Home Finance How to Get a Business Line of Credit with Bad Credit?

How to Get a Business Line of Credit with Bad Credit?

Having a co-signer can enhance the creditworthiness of your business and reassure lenders to consider higher credit limit approval for your company. 

Business line of credit with bad credit

Do you have a bad credit record and need to get a business line of credit? With different financing options for businesses, small business owners choose business lines of credit due to easy access, quick loan approval, and flexible repayment terms.  

According to reports from the Federal Reserve System, 43 percent of all business loan applications opt for lines of credit, making it the most popular type of financing option for business owners in the U.S. But how do companies get a business line of credit with a bad credit score?

What is a Business Line of Credit?

A business line of credit is a type of business financing that is renewable, revolving, and efficient for small business owners to meet their short-term capital needs. This includes day-to-day running to maintain inventory, provide office supplies, meet business emergencies, and cover other business expenses.  

It is a type of business loan where the borrower can withdraw funds gradually up to a certain amount (credit limit), repaying only with interest on the amount withdrawn at a time. As repayments are made, the line of credit is renewed to the original amount, and withdrawals can continue up to several months or years depending on the lender.

The withdrawal period for this type of loan can last up to 10 years–a withdrawal period where the borrower has ongoing access to the financing. Lenders consider borrowers’ credit scores and other financial records like bank statements, income statements, and balance sheets to define how much credit limit they can release. You can shop for a line of credit from commercial banks, credit unions, Fintech, online lenders, and independent lenders.

Is It Possible to Get Business Lines of Credit with Bad Credit?

A business line of credit is possible for businesses with bad credit if they can meet the substitutionary measures for having insufficient credit scores or none at all. If you must qualify for a loan, your business creditworthiness is crucial. Without a good one, you cannot attract lenders with good personal credit scores.  

A good personal credit score is an alternative to what lenders will analyze to determine if your loan can be approved. Lenders are after your business’s ability to repay the loan. More than ever, they prefer fair to excellent credit but with a good personal credit score, your chances will improve for having a good personal credit score. 

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Lenders financing bad credits is not unlikely, instead, it only reduces the borrower’s loan potential. For being a high-risk borrower, business owners may get their loan approved with: 

  • Fewer Options: Business owners with bad credit, for instance, will unlikely get an unsecured business line of credit. 
  • Short Repayment Period: The withdrawal period will be shortened to reduce the risk of repayment.  
  • High-Interest Rates: Interest fees and other charges will be expensive 
  • Lower Credit Amount: Be prepared to get a lower amount to reduce the lender’s risk for repayment.

Factors to Consider for a Line of Credit with Bad Credit

When applying for a line of credit with bad credit, it is not uncommon for lenders to consider these four critical factors: 

1. Business Annual Revenue

A business’s total amount of earnings in a year is crucial to get a line of credit with bad credit. Lenders scrutinize it to gauge the financial health of the business. If a business demonstrates consistent and growing annual revenue, it can positively influence the lender’s perception. A robust revenue stream indicates a stronger capacity to generate income, which is reassuring for lenders. This compensates for a less-than-perfect credit history, showcasing your business’s ability to cover repayment.

2. Cash Flow

A positive cash flow indicates that your business has enough liquid assets to cover operational expenses and debt obligations. Lenders therefore assess the cash flow of a business to understand how effectively it manages its day-to-day finances. Even with bad credit, if your business can showcase a steady and positive cash flow, lenders may view it as a sign of financial stability, improving the chances of securing a line of credit.

3. Debt-to-Income Ratio

If your business has a reasonable debt-to-income ratio it can instill confidence in lenders to approve a line of credit. A lower ratio signifies the business’ financial responsibility to manage its debt effectively, increasing the likelihood of obtaining a line of credit.

4. Collateral or Security

Considering a high-risk borrower often involves requesting a business or personal asset to act as a security for the loan. Having valuable collateral can enhance your eligibility for a business line of credit as it mitigates the lender’s risk. It stands as a tangible asset to recover losses in the event of non-repayment. 

Best Ways to Apply for Business Lines of Credit with Bad Credit 

1. Assess Your Credit Situation

Know where you stand before shopping for a line of credit. Begin by obtaining a copy of your business and personal credit reports. Understanding the specific factors contributing to your bad credit can help you make amends to build your credit score. As you go through the reports, identify any errors that may exist. Correcting such inaccuracies can help improve your creditworthiness.

2. Build a Strong Business Plan

Develop a comprehensive business plan that outlines your business goals, revenue projections, and how you plan to use the line of credit. A well-thought-out business plan showcases your commitment and strategy for success in the eyes of lenders. 

3. Explore Online or Alternative Lenders

Traditional banks often have strict eligibility requirements, so you may need to explore alternative lenders, such as online lenders, credit unions, and community development financial institutions (CDFIs). These institutions may have more flexible criteria for extending credit to businesses with bad credit.

4. Separate Business and Personal Finances

A separate business bank account is necessary when applying for a business line of credit. It shows your business is organized with its own distinct financial identity. It also helps lenders have clarity with your financial records when analyzing your bank statement. Ensure you separate your personal and business finances to enhance the credibility of your business.

5. Build Positive Relationships with Lenders

Bad credits can endeavor to establish and nurture positive relationships with lenders with regular communication, and transparency about the business’s financial health. This can create a positive rapport and lead to more favorable lending terms with established vendors who report payments to business credit bureaus.

6. Personal Guarantor or Co-Signer

A personal guarantor or co-signer with better credit improves your application approval for bad credit. A co-signer is an individual who signs an agreement to take responsibility for the debt if your business is unable to repay. A co-signer must have the creditworthiness to stand for an application. Having a co-signer can enhance the creditworthiness of your business and reassure lenders to consider higher credit limit approval for your company. 

7. Apply for Smaller Amounts Initially

Start with smaller line-of-credit amounts with lenders. As you successfully manage and repay smaller credit lines, you can improve your business’s credit profile over time, making it easier to access larger credit facilities in the future.

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Business financing can be a major concern for both established and budding entrepreneurs. It may not have to be always challenging but businesses may need funding to implement and complete certain projects or meet unplanned demands.  As much as you can keep your business running on the right track, every other thing seems to be perfect. This is where financing with a line of credit may be crucial. However, with a bad credit history, it becomes challenging to get but not impossible if you can apply the strategies aforementioned.

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Tega Daniel is an SEO content writer for EntrepreneurBusinessBlog.com


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