As a small-business owner, you need access to capital to fund your business. One way to access capital is through a small-business loan. Small-business loans are typically used to fund startups or to grow businesses, to help buy inventory or furniture, to pay for marketing, or to strengthen the financial foundation of your business. However, accessing credit can be difficult for small businesses, especially those whose owners have bad credit.

According to the 2017 Small Business Credit Survey, the most recent one from the Federal Reserve, 40% of small businesses applied for some form of financing in 2017 – a modest decline from 45% in 2016. Of those that applied for financing, 82% received at least some financing, and 58% of applicants received the full amount sought.

A lack of affordable capital can negatively affect a business. Fifteen percent of businesses less than 2 years old and 7% of businesses 16 years or older reported that insufficient financing caused a decline in profits, according to a 2017 U.S. Small Business Administration Office of Advocacy report.

For business owners with bad credit, getting a traditional bank loan can be very difficult. However, alternative lenders offer multiple funding options for those with bad credit. Some of these lenders have no credit score requirements and consider additional factors, including business revenue or length of time in business.

In this guide, you’ll learn how small-business loans work and how you can find the best loan from an alternative lender to start or expand your small business, even if you have bad credit.

U.S. News conducted an in-depth review of the leading bad credit small-business loan companies, researching key factors, including customer service ratings, qualification requirements and loan options.

There is no single loan that is perfect for every business, but U.S. News recommends top performers based on their strengths in key areas. These recommendations can support your research by showing you the loan most likely to meet your needs. They are a good starting point for most small businesses, but you should thoroughly research each option yourself.

The term bad credit refers to a fair or poor credit score, usually a FICO score below 670. Your credit score is a numerical representation of your creditworthiness, or how reliable you are at repaying debts. If you have a poo
r history of repaying debts, you will have a bad credit score.

While credit score ranges can go as low as 300, you typically need at least a FICO score of 530 to qualify for a bad credit loan. Each lender will look at your score to determine what level of risk it is willing to bear.

Several credit-scoring models are used today, but the most common one is the FICO scoring method. A second type of credit-scoring model, the VantageScore, is becoming more common.

The VantageScore follows a similar model, and its ranges are defined as:

When a business loan or any other credit product is marketed for bad credit, it is generally aimed at those with a credit score lower than good on the FICO scale. Because they have little creditworthiness in the eyes of lenders, people with a credit score in the range of 300 to 669 can find it very hard to get approval for a small-business loan from a traditional bank lender.

Receiving approval for a small-business loan is always easier when the applicant has strong credit and steady business revenue because loan approvals factor in three main criteria: cash flow, credit history and collateral coverage, explains Jay DesMarteau, head of regional commercial specialty segments at TD Bank.

“When a business owner has poor or unsteady cash flow, banks and lenders often focus more on the company’s documented financial history and assets,” DesMarteau says. “Those with poor credit scores may struggle with their loan approval.”

In addition to your personal credit score, your business credit score may be a deciding factor in receiving financing, particularly from traditional lenders. As with personal credit scores, there are different business scores, each with its own scoring ranges and intents. Your business credit score reflects your payment history on accounts associated with your business. However, your personal credit history will be used exclusively if your business has no credit history, as with a startup.

Work on improving your personal and business credit so you’ll have more options for funding. With good business credit, you may be able to qualify for U.S. Small Business Administration, or SBA, loans, traditional bank loans and other small-business loans without having to rely on your personal credit.

Alternative lending refers to the broad range of loans for consumers and business owners outside of traditional bank loans. They fill the gap in funding options by offering loans to people and businesses that many traditional banks will turn away. Usually, alternative lenders offer loans online and may not have a brick-and-mortar presence like most banks.

Startups in business for five years or less that have a medium or high credit risk are likely to see better approval odds with online lenders than traditional lenders. Forty percent received at least some financing. Among the same group, 49% received financing from large banks and 47% from small banks.

There are two main categories of alternative lenders:

1. Direct lenders. Usually geared toward small to midsize businesses, direct lenders are finance companies that fund your loan while cutting out intermediaries such as private equity firms, brokers or investment banks. While working with direct lenders means you don’t deal with an in-between, many direct lenders now have financial backing by banks.

2. Peer-to-peer lenders. Through an online marketplace, peer-to-peer, or P2P, lending directly connects borrowers with investors who typically fund small chunks of a diversified loan portfolio. Approval requirements may be less rigid than traditional lenders, and these loans offer faster access to capital, but with less stringent lending criteria, alternative lenders take greater risks with borrowers. With higher risk comes higher interest rates; the APR for a 36-month P2P loan starts at 15%, and it could reach 45% for a four-month institutionally backed loan.

Small-business loans work like any other loan, with the condition that the funds be used for business-related purposes. Some loans can be used for working capital and have looser spending requirements, while others have to be used for specific expenses, such as a commercial mortgage, invoicing or new equipment.

Types of small-business loans that alternative lenders offer include:

Term loans are lump-sum loans that provide businesses with a sum of capital. Businesses agree to repay a term loan over a fixed amount of time with a set payment schedule. Each payment you send to the lender includes the principal amount, plus the interest you owe on the loan for that period.

Business lines of credit are similar to credit cards. With a business line of credit, a lender approves you for a pool of funds, otherwise known as a revolving line of credit. As with credit cards, there is a limit to how much you can borrow. With a business line of credit, you’ll be charged interest only for the amount of money you draw, not on the maximum limit.

You can access your line of credit for any business-related needs, whether it’s to expand your business, to fill in gaps from cash flow issues, or to purchase inventory or equipment. As long as you make the minimum payments and don’t go over your limit, you can use your line of credit for as long as you need it. When you’ve repaid the lender in full, you have access to your full line of credit. Borrowers with poor credit are likely to receive business lines of credit with higher interest rates and lower maximum limits.

With equipment loans, lenders typically finance 80% to 100% of the cost of your equipment. The equipment acts as collateral for the loan. While traditional lenders may be reluctant to offer equipment loans to small-business owners with poor credit, alternative lenders are more likely to do so.

If your small business struggles with ongoing cash flow issues because you’re waiting on outstanding invoices to be cleared, invoice financing – also known as factoring – is an option. With invoice factoring, you sell your unpaid invoices to a lender at a discount. The lender pays you the majority of the amount owed on the invoice upfront and keeps a portion of the outstanding amount – usually 20% – until the invoice is paid.

Invoice financing can be a risky choice. There is a factoring fee based on a percentage of the invoice, plus interest charged on the cash advance. The fees can quickly add up, so small-business owners should carefully weigh the costs when considering invoice financing.

For small-business owners who need speedy access to capital, a merchant cash advance, or MCA, is a financing option. With an MCA, the lender provides you with a lump-sum of cash for a percentage of your anticipated sales.

You repay the advance, plus fees, with either a portion of your future credit and debit card sales, or with fixed daily or weekly transfers from your bank account. Your fee is determined by a risk assessment. Lower-risk borrowers will have lower fees and more favorable b
orrowing terms than higher-risk borrowers.

Borrowers should beware of the long-term financial implications of merchant cash advances. ”It’s almost like a drug,” says Kevin Monahan, area director for the Florida Small Business Development Center at the University of North Florida. “Small-business owners need the money desperately, resort to paying high interest rates, and find themselves with less and less money.”

Merchant cash advances are often a poor choice for businesses. They typically have high interest rates that can hit triple digits.

Keeping loan costs minimal allows you to invest profits back into your business, so the lower your fees, the better. Small-business loan costs typically include the following:

Applying for a small-business loan requires preparation, especially if you have poor credit. You can increase your chances of approval and secure the best terms by improving your credit and creating a business plan that will make lenders more confident in your business.

When applying for a small-business loan, a significant amount of documentation is involved. To ensure the application process goes smoothly and you get approved for the amount of money and terms you need, have the following information and documents on hand:

For in-depth information on the loan application process, read the U.S. News Small Business Loans guide.

When choosing an alternative lender for your small business, pay close attention to the lender’s eligibility requirements, loan options, costs and reputation. Keeping these factors in mind will aid you in finding a lender with a higher chance of approving your loan and offer you solid customer service and the best terms possible with reasonable costs.

Loan types: During your search, look for a lender that offers the type of loan you need (i.e., a line of credit, invoice financing, term loan). To make sure you get approved for enough funding to start or expand your business venture, before you begin your search, draft a detailed business plan and zero in on the type of funding you need.

“The business plan should present in clear and concise terms your company’s unique value proposition, the current revenue and profit model, current cash flows, the burn rate, and how new cash infusions into the company will be used,” Sury says.

Loan limits: If the lender doesn’t extend financing in the amount you need, do your best to find one that will. If you have bad credit, you could consider lowering the amount you need or turning to creative sources of funding.

Loan term: Your loan’s term is the amount of time you have to make payments on the loan. Note that if you take a loan with a shorter length, it will have higher monthly payments, but you may pay less in total interest on the loan. If you take out a loan with a longer term, your monthly payments may be lower, but you may have to pay more in total interest over the life of the loan. For small-business owners with bad credit, there may be fewer options and less flexibility with your loan term, so beware of taking on a loan with repayment terms you won’t be able to manage.

Look for a lender with the lowest costs, including:

Read reviews to find out how businesses rate the service and products each lender offers. Two good review sources for alternative lenders are Trustpilot, which rates companies based on an aggregate of customer reviews, and the Better Business Bureau.

If you’re denied a small-business loan or can’t secure enough financing because of poor credit, there are some things you can do to get the capital you need: