The 5 Best Business Lines Of Credit For Bad Credit
Each small business is unique, but every business has at least one thing in common: they all need money to operate. Whether it’s for day-to-day operations, a major purchase, or the dreaded unexpected emergency, businesses need ready cash — and lots of it.
In an ideal world, you would just reach for your checkbook or debit card every time another expense popped up. Unfortunately, things aren’t that cut and dry in the real world. Customers are late in paying their invoices; businesses have seasonal slumps; emergency expenses cut into the bottom line.
Wouldn’t it be great to have on-demand access to cash whenever it was needed? Actually, there is a small business financing solution that works that way: a business line of credit.
What happens, though, when you have poor credit? Maybe you’ve tried to qualify for some other business financing in the past and have been turned down. The great news is that business lines of credit are available to everyone, even applicants with low credit scores.
Ready to learn more? Read on for more information about business lines of credit, including what they are, how you can use them, and how to obtain one — even if you have less-than-perfect credit.
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What Is A Business Line Of Credit?
A business line of credit is a type of revolving credit. The lender provides the business owner with a credit limit. Much like they would with a credit card, the borrower can make as many draws as needed — up to and including the total credit limit — to get fast access to funding. Interest and fees are charged only on the balance that has been used by the borrower.
Once a borrower begins to make draws, the money is paid back at a later time on a scheduled basis, which could be weekly, monthly, or on another schedule set by the lender. Payments are made toward the principal balance as well as toward the interest and fees charged by the lender. As money gets paid back, it becomes available to borrow again.
Is A Credit Card A Type Of Line Of Credit?
Business credit cards are another type of revolving credit, and while very similar to lines of credit, they aren’t exactly the same thing.
A credit card allows a borrower to make multiple purchases up to and including the set credit limit. Cards can be used for online purchases or brick-and-mortar establishments that accept credit cards.
Cash draws can be made from a credit card, but they typically come with higher fees and interest rates. With most credit cards, you also can only access a certain percentage of your total credit limit as a cash advance. When cash is needed, a line of credit is the better option.
However, credit cards have their own benefits. Credit cards can be used immediately, while draws from lines of credit may take 24 hours or longer. Credit cards also offer rewards programs, allowing users to rack up airline miles, bonus points, and cash back with every use. Lines of credit do not provide these rewards.
When Should I Use A Line Of Credit?
A line of credit is handy any time you need quick access to money. A line of credit can be used when an emergency expense arises; it can also be used for purchases that you’d rather pay off over time.
Really, a line of credit can be used for any business expense. However, like other types of financing, lines of credit loans should only be used when needed. Interest and fees can make this a costly form of credit. Before spending, ask yourself if the return on investment will be worth the cost or if there are more affordable alternatives available. If you do decide to make a draw, try to pay the balance off as quickly as possible to avoid paying unnecessary interest or fees.
When Should I Look For Other Financing Options?
In some scenarios, you may want to look into other financing options. For very large purchases, a long-term loan with a lower interest rate may be a more logical choice.
One of the main benefits of a line of credit is how fast you can receive the money you need. For emergencies, this may be the only option. However, if you are planning to make a purchase that isn’t an immediate need, it may be best to shop your options to find the most affordable type of financing.
What Is Considered Bad Credit?
Some lenders have their own standards to define bad credit, but in general, a score between 350 and 599 is considered poor.
A low credit score could occur for several reasons. A missed payment, foreclosure, collections, or bankruptcy can pull a credit score down quickly. Even having too many new accounts or high credit utilization can drag a score down. Unfortunately, most lenders don’t consider the circumstances and just see one thing with a low credit score: risk.
Why Is My Personal Credit Score Important?
Lenders consider borrower risk before approving a loan. The lower the risk, the more likely the lender will be to approve the loan. The higher the risk, the higher the chances are of a rejected application. If a risky borrower is approved, interest rates are usually much higher, and terms are not as favorable.
Personal credit score plays a big role in assessing risk. Borrowers with high credit scores will have more financing options and will receive the best rates and terms. Borrowers with lower credit scores will be limited in their options. They may qualify for lower amounts and suffer from higher overall loan costs. In some cases, borrowers with low scores will be unable to qualify for unsecured loans. These borrowers will have to put up collateral or pay a deposit for a secured loan.
How Quickly Can I Improve My Personal Credit Score?
Unfortunately, boosting your personal credit score isn’t an overnight process. While it’s possible to raise your score by a few points in just a few weeks, the process of raising your credit score from “bad” to “good” could take months — or in some cases, years.
The first step to improving your personal credit score is to pull your report and score to see where you stand. This can be done at no cost online. Look carefully through your report for any erroneous items that can be disputed with the credit bureaus. A mistake on your credit report will need to be proven to the creditor and then corrected or deleted.
If you have open lines of credit, make sure to pay your balances down as quickly as possible. Not only will this help you save on interest over time, but it will also lower your credit utilization, which in turn can help raise your credit score.
At the very least, make sure that you’re making minimum payments on all of your accounts each month. A late or missed payment can severely affect your credit score. Do not make too many inquiries into new accounts, and don’t open too many new accounts at the same time. All of these moves throw up a red flag to lenders.
Finally, raising your score can sometimes be a waiting game. Hard inquiries remain on your credit report for two years, while bankruptcies and foreclosures stay on your credit report for seven years. While you can work in other ways to build your credit in the meantime, only time will erase these past mistakes.
Is My Business Credit Score Important?
If you’re a business owner, you have a business credit score in addition to your personal score. A business credit score shows your business’s credit history and helps lenders assess whether or not you are a risky borrower.
Lines of credit, credit cards, and loans taken out for your business will all affect your business credit score. As with your personal credit, if you make late payments or miss payments on a business account, your score will be lower. Your business will be viewed as a riskier investment. If your score is high, lenders will feel more confident in giving you the financing you seek.
A business credit score is important when applying for financing, so it’s vital to ensure that your business credit score is as high as possible. The best loan products, such as long-term bank loans and commercial mortgages, are reserved for borrowers with high personal and business credit scores. For many lines of credit, a business’s credit score is considered by the lender when determining whether to approve your application.
The Best Business Lines Of Credit For Bad Credit
Whether you have an emergency expense and need money quickly, or you just want to have a backup form of funding on-hand for the future, a line of credit can be good for your business. Before you apply, become familiar with the best lines of credit for borrowers with poor credit scores.
Fundbox provides business lines of credit up to $100,000 for qualified borrowers. To qualify, all applicants must have a business checking account and a recommended yearly revenue of $50,000. Businesses must be based in the US or select US territories. Applicants must have at least two months of activity in Fundbox-supported accounting software, such as QuickBooks. If this (accounting software) qualification is not met, an applicant can connect their business bank account showing at least three months of transactions to be considered. You also must have a credit score of at least 500 to qualify.
The application process for Fundbox takes less than 10 minutes, and most applicants can receive an approval decision in three minutes or less. Once approved, the borrower can access funds immediately, with most transfers going through as quickly as the next business day. Fundbox charges fees starting at 4.66% on the amount drawn. Balances can be paid early, and any remaining fees will be waived. Repayments are made weekly for 12 or 24 weeks.
Kabbage provides up to $250,000 via lines of credit. While Kabbage does pull your credit score, the lender focuses more on business performance than credit history, so borrowers with low credit scores can be approved.
To qualify for a Kabbage line of credit, the business must have been in operation for a minimum of one year. There are revenue requirements: either $50,000 in annual revenue or $4,200 monthly revenue for the last three months. Kabbage requires borrowers to link their business accounts (PayPal, QuickBooks, business bank accounts, etc.) to determine if they qualify and how much they are qualified to receive.
With Kabbage, once a borrower is approved, they can draw money immediately, and funds usually transfer the next business day. Kabbage has also released the Kabbage Card, which lets borrowers use funds instantly anywhere VISA is accepted.
Kabbage offers repayment terms of six, 12, or 18 months. Payments are made monthly through automatic withdrawals. Kabbage APRs range from 9% to 36% on the borrowed amount based on business performance, with a total expected cost of 2%-27% over the life of the loan.
Headway Capital provides lines of credit of up to $100,000. To qualify, you must make at least $50,000 annually, have been in business at least one year, and have a credit score of 550 or above. Your business must also be located in one of the states served by the lender.
Headway Capital offers repayment terms of 12, 18, or 24 months. Weekly or monthly payment options are available. Fees, minimum initial draw amounts, and maximum credit limits vary by state. Applicants for Headway Capital lines of credit can be pre-approved in just minutes. Once underwriting is complete and the loan is approved, borrowers can draw immediately from their line of credit and receive the funds as quickly as the next business day.
Two Credit Cards For Merchants With Bad Credit
If you want to pay your vendors, contractors, and suppliers, a business credit card may be the right choice for you. A credit card gives you instant access to funding without waiting for transfers, and you can withdraw cash if needed. Not only will you be able to use your funds immediately, but business credit cards can also help you boost your credit score to apply for other types of financing in the future.
Capital One Spark Classic
Capital One Spark 1% Classic
The Spark® Classic from Capital One® is a popular choice with business owners that have lower credit scores. Applicants are recommended to have a credit score of at least 580 to qualify. This is an unsecured credit card, and it carries no annual fee.
One of the advantages of this card is that it has a 1% cash back offer for every business purchase. Rewards are unlimited, and there is no minimum to redeem. The Capital One Spark Classic comes with fraud coverage and free employee cards. Using the card responsibly can also help you boost your credit while giving you access to the capital that you need.
Wells Fargo Business Secured Credit Card
Wells Fargo Business Secured Credit Card
$25 per card
Prime + 11.90%
The Wells Fargo Business Secured Credit Card is a secured credit card, which means you have to put down a security deposit before you can use the card. That makes it a great option for those struggling with credit, or who have no credit history.
Like the Spark Classic, this card from Wells Fargo offers up rewards; however, it does things a bit differently. You can choose between points or cash back rewards. If you choose points, you’ll collect one point per dollar spent on net purchases, and once you spend at least $1,000 in a month, you’ll receive 1,000 bonus points. If you choose cash back, you’ll snag an unlimited 1.5% back on net purchases.
Note that this card does cost $25 per year, and a security deposit is required. The credit line available will be based on said security deposit — you can put in between $500 and $25,000.
Business Line Of Credit For Bad Credit: FAQs
Having a low credit score can make qualifying for a business loan difficult but not impossible. Lines of credit and credit cards can help even borrowers with low scores receive the money they need to build their businesses. By applying for the right line of credit and using it responsibly, you will not only keep your business operating smoothly but can also build your credit in the meantime to qualify for more financing options in the future.