How to Get a Commercial Loan With Bad Credit?

A commercial loan provides businesses with funds for growth, equipment purchases, real estate investments, or covering operational costs. While a less-than-ideal credit history can present challenges, obtaining a commercial loan with bad credit is not impossible. Understanding specific considerations and alternative financing options can pave the way for securing the necessary capital.

Understanding Commercial Loan Credit Requirements

Lenders evaluate several factors when considering commercial loan applications, extending beyond just a credit score. They assess the overall financial health of a business to determine its ability to repay the loan. This includes analyzing the business’s revenue, cash flow, and its time in operation. The stability of the industry and the business’s existing debt obligations also play a role in the lender’s risk assessment.

A business’s credit history, alongside the owner’s personal credit score, significantly influences lending decisions. A personal credit score below 680 can make it difficult to secure a loan from traditional lenders like banks, with many preferring a score above 700. However, online lenders may work with scores as low as 500 if the business demonstrates strong repayment ability.

Lenders also scrutinize key financial ratios such as the Debt Service Coverage Ratio (DSCR) and the Debt-to-Income (DTI) ratio. The DSCR measures a business’s ability to cover its debt obligations with its net operating income, calculated by dividing net operating income by total annual debt payments. A DSCR of 1.25 or higher is considered favorable, indicating that the business generates $1.25 for every dollar of debt owed. For riskier industries or loan types, lenders might require a DSCR of 1.5 or more.

The DTI ratio compares a business’s total monthly debt payments to its gross monthly income, indicating the proportion of profits used to service existing debt. Lenders prefer a DTI ratio below 50% for loan consideration, with an ideal target of 36% or less for better approval chances. A lower DTI suggests the business has ample income relative to its debt, making it a more attractive borrower.

Types of Commercial Loans for Businesses with Credit Challenges

Businesses facing credit challenges often find more accessible financing options beyond traditional bank loans. These alternatives place less emphasis on credit scores and more on other factors like collateral or consistent cash flow. Understanding these different loan types can help businesses secure necessary funding.

Asset-backed loans are a common solution, as they use specific assets as collateral, reducing the lender’s risk. Equipment financing falls into this category, where the equipment being purchased directly secures the loan. Accounts receivable financing, also known as invoice factoring, is another asset-backed option where a business sells its unpaid invoices to a third party at a discount for immediate cash. The lender’s primary concern becomes the creditworthiness of the customers who owe the money, rather than the borrowing business’s credit score.

Merchant Cash Advances (MCAs) provide a lump sum in exchange for a percentage of future daily or weekly credit and debit card sales. This option is accessible even with low credit scores, sometimes as low as 500, because repayment is tied directly to the business’s sales volume. While accessible, MCAs come with higher fees compared to traditional loans due to the increased risk for the lender.

Revenue-based financing offers funds based on a business’s predictable future revenue streams. Lenders evaluate the company’s historical income and projected earnings instead of credit scores. This type of financing can be flexible, with repayment structures often adjusting to the business’s monthly revenue. Hard money loans are short-term loans from private investors or specialized institutions, secured by real estate. They are used for property acquisition or development and are characterized by quick funding and higher interest rates, suitable for businesses needing rapid capital and planning a swift repayment.

Secured lines of credit provide flexible access to funds up to a certain limit, with business assets serving as collateral. Businesses can draw funds as needed and repay them, with the credit becoming available again. While traditional banks require strong credit for lines of credit, some alternative lenders may offer secured options for businesses with credit challenges, focusing on the value of the collateral. These facilities are useful for managing working capital fluctuations or unforeseen expenses.

Key Information for a Commercial Loan Application

Preparing a comprehensive set of documents is essential for any commercial loan application, especially when credit is a concern. Lenders require specific financial and operational information to assess risk and determine repayment capacity. Gathering these documents beforehand streamlines the application process.

Financial statements are central to a lender’s evaluation of a business’s health. These include the profit and loss (P&L) statement, balance sheet, and cash flow statement. The P&L statement, also known as an income statement, summarizes revenues, expenses, and net income over a period, demonstrating profitability trends. The balance sheet provides a snapshot of assets, liabilities, and equity at a specific point in time, showing the company’s financial position. The cash flow statement tracks the movement of cash, indicating how cash is generated and used within the business. Lenders request two to three years of these statements.

Tax returns, both business and personal, are crucial for verifying financial information. Lenders ask for the past two to three years of federal tax filings, such as IRS Form 1120 for corporations, Form 1065 for partnerships, or Schedule C of Form 1040 for sole proprietorships. Business bank statements for the most recent 6 to 12 months provide insight into daily financial activity and cash flow patterns. Personal financial statements of the business owner may also be required, detailing individual assets, liabilities, and income.

A detailed business plan outlines the company’s mission, market position, growth potential, and how the loan will be utilized. This document helps lenders understand the business’s strategy and repayment plan. Legal documents, such as articles of incorporation or organization, partnership agreements, and business licenses, establish the entity’s structure and legitimacy. For incorporated entities, lenders also require ownership details and beneficial ownership information.

Information regarding available collateral is important for secured loans. This includes documentation for:

• Real estate deeds
• Vehicle titles
• Equipment appraisals
• Inventory lists

A personal guarantee, where the business owner pledges personal assets to secure the loan, is required, particularly for newer or less established businesses.

Submitting Your Commercial Loan Application

Once all necessary information and documentation have been prepared, the next step involves submitting the commercial loan application. Businesses can approach lenders through several channels, including direct application to banks or credit unions, utilizing online lending platforms, or working with a commercial loan broker.

Many lenders offer online portals for submitting applications, which can expedite the initial review process. Some institutions may still accept physical mail or require in-person submission for certain loan types or complex applications. After submission, businesses should expect a confirmation from the lender. Lenders then review submitted documents for completeness and basic eligibility.

During this post-submission phase, lenders often have follow-up questions or request additional clarification or documentation. These may involve inquiries about financial figures, business operations, or collateral details. Responding promptly and thoroughly to these requests is important to maintain momentum in the approval process. The underwriting team then conducts a deeper analysis, evaluating repayment ability, credit history, and the business’s financial strength.