When you’re applying for small business funding, your credit score is often the primary metric used to measure your business’s risk and creditworthiness. But do you actually need good credit to get a small business loan?
The short answer is “yes, but also no, with some exceptions”. There is no universal credit score minimum requirement for a business loan. Ultimately, credit score minimum requirements depend on what kind of funding you’re seeking and what kind of lender you’re working with.
There are two types of credit you’ll need to consider when applying for small business funding: personal credit and business credit. Lenders may review both your personal and business credit scores when assessing your application, and many will actually place more emphasis on your personal credit score as a stronger indicator of your fiscal responsibility.
Personal Credit vs. Business Credit
Your personal credit score reflects how you handle your personal credit obligations. It’s scored on a scale of 300-900, and is based on a number of factors, including your payment history, amounts owed, length of credit history, type of credit used, and new credit applications. “Bad credit” typically refers to a credit score between 300 and 600. The minimum personal credit score for a small business loan is usually in the high 600s or low 700s for traditional lenders, and around 550 for alternative lenders.
Business credit, on the other hand, assesses your business’s ability to manage credit responsibilities. Business credit scores are based on factors similar to personal credit, but will also consider criteria like the size of your company, industry risk factors, and your relationships with vendors. Credit scores in Canada typically range between 1-100, where anything above 75 is considered “good”.
Having a low personal or business credit score doesn’t mean that you can’t get the small business funding you need. However, it may mean that you might not be able to get financing from traditional lenders, or that you may be approved for a lower loan amount, shorter term lengths, or with a higher interest rate.
Why Does Credit Score Matter?
Credit score matters because lenders use it to measure the amount of risk you pose. The lower your score, the more risk you present.
A low credit score can impact your ability to get approved for small business funding, as well as your loan terms. Lower credit scores may not disqualify you from all forms of funding, but they will likely lead to higher interest rates, different repayment schedules, and lower loan amounts.
It’s important to remember that a low credit score doesn’t mean your business is weak. Younger businesses may not even have a credit score because they simply haven’t been operating long enough, and if they do, it may be low simply because it hasn’t had time to build. In these cases, lenders will look exclusively at your personal credit score when assessing risk.
Traditional Lenders vs. Alternative Lenders
Different lender types have different minimum credit score requirements. Traditional lenders tend to be quite strict with minimum credit scores, while alternative lenders offer more flexibility. Let’s take a closer look at these two types of lenders.
The Canada Small Business Financing Program and other traditional lenders like banks and credit unions will consider both your personal and business credit scores when assessing your application, often with more emphasis on credit score compared to other factors. These lenders also have the strictest approval requirements overall, requiring a multi-page application form and up to three years’ worth of financial statements, as well as a business plan.
Traditional lenders have very high minimum credit score requirements, typically starting around 680 or the low 700s.
Alternative lenders emerged after the 2008 recession in response to a greater need for accessible small business funding. These lenders will consider your personal and business credit scores when evaluating your application, but will typically place less emphasis on your credit history than traditional lenders. Instead, your credit score will be considered alongside factors, such as your annual revenue, cash flow, vendor payment history, and other indicators of your business’s financial health.
Alternative lenders also have lower credit score requirements, typically starting around 550. This makes alternative business funding available to more small businesses, including those that have lower credit, don’t have an existing relationship with a lender, and younger businesses that are still working to build their credit score.
Small Business Loan Options for Low Credit Scores
If you have a lower credit score and are unable to qualify for traditional lending options like the Canada Small Business Financing Program or bank loans, don’t worry—there are a number of funding options available to businesses with lower credit scores. Here are 6 of the most popular:
1. Merchant cash advances
Merchant cash advances (MCAs) are a non-loan form of financing known as a purchase of future receivables. Available from direct online lenders like Greenbox Capital®, MCAs provide a lump sum up front in exchange for a percentage of your business’s daily or weekly credit and debit card sales until the advance has been repaid. On days or weeks when your sales are higher, your payments will be higher; conversely, on days and weeks when your sales are lower, your payments will be lower. This makes MCAs especially ideal for businesses that process a high volume of credit card transactions.
Your credit score will be considered when you apply for an MCA, but because repayment is based on sales, cash flow may be a stronger factor.
Learn more about merchant cash advances.
2. Invoice factoring
Invoice factoring is another non-loan form of financing called an “asset purchase”. With invoice factoring, a lender (called a “factor”) will purchase your outstanding invoices and advance your business their value up to 90%. The factoring company will send you the remaining value when your client pays, minus any fees.
The unpaid invoices act as collateral to secure the loan, so businesses with lower credit scores may be more likely to qualify for invoice factoring.
Learn more about invoice factoring.
3. Alternative funding
Alternative lenders like Greenbox Capital offer a number of funding options, including MCAs and invoice factoring, as well as more traditional funding options like collateral loans and term loans. Typically, these lenders will have more flexible approval requirements that are friendlier to businesses with lower credit scores, but funding amounts will be lower with shorter repayment terms and higher fees.
Learn more about alternative small business funding.
4. Business credit cards
Business credit cards provide fast access to working capital, and can even help improve your business credit score if you make payments on time. Make sure you choose a credit card that reports payment history to major credit reporting agencies.
Business credit cards have higher interest rates than other forms of funding, so they are ideal for covering day-to-day expenses or financing smaller projects you know you can pay off quickly in full.
Some local non-profit organizations offer microloans for small projects, with funding amounts as small as $500 up to $10,000. These loans are primarily intended for business owners in underrepresented or underprivileged communities, or those who run socially-responsible businesses. In this case, to qualify for a microloan, your business’s goals must align with those of the non-profit.
6. Equipment financing
Equipment financing is designed specifically to fund the purchase of new equipment such as heavy machinery, specialized technology, or store fixtures. The equipment acts as collateral, which may make it easier to secure the loan with a lower credit score.
Small Business Loans for Low Credit Scores & Bad Credit
Whether your credit is low because of your personal financial history or because your business hasn’t had a chance to build a good credit score, bad credit can overshadow even the strongest business finances. If you have low personal or business credit, don’t panic—you can still get the funding you need to manage unexpected expenses or support your growth. It may be difficult to access financing through traditional lenders, but a number of alternative lending products exist to help businesses that don’t meet the strict standards of these lenders.
As an alternative lender, Greenbox Capital is able to approve more funding for businesses with low credit or bad credit, including merchant cash advances, online invoice factoring, collateral business loans, alternative small business loans, and alternative business credit.
- “How Good Does Your Credit Have to Be for a Business Loan?” Russell Huebsch. Chron. Updated March 4, 2019.
- “Can You Get a Business Loan with Bad Credit?” Kody Wirth. Bplans.
- “How to Get a Small Business Loan With Bad Credit.” Karen Axelton. Experian. August 31, 2019.