5 Best Small Business Loan Options for those With Bad Credit

Eighty-two percent of small businesses fail due to cash flow problems. And 50% fail in less than five years of operation.

These numbers are only the tip of the iceberg. They are many challenges that face startups and small businesses, but the most significant is obtaining funding. Banks avoid financing small and new businesses due to a lack of collateral and cash flow. It gets worse if you have bad credit.

But the good news is that many non-bank institutions are willing to fund small businesses and startups that do not qualify for bank loans. These are known as alternative lenders.

Their loan approval does not depend on the credit score or availability of collateral. Alternative lenders collect data using artificial intelligence and use this data to determine your capability to pay back. The information also helps in determining the interest rate and amount approved.

How to Find Small Business Loans When You Have Bad Credit

You can find most alternative lenders online. They offer both short-term and long-term loans, as well as invoice financing and various other types of funding.   

Here are the top five alternative lenders in the market.

1) Peer to Peer Lending


Also known as P2P lending, crowdlending, or social lending, this is an online platform that connects borrowers and lenders. 

Usually, banks use deposits to lend to borrowers at an interest rate. A small part of the interest earned goes to the deposit holders as interest earned on their savings, while the rest is the bank’s earnings.

P2P lending cuts out the middle man – banks. It allows investors to lend to small businesses and startups without placing limitations based on the borrower’s credit score or collateral.    

So how does it work?

The P2P lending website enables the transaction by setting the interest rates and terms of engagement. The rates will depend on the creditworthiness of the borrower. Borrowers with poor creditworthiness are risky borrowers, and so they get a higher rate.

The lender opens an account and deposits the amount they wish to invest. The borrower creates a financial profile.

The borrower then reviews the various offers from interested lenders and accepts one. They could also break down their request into parts and accept multiple offers.

The applicant then receives the money through the platform and makes repayments there as well. Some transactions are automated while others allow for negotiations. 

2) Merchant Cash Advances (MCA)

An MCA is the use of your business’s card terminal to secure lending from investors. 

Like you have probably noticed, your assets, credit score, or size of the business does not play a part in determining if you get your loan approved. It is an excellent alternative for businesses that make a sizeable volume of card transactions in a month. 

Here is how it works.

The borrower receives a loan from the financing company, on the agreement that a percentage of your future daily debit or credit card sales will go to the lending company. And of course, the amount repaid will include a fee. It provides short payment terms, commonly less than two years.

The fact that the repayment amount depends on the number of sales makes it a great funding solution for small businesses and startups. Unlike other loans, on those days when the sales are low, you will not have to make repayments from personal finances.

Daily repayments over a short period are also less strenuous as opposed to large monthly repayments over a long period. 

3) Invoice Financing


Invoice financing is another excellent alternative lending option for a small or new business. 

Unpaid dues from customers can paralyze a new business. It could cause poor cash flow, delays in salary payments, and late payments to suppliers. 

Invoice financing offers a solution to this problem. It allows businesses to borrow against uncollected cash from customers. You can use the funds to reinvest in operations without delay, a move that could lead to the growth of your business. 

The lender will usually purchase the unpaid invoices and provide you with a portion of the amount owed. They will hold on to the rest of the amount until the debtor makes the invoice payment in full. The amount approved and interest charged will depend on the creditworthiness of your customers and their timeliness.

4) Short term loans

Small short-term loans, also known as microloans, are an ideal option for small businesses and startups. They are typically less than $50,000. Microloans can sufficiently improve the business’s working capital or purchase more inventory.

Most institutions that offer microloans operate intending to help small businesses stabilize. They do not focus much on the business credit score. They will carry out a background check, asses your repayment history, and use this information to decide on the interest rate.  

Institutions that offer microloans include nonprofit community-based organizations, credit unions, and micro finances. 

Some pay special attention to female and minority business owners.

5)  Equity-based Crowdfunding

If you are seeking to raise capital with a poor credit score, equity crowdfunding could solve your problem.

Equity crowdfunding is the sale of securities to a crowd, usually interested investors, to raise capital. Your business will need to be a private company that is not listed. It uses an online funding portal website, allowing you to reach out to a bigger crowd.

The security can be in the form of equity in the company, a convertible note, debt, or revenue share. 

The fact that the lender earnings on the investment depend on the profitability of your business will give provide you with committed brand ambassadors, determined to see your business succeed.  They are sure to market your products in their network, and this will facilitate the growth of your business.


In a nutshell, financing a startup or raising funds for a small business is not easy, especially with a poor credit score. You can always seek funds from friends and family, but it is unlikely to be sufficient. 

Investors are filling this gap by offering excellent alternatives to bank institutions. Peer to peer lending, merchant cash advances, invoice financing, microloans, and equity crowdfunding are among the best options. 

They are convenient because they utilize an online platform. With no collateral involved, disbursement is fast. It’s up to you to choose the option that best meets your needs.

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