay for them is almost always more costly than making steady, small loan repayments over a longer period.
Maybe your small business will need funding again in the future, but you’re currently unable to meet certain lenders’ credit score requirements. Long-term business loans for bad credit can help solve this problem. If you make all your payments on time, then over your loan’s lifetime, your credit score will generally gradually increase. As it does, you’ll likely be able to qualify for other types of funding.
How to get a business loan with bad credit
Whenever you’re in the market for long-term business loans for bad credit, you’ll likely benefit from taking these steps as you search and apply:
No two lenders, especially non-government entities, are quite alike. Spend some time comparing and contrasting lenders and loan products. Qualification criteria and loan terms that work for you should be somewhere out there.
Create a great business plan
Many lenders will ask you to present a business plan alongside your application. This lengthy document explains your business concept, how you’ll fund and market your business, and why you expect it to succeed. Your business plan can help persuade certain lenders to approve you when your credit score is low enough that they might otherwise deny your application. Note that if you apply for funding through SmartBiz, a business plan is not required.
Provide a down payment
With equipment financing, down payments are standard practice. However, they’re less common with other loans – and you can use that to your advantage. Whenever you’re the first to suggest making a down payment, you might sway lenders who would otherwise shy away due to your credit score. A down payment of 10 to 20 percent of the loan’s total is generally a great starting point for negotiations.
Although most long-term business loans for bad credit require collateral, you only stand to benefit from offering it first. Your willingness to put your assets at risk can show certain lenders that you’re truly invested in repaying your loan. That resolve can put you over the line with lenders typically inclined to decline applicants with poor credit.
Sign a personal guarantee
Where collateral puts specific assets at risk, personal guarantees give lenders the ability to seize any of your assets. This arrangement reduces the lender’s risk and makes them more likely to approve you for a loan if your credit is poor. You can indicate your willingness to sign one – even if not required – to make up for a poor credit score.
Build business credit
Paying your bills on time and using a secured or starter credit card can build your business credit. As your credit grows, you’ll qualify for more loans. These loans don’t necessarily have to be strict-criteria loans, such as SBA 7(a) loans. For example, if you get your credit from 600 to 630, an SBA Microloan – a more flexible government-backed option – is on the table.
Consider a smaller loan amount
Some lenders who might decline your application for a large loan might approve it if you ask for less. To lower your ideal loan amount, determine if you can use your existing cash for part of the initiative you need to fund. Then, consider lowering your target loan amount by that cash amount to see if it helps you get approved.
Get a co-signer
A friend or family member with a great credit history or substantial money in their bank account can co-sign your loan. This person then becomes responsible for your loan if you fail to repay it. Their excellent finances and credit – and their liability – can minimize risk for lenders, who may then approve you despite your credit score.
Apply for long-term business loans with SmartBiz
You can generally still find long-term business loans even if your credit is bad. In fact, SmartBiz® can help connect you with certain custom financing options that you may be able to qualify for with low credit. As you rebuild your credit score with your loan repayments, you may qualify for other SmartBiz options such as SBA loans and bank term loans. Check now to see whether you pre-qualify* for the capital you deserve regardless of your credit score.