Your credit score can have a huge and lasting impact on your life.
It affects your ability to get credit cards, auto loans, and mortgages. It can be a barrier to working in certain jobs or for certain employers. If you’re an entrepreneur, your personal credit score can even get in the way of obtaining a business loan to start, grow, or acquire a company.
Traditional lenders will typically check your personal credit when you apply for most types of small business loans, and if your credit score is too low, you may be deemed too risky to receive a loan or line of credit.
But what is “bad credit” when we talk about your personal credit score?
Your credit scores explained
There are three credit bureaus: Experian, Equifax, and TransUnion. Each bureau has their own way of calculating a credit score, but all bureaus generally follow the FICO scoring model, which ranges from 300 to 850.
The FICO Score, developed by the Fair Isaac Corporation, primarily assesses your creditworthiness based on your history of making timely payments on outstanding debts, the amount of debt you carry relative to your available credit, and the age of your debts and lines of credit, as well as other factors.
More recently, the three credit bureaus have developed a scoring model called VantageScore. This score also ranges from 300 to 850 and assesses your risk as a borrower along the same lines as the FICO Score. Equifax, uniquely among the bureaus, starts its scoring at 280, but very few people will drop below a score of 300 at any rate.
You may see variations in your credit score between the three bureaus, and your scores are also likely to fluctuate from month to month as your information is updated in the various scoring models.
However, all three bureaus should report similar scores, often within 20 to 50 points of each other. After all, they’re all using the same data.
The bureaus have published guidance on credit score ranges as follows:
|Grade or Rating||Experian Range||Equifax Range||TransUnion Range|
|Bad||300 to 579||200 to 559||300 to 600|
|Fair||580 to 669||560 to 659||601 to 657|
|Good||670 to 739||660 to 724||658 to 719|
|Very Good||740 to 799||725 to 759||720 to 780|
|Excellent||800 to 850||760 to 850||781 to 850|
How your credit score impacts your funding options
Regardless of how the credit bureaus “grade” your score, lenders will typically look for a credit score of at least 630 to approve your application for business financing. Many traditional lenders want higher scores, and some won’t even consider funding applications from business owners with personal credit scores below 700. “Good credit” can be a high bar to clear.
We say “typically” here because there are many caveats to the 630 floor, as well as many alternatives to the “typical” small business loan.
Not only do alternative lenders offer certain funding products, particularly working capital, for small business owners with bad personal credit, there are also specific loan options that may not come with a minimum personal credit score requirement at all.
Here are the absolute minimum credit scores we work with for all funding products, ranked from lowest to highest, as well as the maximum amounts available:
|Funding Type||Min. Score||Max. Available|
|Real estate financing||None*||$5 million|
|Working capital||450||$1 million|
|Equipment financing||500||$2 million|
|Purchase order financing||500||$20 million|
|Invoice factoring||500||$20 million|
|Term loan||550||$20 million|
|Business line of credit||550||$20 million|
*For high-risk borrowers, who must meet certain other criteria.
It’s important to note that a poor credit score can be offset by pledging personal or business assets as collateral for your business funding. Nearly every funding option in the table above can be provided to entrepreneurs with the minimum score, if they have adequate collateral.
Alternatively, strong business history, as demonstrated by bank account statements and other financial records, can also offset a weak personal credit score.
Lenders may overlook your low personal credit score if you own a business with strong cash flow, with growing annual revenues, that’s reliable in paying its obligations. Over time, a business can build its own credit score and history, separate from its owners’ personal credit history.
A lower personal credit score is likely to impact your loan options in a number of ways, even if you can secure funding through collateral or a strong business history.
Most notably, a bad credit score is likely to result in offers with higher interest rates and other fees. Lenders who see you as a risky borrower will look for ways to protect themselves against any perceived risk of non-payment. You’ll encounter the same issue with any type of funding, from credit cards to home mortgages to auto loans. You’re also likely to be offered lower overall funding amounts for the same reason.
The lower your score, the riskier you look as a borrower, and the less likely you are to get funding in the amounts and rates you really want. The strength of your credit score has a significant and long-lasting impact on your financial outcomes, no matter what you do. It just happens to cause additional problems for ambitious business owners.
So, if you do have a bad personal credit score, what can you do to overcome it when seeking out business loans?
How to overcome a bad personal credit score
If you’ve read this far, your credit score probably sucks. Having a bad credit score doesn’t make you a bad person and it certainly doesn’t make you a bad entrepreneur — many business owners have wrecked their personal credit in the process of building a sustainable business.
But you certainly don’t want your personal credit getting in the way of building your business.
The first step to fixing your personal credit is to understand why it’s in its current state. Luckily, there are some excellent free resources that help you track the movements in your credit score and provide detailed reports from the major credit bureaus.
We recommend Credit Karma for anyone interested in tracking and understanding their credit scores. You can create a free account and get free detailed credit reports from TransUnion and Equifax from this Credit Karma sign up page (click the link in the sentence). Through this service, you should be able to see your score and why it is where it’s at right now.
Pay close attention to any reports of delinquent payments and outstanding debts. You may find some items that were added to your report by mistake, especially if you’ve unknowingly been a victim of identity theft. Scammers and thieves sometimes use stolen information to open up credit-based accounts in your name, and these accounts can show up on your credit report as negative factors when (as usually happens) the scammers run up debts that are never paid.
You can — and you should — dispute false entries on your credit reports. Removing a fraudulent debt or negative report from your personal credit history can have a major positive impact on your credit score.
Make sure you can support your claims if asked for proof, and don’t try to report legitimate entries as fraudulent. Making a false claim about your credit history could land you in worse trouble than you faced from the bad score alone.
Other elements on your credit report, such as late payments or high debt ratios, will take more work to overcome.
You may be able to ask your credit card provider to remove rare late payments from your credit report if you’ve otherwise been consistent about paying on time. If your history is full of missed payments, you probably can’t do much about it except wait things out. Items will drop off your credit history after seven years, which is a long time to wait, but it’s better than forever.
You’ll also have a weaker score if you’re carrying a high debt load relative to your total available credit. The only real way to address this issue is by paying down debts, which might be difficult if you’re simultaneously looking to finance the growth of your business.
If you’re still current on payments, you may be able to negotiate payoffs with your credit card providers by offering lump sums less than the total amount owed. Negotiating with credit card companies is never a sure thing, and is generally a last resort for someone with bad credit but the means to improve it.
The best bad credit business loans
There’s no better time to seek out small business financing than today. Entrepreneurs can choose from many reputable online lenders with a range of funding products designed for many business needs.
If you’ve recently started your business, you may be restricted to working capital funding, also called a merchant cash advance. Working capital is available to new businesses with as little as three months of operating history, while most other forms of business funding are only available to businesses with at least two full years in operation.
Working capital is typically offered in smaller loan amounts, on a more short-term basis, and with higher interest rates, than many other forms of business funding. It can be effective for fast-growing startups, but may not be ideal for established businesses with more modest growth rates.
Businesses that need equipment can get equipment financing, even if the business owner has weak personal credit. Because the funding is backed by the equipment itself, lenders have the option of repossessing your equipment if you fall behind on payments. You may need to demonstrate a solid plan to utilize the financed equipment for business growth in order to secure the loan, just as car buyers need to show proof of income to receive auto loans or leases.
Purchase order financing and invoice factoring are two similar financing options that can allow you to overcome weak personal credit, because approval for these funding products depends more on the creditworthiness of your customers and suppliers than on yours or that of your business.
Purchase order financing allows you to exchange purchase orders, or contracts not yet delivered, for financing. Invoice factoring, sometimes called invoice financing, helps you shorten the invoicing cycle for completed contracts or deliveries by paying you (most) of the outstanding balance on your customers’ unpaid invoices. Take a look at each product’s page for more details and information.
Want more information on funding your business growth if you have bad personal credit? Start our easy online application process (look to the right on a PC) or call us at 888-700-7512 today!