Best Business Financing Alternatives to Merchant Cash Advances for Bad Credit

If you have bad credit, online lenders, SBA lenders and community development financial institutions (CDFIs) may be able to help.

You may qualify for some small business loans despite having a bad credit score. Note that your rates will likely be higher. Expect higher fees, too.

When looking for a business loan for bad credit, you should consider all of your options. Make sure to weigh all the pros and cons. Applying carelessly can hurt your credit even more.

Credit standards have been tightening, according to the Federal Reserve’s small business credit survey. The 2024 survey found nearly a quarter of businesses looking for financing got turned down, and 29 percent of those rejections were due to poor credit. So, while not impossible, getting a business loan with bad credit is hard.

Getting a Business Loan with Bad or Fair Credit

Borrowers with FICO scores of 669 or lower are usually considered to have “bad” or “fair” credit. For the most part, you’ll be looking at alternative financing, like online loans, SBA loans, loans from CDFIs and loans from MDIs.

Online lenders are fintech companies that do all their business over the internet. These lenders usually have looser credit standards than traditional banks. Some lenders may set the bar as low as 500. That can make it a good option for businesses with bad credit.

Many online lenders will show their offers without a hard credit pull. Compare offers without multiple hard inquiries hurting your credit.

Online lenders offer quick funding options. Some will let you apply in minutes and give you a decision within days. A few could fund your loan the same or next business day.

The pros of online business lenders are that they’re usually easier to qualify for than traditional banks. Many have lower minimum credit scores and shorter time in business requirements.

While online lenders may have looser credit requirements, they often charge higher rates and more fees than banks. You should weigh the cost of the loan before making a decision.

Online lenders often focus on short-term loans. Depending on how the terms are set up, payments can fall due weekly or even daily. Those frequent outflows can add up and make it hard to manage cash flow.

With an SBA loan, the SBA doesn’t actually make the loan. You apply to a private lender that they’ve approved. Even with bad credit, you can get an SBA loan, but each lender has their own requirements and approval is never guaranteed.

The SBA’s Microloan Program offers business loans of up to $50,000. These are small amounts that may not help established firms much, but for struggling owners or cash-poor startups with bad credit, they may be one financing option. Eligibility is somewhat looser than for other SBA-backed loans.

The SBA’s Community Advantage program gives more financing options to people in underserved communities. Lenders make up to $350,000 in 7(a) loans to businesses in low-to-moderate income areas, or owned by veterans. Businesses under two years old may also be eligible.

The SBA offers some of the most attractive terms in small-business lending. Typical interest rates range from 5.82% to 16%, and repayment terms can be as long as 25 years.

SBA loans usually come with some educational resources to help borrowers start and grow their businesses.

Applying for an SBA loan is no walk in the park. The process can be confusing to navigate and often involves more documentation than typical loans.

SBA loans are not the fastest money available. Getting a decision and final approval can take a long time, from weeks to months, or up to 90 days.

A CDFI is an organization, like a bank or credit union, that focuses on loans to people who might otherwise be shut out of the financial system. Community development financial institutions can be banks, credit unions, loan funds, venture capital funds or holding companies. Their common mission is helping underserved communities get funding.

Even for borrowers with bad credit, CDFIs may offer competitive interest rates.

Borrowing from a CDFI isn’t just about getting money. They often provide the opportunity for financial education and advice as well.

Unlike online lenders that can sometimes fund loans the same or next business day, you may be waiting weeks to get your cash.

CDFIs typically focus on small businesses in low-income and minority areas, which means not everyone will be able to access them.

Minority Depository Institutions (MDIs) - banks or credit unions that are majority-owned by minorities - are another funding source to consider for businesses with bad credit. Anyone is welcome to bank with an MDI. But they tend to focus their services on underserved communities and groups: veterans, women, people of color, and low- to moderate-income areas.

Many MDIs are set up to focus on specific underserved groups, such as Black or Hispanic business owners. Finding a bank set up to target your group may make financing easier to get.

MDIs will sometimes provide business education or financial counseling to customers.

For businesses in rural areas, it may be hard to find an MDI. Most tend to focus on lower-income and minority neighborhoods, mostly in cities.

Compared with big banks, MDIs tend to have less funding, and therefore fewer loans. Some also don’t offer online loans.

Microloans are typically $500 to $50,000, with an average size of around $13,000 according to the SBA. Nonprofits and online lenders often give out microloans. They’re aimed at small and underserved businesses unable to get other financing. Because the sums are relatively small and are often aimed at those the financial system would exclude, guidelines can be more relaxed.

Microloans have eligibility rules and limits on how funds can be used. Many lenders let you use the money however your business needs it, except to repay existing debt or buy real estate.

Each microloan will have its own terms, which can vary quite a lot. The terms of microloans generally last from six months to seven years.

A quick decision isn’t the strong suit of microloans. A lender may take as long as three months to decide on your loan.

Microloans may also come with a packaging fee. This is usually around 2% for one year or less, and up to 3% for loans over a year. That adds to the cost of the loan, so factor that in when thinking of whether it’s right for you.

Accion Opportunity Fund is a nonprofit lender, one of many offering business loans. Accion’s loans go from $5,000 to $250,000, and require at least $50,000 in annual revenue and 12 months in business. Rates start at 8.49%.

Loan Gets Denied

Funding is essential for your business to grow, and a loan is just one option. You can also consider these alternatives.

A business credit card can be a valuable tool for managing cash flow or access to credit in an emergency. It lets you spend up to a limit, paying interest on only what you use, so you can cover short-term cash gaps. As you pay back the money, the amount you can spend goes back up, ready for future spending. Business credit cards can have high interest rates, so they aren’t suitable for long-term borrowing. While many credit cards for business require a strong credit score, some can be obtained even with bad credit.

Grants are free money: There is no repayment. Grants often come from governments, but can also come from organizations and large businesses. Eligibility may be based on location or industry, and not credit or revenue.

Crowdfunding is raising money from many online backers. There are no traditional qualification requirements, like minimum revenue or credit score. Instead, you get funds from donors who believe in the project. In exchange, you might give them some equity, or rewards or perks.

If you’re lucky enough to have friends or family willing and able to lend you money, they may be a simple way to get financing. Make sure you set the terms in writing to protect all parties and prevent a friendly loan from becoming a sour memory.

Invoice factoring allows you to sell your unpaid invoices to a third party for a lump sum of their value, typically up to 85%. The third-party service (a factor) charges a discount for this service, and then handles collections. It’s not a loan, and is based on the strength of your customers’ credit, not your own.

A merchant cash advance (MCA) is cash now against the future value of sales. Because MCAs are generally structured as purchases of future receivables rather than loans, and federal lending-disclosure laws like the Truth in Lending Act don’t cover business financing, the industry often uses factor rates, not APR, to show costs. Once converted to an APR, the actual cost can be triple digits. A qualified financial professional can help compare its costs and risks with other options.

Taking time to improve your personal credit before applying for a business loan can help you qualify for more loans and lower rates. This is best if you have time before you need the money. You can take steps to improve your personal credit by checking your credit report for errors and disputing them and paying down balances.

One way to build your business credit is with a business credit card secured with collateral. These cards, and similarly, secured lines of credit, work like any other plastic: spend within the limit and repay under the terms; credit effects depend on payment history and reporting. The difference is, since you’re putting up something to guarantee the loan, eligibility requirements are often easier to meet.

Not every lender is right for your business. No matter the financing option you choose, taking on debt you can’t manage will hurt your credit further. Before borrowing, you should be sure your business can afford to repay what you’re borrowing, which may be hard if you’ve already got bad credit. If you can wait, taking the time to build credit and establish a record of revenue may open up better, cheaper options for you.

It’s essential to do your research and compare as many lenders and loans as possible to find the one with terms and features that meet your needs.

Get a Loan with Bad Credit

Can you get funding if you’re cash-strapped with bad credit? Financing is possible. But with bad credit, getting approved can be harder and more expensive.

With bad credit, you might not have a lot of options. Few lenders will give you a loan if you also have no money - no business revenue. Borrowers with bad credit might have better luck with an online lender, microloan, a loan from a CDFI, an MDI or Kiva, which has no annual revenue requirements. But if your business is not generating income yet, securing funding will be tough.

It’s possible to get a loan with bad credit and no collateral, but not easy. With bad credit and no collateral, getting a loan is very hard at traditional lenders. Alternative lending options, like online lenders or CDFIs, have different eligibility rules and costs. Be sure to weigh up if you’ll be able to repay the money. By repaying your loan on time, you may also be able to build your credit, and get better terms on future loans.