Many people have a few years of employment and personal credit history behind them before they need to finance any significant purchases. Businesses, on the other hand, often need funding most in their early years when revenues tend to be lowest.

Unfortunately, these young businesses don’t have much time to establish a credit history, which means they usually have a low credit score if they have any at all. That makes it harder to get financing – but not impossible.

If you’re looking for a debt account to help your new business get through periods of thin margins or low revenues, here’s how to get a business line of credit with bad credit.

How to Get a Business Line of Credit with Bad Credit

A business line of credit is a type of revolving credit account that’s similar to a business credit card, with a couple of exceptions. First, there’s generally no grace period before interest accrues.

That means as soon as you take a cash advance from a line of credit, your lender starts charging you interest on the outstanding balance. They may also charge a flat fee for each transaction.

Second, lines of credit generally aren’t permanent. You can hold onto a credit card forever, but you’ll usually need to renew your line of credit regularly to keep it open.

Business lines of credit are often secured with some form of collateral, especially when you have a bad credit score. The extra security can increase your chance of getting approval and better account terms, such as a higher credit limit or lower interest rate.

Using inventory as collateral is common, but if your business owns real estate or equipment, those can also work for some creditors.

Besides collateral, here are some other ways to get a business line of credit despite having bad credit.

Online Business Lenders

In general, the younger your business is, the harder it is to qualify for a line of credit, especially from a traditional lender like a bank or credit union. For example, Bank of America and Wells Fargo require you to be in business for at least two years.

If your business is younger than that, it’ll be hard to get a line of credit or any other type of business funding from these kinds of creditors.

Fortunately, you may be able to get a business line of credit from an online lender. They’re generally more lenient when it comes to time in business and minimum credit score requirements.

For example, here are the minimum qualifications necessary for a few popular options:

• BlueVine: Six months in business, a minimum personal credit score of 625, and annual revenue of at least $120,000.
• Kabbage: One year in business, a minimum personal credit score of 640, and annual revenue of at least $50,000.
• OnDeck: One year in business, a minimum credit score of 600, no personal bankruptcies in the last two years, and $100,000 in annual revenue.

Note that using an alternative lender for a business line of credit or bad credit business loan will likely be noticeably more expensive than an account from a traditional institution.

They’re likely to charge more and have higher fees, such as an annual, renewal, or origination fee.

Consider Invoice Financing

While it’s not a business line of credit, invoice financing is another viable financing option for businesses that need a flexible source of working capital to help cover their overhead and smooth out their cash flow.

Creditors that offer invoice financing tend to have unique approaches to it, but it always involves borrowing against your outstanding invoices or accounts receivable. Usually, it looks something like the following.

You provide goods or services to your customer and invoice them for the value provided. However, they have a month or more to pay, which means you’re covering expenses during that period without the cash you earned.

To pay your bills in the meantime, you borrow a portion of the outstanding invoice’s value from a lender that offers invoice financing. Finally, when your customer pays you, you use the cash to pay back the amount you borrowed plus fees and interest.

Invoice financing is a relatively expensive form of borrowing in general, but it’s also usually easier to qualify for than a business line of credit. For example, in addition to business lines of credit, BlueVine also offers invoice financing.

They require you to have been in business for three months and have a personal credit score of 530 to qualify for invoice financing, but they ask for six months and a 600 credit score for a line of credit.

Invoice financing is similar but distinct from invoice factoring, which involves selling your invoices to a third party instead of borrowing against them.

How to Qualify for a Low-Interest Line of Credit

An online, bad credit loan will always have a higher interest rate than a competitive bank loan. Similarly, you’re only going to find legitimately low-interest lines of credit at traditional institutions, not online lenders.

To qualify, you’ll have to meet their higher credit and financial standards. There’s really no way around them. 

Here’s what you need to do to get yourself and your business ready to apply for a bank’s low-interest line of credit.

Build Your Personal Credit Score

Businesses may be separate entities from their owners on paper, but many lenders still review your personal credit as part of their underwriting for a business line of credit.

The primary reason for this is that most business credit accounts require that you guarantee them personally. That means if your business fails to pay back its debt, you’re personally responsible for covering the balance.

Besides, examining your well-established personal credit score gives lenders much more insight than they’d get from analyzing what might only be a year or so of business operations.

One of the best ways to build your personal credit for business purposes is with Credit Strong’s MAGNUM accounts, the nation’s largest and longest credit builder loans.

Our credit builder loan is like an inverted secured loan. Instead of getting your proceeds upon approval for the account, we put them in a locked savings account as collateral.

Then you make your monthly payments, which we report to the credit bureaus until you pay off the loan principal or cancel your account. At that point, we release the funds.

Our MAGNUM accounts are uniquely suited for people who want to improve their poor credit score and prime their personal credit for a future small business loan.

Business credit providers may discount a personal loan of a few thousand dollars when assessing your credit history, but our MAGNUM accounts report loan amounts up to $30,000. That’s irrefutable evidence of your ability to repay significant credit obligations.

Build Your Business Credit Score

Having a good personal credit score is usually necessary when applying for business accounts, but establishing a good credit rating for your business is just as important.

When your company is new, you’ll have to lean on your personal credit to get business financing, but if you prioritize building up your business credit score, you may be able to use it instead after a few years.

There are significant benefits to qualifying for financing using a business credit score. Perhaps most importantly, it can help you avoid signing a personal guarantee for company debts, which lets lenders collect from you if the business fails to pay.

Fortunately, CreditStrong also offers credit builder loans for businesses that can help you build business credit for future financing. Here’s all you need to do to qualify: 

• Form a business entity other than a sole proprietorship
• Request an employee identification number (EIN) from the IRS
• Be in business at least three months

Once you’re approved, we’ll report your payments to Equifax Business and PayNet, each of which is a major commercial credit bureau. Soon we’ll share them with Experian and the Small Business Financial Exchange, too.

You can customize your monthly payment and loan term, and there are no fees for canceling at any time.

Keep Your Financials Strong and Stay in Business

Your personal and business credit scores aren’t the only things lenders consider when you apply for a business line of credit. They’ll also analyze your financial statements and verify your time in business.

Work on improving financial metrics like your debt-to-equity and current ratios. Even if all you manage to do is scale up your operation and expand your gross annual revenues, lenders will be more willing to offer you a line of credit.

Having strong finances makes it more likely that you’ll stay in business, and simply keeping your company afloat for a few years makes it easier for you to qualify for financing.

Remember, most traditional financial institutions want you to be in business for at least two years before they’ll lend to you. If you have to, don’t be afraid to use short-term loan options like invoice financing until you reach that two-year mark.

With an excellent personal credit score, an established business credit history, a strong financial position, and a few years of operations under your belt, you’ll have no problem getting a low-interest business line of credit.

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