The 2024 FDIC Small Business Lending Survey found that, while lending relies heavily on credit scores, banks evaluate up to twelve other pieces of information when making business loan decisions. So if you’re wondering how to get a business loan with bad credit, you likely have options.
In this article, we’ll examine how lenders evaluate applications, the difference between large and small banks, and steps you can take to improve your chances of approval.
Let’s dive in.
What to Expect: Average Interest Rates vs Credit Scores
You’re right to be concerned about predatory lenders charging unfairly high interest rates. Before you accept a loan, check to see if the price is in line with what the market is charging.
Every month, Nerdwallet matches thousands of borrowers with lenders. Here are the average interest rates their users were offered in January 2025. These figures are for personal loans rather than business loans, but since many business owners rely on personal credit, these should serve as good benchmarks.
| Borrower Credit Rating | Score Range | Average APR | Typical Range |
| Excellent | 720+ | 12.69% | 10.97 – 14.47% |
| Good | 690-719 | 15.92% | 11.56 – 17.22% |
| Fair | 630-689 | 19.52% | 15.26 – 20.04% |
| Bad | 300-629 | 21.72% | 20.78 – 28.44% |
What Matters Beyond Credit Scores?
If you have bad credit, it’s easy to assume that getting a business loan is impossible or a bad idea. But the truth is, credit scores are just one part of the equation. Banks and other lenders consider a wide range of factors when evaluating applications.
The FDIC survey asked banks to rank factors that are important for loan approval. In order of importance, the results were as follows:
- The business’s financial position (balance sheet, revenue, profit, debt to income, etc)
- Personal credit scores
- Geographic proximity to the bank
- Collateral and personal guarantees
- Industry of the business
- Qualitative factors (business plan, age of business, experience of owner, etc)
Source: FDIC Small Business Lending Survey
Their survey aligned with our experience working with small businesses and startups. We’ve found that SBA loan applications depend primarily on a business’s profitability, with other factors being of secondary importance.
Small vs Large Banks
Borrowers with poor credit are likely better off approaching small banks (with less than $10 billion in assets) than large banks (with more than $10 billion in assets).
Here’s why:
- The majority of large banks, compared to just one in ten small banks, view credit bureau information as the most important aspect of a small loan.
- Most large banks make small (sub $25k) loan decisions using only information from credit bureaus. In contrast, small banks evaluate applications using a wider variety of soft information, including loan officer evaluations.
- Small banks are more likely to have loan decision-makers meet you in person, providing an opportunity to make a case for your business on the merits rather than a credit score.
- Small banks have more flexibility in pricing, structure, collateral requirements, and willingness to accept informal documentation.
Most small business lending is geographically based. Start your search by looking for local credit unions, and avoid nationally recognized brands such as JP Morgan or Wells Fargo.
How to Improve Your Chances of Approval
Bad credit isn’t the end of the road when it comes to securing a business loan.
Firstly, a loan officer’s job is to “sell” you. Starting by presenting a well-thought-out business plan is one of the most powerful tools you have. Lenders want to see that your business has a clear path forward and that you understand the market you’re working within.
Another key step is separating personal and business finances. Many small business owners start by using personal bank accounts for business expenses, but this can confuse lenders reviewing financial records. Instead, open and run all transactions through a dedicated business bank account.
Consider offering collateral. Many lenders are more willing to work with businesses that can secure loans with assets. Cars, equipment, real estate, or even accounts receivable could be sufficient.
Another option for those without collateral is to apply with a co-signer. Whether they’re a business partner, family member, or investor, adding someone with a stronger credit score to the application can tip the scales in your favor.
Types of Loans for Bad Credit
Many loans are specialized to work with borrowers with poor credit. Some deemphasize credit scores in their approval process, while others secure the debt in other ways.
Invoice Financing: If your business has unpaid invoices, lenders might let you borrow against them to maintain cash flow. You can easily access cash without strong personal credit, but fees and interest can accrue if your clients prove unreliable.
Revenue-Based Financing: Lenders may provide credit in exchange for an agreed-upon percentage of future sales. Fees and interest can add up if sales are less than you projected, but this may be a strong option if you have a substantial amount of monthly credit card transactions.
Equipment Financing: Lenders can secure loans using the equipment itself. Since the equipment is collateral, approval is easier, but the machinery may be repossessed if you fail to make payments.
Peer-to-Peer Lending: Online platforms, such as Kiva, allow borrowers to crowdsource loans from individual investors. Funding can take longer to secure this way, but those with low or no credit scores can participate.
Microloans: The Small Business Administration (SBA) offers a microloan program. The maximum loan amount ($50,000) is small, but it’s easier to qualify for than traditional loans.
Avoiding Predatory Lenders
If a traditional bank turns you down, it’s natural to consider alternative lending options. However, some fintech companies make offers that are too good to be true. For instance, some “small business financing companies” simply apply for credit cards en masse on your behalf. You could do that yourself!
Beware of loans with excessively high rates, prepayment penalties, hidden fees, or upfront payments before approval.
The Role of Accounting in Loan Approval
Lenders want to see evidence of a strong financial foundation. Strong accounting and bookkeeping practices will impact your ability to get a loan, especially if your credit is less than ideal.
From balance sheets to cash flow and P&L statements, the better maintained your financial records are, the more effectively you can make your case.
We’re indinero, an expert accounting, tax, and CFO advisory firm. We handle the numbers so our clients can focus on growth. Reach out for a free consultation today.
