Can I Get a Business Debt Consolidation Loan With Bad Credit?

As a business owner, you may find yourself needing to consolidate debt at some point. Debt consolidation can help simplify your finances by rolling multiple debts into one new loan with one monthly payment. But what if you have bad credit? Is it still possible to get a business debt consolidation loan if your credit score is low?

The short answer is yes, you can get a consolidation loan for your business even with bad credit. However, it may be more challenging and require more effort on your part. Here is what you need to know about getting a business debt consolidation loan when you have bad credit.

Check Your Credit Score

The first step is to check your personal and business credit scores. This gives you an idea of what interest rates and loan terms you may qualify for.

You can get free credit reports from AnnualCreditReport.com. This won’t give you your scores, but will show your credit history. To get your scores, you may have to pay a small fee. For personal credit, check your FICO score. For business credit, check your business credit score through Experian, Equifax or Dun & Bradstreet.

If your credit scores are low (generally below 600), you will likely pay higher interest rates. But don’t let that stop you from applying. There are still financing options available.

Improve Your Credit if Possible

If your credit is poor, take steps to improve it before applying for a loan. This can help you get better loan terms. Here are some tips:

• Pay all bills on time going forward. Payment history is a major factor in credit scores.
• Pay down balances on credit cards and other revolving debt. High balances relative to limits hurts scores.
• Dispute any errors on your credit reports. Mistakes can drag down your scores.
• Become an authorized user on someone else’s account. This can add positive history.
• Avoid new credit applications until after you apply for the consolidation loan. Too many recent inquiries looks risky.

Allowing time for your credit to improve before applying for a consolidation loan can make a big difference in your interest rate. Even a small score increase can help.

Research Lenders Willing to Work With Bad Credit

While traditional banks shy away from bad credit borrowers, there are alternative online lenders and fintech companies that specialize in bad credit business loans.

Spend time researching lenders that offer consolidation loans to those with poor credit. Look for reviews from other borrowers about their experiences. Here are some lenders to consider:

• Kabbage – Offers lines of credit up to $250,000 for bad credit.
• OnDeck – Provides term loans up to $500,000 for newer businesses.
• CAN Capital – Funds up to $150,000 with flexible repayment options.
• LendingClub – An online marketplace with loans issued by banks.
• PayPal Working Capital – Advances based on PayPal sales history.

The more lenders you apply with, the better your chances of getting approved. Cast a wide net and compare offers.

Consider Secured Loan Options

If your credit score is very low, another option is a secured loan. This requires collateral – usually a cash deposit or asset – that the lender can seize if you default.

Because secured loans are lower risk for lenders, they are more attainable for those with bad credit. Options include:

• 401(k) business financing – Borrow against your 401(k) balance.
• Equipment financing – Use owned equipment as collateral.
• Business cash advance – Receive an advance on future credit card sales.
• MCA (merchant cash advance) – Similar to a business cash advance.
• Business line of credit – Revolving credit secured by assets.

The downside is if you default, you risk losing valuable assets. But for some business owners, this is the only financing within reach.

Apply with a Cosigner or Guarantor

Another possibility is to apply for the consolidation loan with a cosigner who has good credit. Their positive credit record can offset your bad credit.

A cosigner shares equal responsibility for repaying the debt. If you default, it also damages their credit.

A guarantor also agrees to be responsible for the loan if you can’t pay. But their credit is not impacted by your actions.

Asking a trusted friend or relative to co-sign or guarantee the loan substantially improves the chances of approval. Just be sure they recognize the risk they are taking on.

Use Collateral or Business Assets

Putting up collateral or leveraging business assets when applying for a consolidation loan also improves the chances of getting approved with bad credit. Potential assets that may help secure a loan include:

• Accounts receivable – Money owed to your business by customers
• Business equipment – Machinery, vehicles, furniture, etc.
• Real estate – Commercial property or land owned by your business
• Inventory – Materials, supplies, finished products for sale
• Cash savings – Business savings account or CD

The more valuable collateral you can put up, the better. This gives the lender recourse if you fail to repay the loan as agreed.

Prepare a Convincing Business Plan

To get approved for a sizable consolidation loan, you will need to present a compelling business plan and loan proposal, even with bad credit. The business plan should include:

• Executive summary – Overview of business operations and consolidation need.
• Financial history and projections – Past income statements and balance sheets, plus 5-year profit/loss forecasts.
• Debt consolidation specifics – Breakdown of debts to consolidate, proposed repayment plan.
• Collateral details – Assets to secure the loan, with valuations.
• Management team – Background on owners and key employees.
• Competitor analysis – Research on competitors in your industry.
• Marketing strategy – How you will promote business growth.

A solid business plan helps assure lenders that you are committed to repayment and that consolidating debt will improve your cash flow.

Compare Loan Terms and Fees

Once you start receiving loan offers, compare terms carefully. Key factors to consider include:

• Interest rate – The lower the better. Rates are higher for poor credit borrowers.
• Origination fee – Upfront fee charged by the lender, often 1-5% of loan amount.
• Repayment term – Typically 2-5 years for consolidation loans. Longer terms have lower monthly payments.
• Prepayment penalties – Some lenders charge fees if you pay off early.
• Collateral requirements – What assets are required to secure the loan?

Run the numbers to see the true cost of each loan option. Avoid agreements with excessive fees and prepayment penalties.

Pick the Most Affordable Offer

Ideally you want the lowest cost consolidation loan that fits your budget. Crunch the numbers to facture in the interest rate, fees, term length, and monthly payments.

Be realistic about what you can afford. It’s better to leave some wiggle room in your budget as opposed to getting overextended with debt payments.

If you receive multiple offers, don’t hesitate to negotiate with lenders for better terms. Competition for your business may motivate them to reduce rates or fees.

Read All Terms Carefully Before Signing

Before signing the loan agreement, read all terms very closely. Get clarification from the lender on any points you find confusing. Don’t gloss over the fine print.

Some key areas to review in detail:

• Interest rate and whether it is fixed or variable
• All origination fees and when they are due
• Length of repayment term
• Prepayment policy and any penalties
• Collateral required to secure the loan
• Consequences of late or non-payment

Never take a lender’s word for it. Verify everything yourself in the loan documentation before signing. Doing your due diligence protects against misunderstandings down the road.

Have an Exit Strategy

Ideally your improved financial situation after consolidating debt allows you to pay off the loan on schedule without issue. But have a “Plan B” in case you struggle to make payments.

Be proactive about communicating with the lender early if you anticipate problems. They may allow adjustments like interest-only payments for a few months.

Also be aware of the consequences of default, such as:

• Huge hit to your credit scores
• Entire loan balance plus fees become due immediately
• Lender can seize collateral like equipment or property
• Potential lawsuits, collections and wage garnishment

Knowing what happens if the worst comes to pass gives you time to prepare other options, like selling assets. The better your exit strategy, the less risk in taking on the debt consolidation loan.

The Bottom Line

Getting approved for a business debt consolidation loan with bad credit takes some work. But with a diligent approach, it is doable.

The keys are researching lender options, taking steps to improve your credit, securing the loan with collateral, and putting together a solid business plan.

If you stay organized and proactive, a business consolidation loan can still be within reach even with poor credit. Carefully consolidating multiple debts can put your company in a better financial position.