Underwriting 101: How to Get Business Loans for Bad Credit Borrowers
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Underwriting 101: How to Get A Business Loan with Bad Credit

By Excel Capital Management President, Nathan Abadi

Nowadays, your credit score is more important than ever.

Whether you’re looking to open a credit card, rent an apartment, purchase a new home, or lease a car, your personal credit score is typically the deciding factor.

Unfortunately, the same is true when it comes to applying for a business loan. Unless it’s a major bank, most lenders care more about your personal credit score than your business credit score– even for a business loan.

For that reason, your personal credit score can be a major hurdle when looking for business loans with bad credit.

How Does the Business Loan Application Process Work?

Typically, when applying for business funding the process works like this:

  1. An underwriter evaluates your business and personal credit.
  2. Next, they review the financial health of your business through an audit of your financial statements and tax returns.
  3. And lastly, they measure your debt to income ratio.

Based on this information, the underwriter either approves or denies you. And if approved, typically presents you with several different options.

Of course, that’s how things go in a perfect world where you have no problems getting approved for a business loan.

You’ll notice that, with traditional business loans, the underwriter checks your credit first. If you have bad credit, the entire process ends almost as soon as it began and you’re left with a pleasant denial letter, wondering what your next should be.

Luckily, there are business loans for bad credit. However, bad credit or “alternative” business loans work a bit differently from traditional business loans, so there are some things you should be aware of.

How to Get Approved for a Business Loan with Bad Credit

According to FICO, a bad credit score is generally one that falls between 300 and 629 points.

Having a credit score within this point range will typically result in a rejected business loan application from a traditional bank or lender.

Unfortunately, traditional financial institutions and lenders won’t even bother looking at your revenue or financials since credit is used as the primary decision making factor. If your credit is bad, the entire process stops there and you’re denied.

Most people apply for emergency business loans and can risk losing the business if proper funding is not achieved. 

But if you’re applying for a business loan with bad credit from an alternative lender, your credit score is much less of a factor than it typically would be. 

So, what is then?

The overall strength of your business is what an underwriter will be looking at when they review your application for credit.

That means things like cash flow, profitability, and debt are the major deciding factors you need to be aware of if you’re applying for a business loan with bad credit.

The reality is, running a business can sometimes have a negative impact on your credit.

This can make it seemingly impossible to get a business loan, further halting your ability to make significant progress (or slowing that progress down).

At Excel, our review process is designed to work with you– whether you have good or bad credit (as it should be).

We understand that things happen, both personally and professionally in your business, so as long as you’re on the right track to improve your credit, we believe you should have the opportunity to obtain funding.

This is especially beneficial to small business owners who are still in the startup phase or who haven’t established a good credit history yet. And while the process for obtaining a loan with an alternative lender is a bit tougher, your options are plenty.

3 Options for Obtaining a Business Loan with Bad Credit

If you’re seeking a bad credit business loan, you have several different options.

Before we talk about the various alternative loan and funding options, keep in mind that taking advantage of one of these options can help improve your business’ credit score. That can then further help you get approved for a better loan down the line.

Here are 3 options for obtaining a business loan with bad credit:

1. Split Funding

Not technically a business loan, split funding is a purchase of your future credit card sales done at a discount.

This is a great option for businesses because you get to pay the loan back at a pace that fits your business with that loan being repaid as a percentage of your credit card sales. This means that the loan repayments never become unmanageable and there’s no maturity date.

If your business has a regular flow of credit card sales, this may be the perfect alternative loan option for you.

Who this bad credit business loan option is great for:

  • A business with regular credit card sales
  • A business that needs funds to invest for growth but doesn’t have extra cash on hand for repayments

2. ACH or Short Term Business Loans

This bad credit loan option is similar to split funding but with one primary difference: unlike split funding, this does require a repayment date and schedule.

Typically, the repayment date on these types of loans ranges from 3 months to 3 years with monthly or weekly payments.

The exact structure depends on your loan application and decision from underwriters, but on occasion, this loan option may also require a personal guarantee (but never collateral).

When underwriting is reviewing your application they may look at credit to determine the term and rate of the loan. However, if you have good cash flow and strong average daily balances in your accounts then underwriting may decide this isn’t necessary.

Who this bad credit business loan option is great for:

  • A business that doesn’t have regular credit card sales
  • If you rather make regular, fixed payments like a more traditional loan rather than have a lender take a cut out of every sale until the loan is paid

3. Funding Alternatives

If your business can’t yet qualify for one of the above business loan options, there are alternative funding solutions such as:

Each alternative lender has different qualification requirements, however, when applying for one of these loan options with bad credit, the requirements are usually minimal.

In fact, most lending institutions will simply require:

  1. A one-page application
  2. Four months of recent business bank statements
  3. And four months of recent credit card processing statements.

Keep in mind that additional documentation may be requested, so it’s a good idea to have these documents ready and available just in case:

  • Proof of ownership
  • Business license
  • Trade references
  • Voided check
  • Driver’s licenses
  • And anything else potentially relevant to your business
  • Accounts receivable aging report

Overall, try to be as prepared as possible. While these documents might not affect your ability to get approved in some cases, lacking one of the above may still slow the process down, so it’s better to be prepared.

Next Steps: How to Improve Your Business Credit Score

Qualifying for and obtaining a business loan is just the beginning. Once you’ve obtained an alternative loan you should turn your focus to improving your business credit score for the future to obtain a better loan the next time around.

Here’s how:

1. Pay your bills on time

The easiest (and likely best) way to improve your business credit score quickly is by paying your bills on time. That’s all there is to it.

Now that you have a loan you’re in a unique position to rack up a history of on-time payments and the credit score bump that happens over time from doing so. Both of these will play a big part in getting approved for a better business loan down the line.

Also, if you want to take it a step further and look really good to loan companies make payments in advance whenever possible.

2. Keep your credit lines open

A lot of business owners think canceling all of their credit cards is the best solution when they find themselves in a rut, however, this is one of the worst things you can do.

Closing your credit lines will cause your overall business credit lines to decrease both quickly and dramatically, negatively impacting your overall credit score.

Instead, pay off your balances steadily and consult a credit professional if you believe you need additional help.

3. Monitor your balances

Paying your monthly payment and other bills on time is great, but paying down your balances when you can to under 10% will increase your overall credit score tremendously.

So, make sure to monitor your balances and plan payments accordingly so that you stay below that as often as possible.

4. Watch your credit report

Lastly, one of the most important things you can do is monitor your credit report. Look for errors, chargebacks, items that have been sent to collections, etc. and handle them as you see necessary.

Taking the extra time to make sure your report is accurate and up-to-date can go a long way. And with all of these points taken together, the next time you’re applying for a business loan you can get the best terms possible.

Business Loans for Bad Credit Are Possible

Now you know– it’s possible to get a business loan with bad credit.

And these bad credit business loans aren’t just an option, they’re both varied and flexible to help fit your business.

Plus, by paying your loan on time and continuing to grow your business, you can position yourself to be approved for a much better loan the next time your business needs funding.

To learn more about Excel Capital’s bad credit business loans and other funding options, click here to apply and see how we can help you and your business.

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