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How to Get a Working Capital Business Loan with Bad Credit

Written by Banks Editorial Team

Updated May 23, 2023​

4 min. read​

Bad credit can limit your funding options when you need a small business loan. A working capital business loan might provide you with the funds you need, and it may be an option for you even if you have bad credit if you approach the right lenders.

When you run or own a small business, cash flow is always a consideration. You might need to get a small business loan to get raw materials or make necessary payments. If you struggle with bad credit, a working capital business loan may offer you access to the funds you need now. This isn’t a traditional loan, so you need the details.

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What is a Working Capital Loan?

A working capital loan is a loan product specifically designed to help your small business meet everyday expenses, such as payroll or rent. These are generally short-term loans designed to help you manage your cash flow problems.

How Are Working Capital Loans Used?

Working capital loans are used to cover your everyday expenses. You would use this loan to shore up any shortfalls in your cash flow and need a cash advance. It’s a great option for companies that deal with seasonal sales.

Things To Consider Before Taking A Working Capital Loan

Before you sign up for a working capital loan, you need to consider your options carefully and understand what you can use the fund for and what you can’t. Here are some things to consider before pursuing a working capital loan:

What You Need to Qualify

Each lender and loan type has certain criteria that you need to meet in order to qualify for the loan. You may need to meet a certain amount in daily sales, have a credit score above a certain threshold, and have been in business for a specific length of time.

What You Can Use A Working Capital Loan For

Working capital loans are used to meet your most common business expenses, such as utilities, payroll, insurance, and rent or mortgage payments. You can only use these funds for expenses and not for growth or buying new equipment.

When You Should Consider Taking a Working Capital Loan

When you need money to cover everyday expenses, and you don’t think you’ll qualify for a traditional loan or a line of credit, you should consider taking a working capital loan.

What is Bad Credit?

Bad credit is a credit score that falls below 600 or 540. If you’ve missed payments or have accounts in collection, you probably have bad credit. You aren’t a good risk for a lender.

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How Does Bad Credit Affect Ability to Get a Loan?

When you have bad credit, it’s a high risk for a lender to loan you money. Your credit history shows that you might not pay the funds back on time or ever.

Can You Get a Business Loan Without a Credit Check?

Yes, there are some business loans that you can get without a credit check. However, you might need to provide collateral or pay an extremely high interest rate to get a loan, and even then, your options might be limited.

How To Get a Working Capital Loan with Bad Credit

When you have bad credit and need a working capital loan, you need to start by looking at non-traditional lenders. Here are some other things to consider:

Know How Much You Can Borrow

Before you apply for a working capital loan, you need to know how much you need and how much you can comfortably afford to repay. You don’t want to default or make late payments on a new loan, so looking at the repayment terms of the loan before you sign off is important.

Check Your Credit Reports

You need to check both your personal and business credit reports. They will show you where you stand credit-wise and offer the chance to explain any black marks. Having poor credit or a low credit score does not mean you can’t get a loan as there are still bad credit business loans. However, you may need to look for alternative lenders rather than a traditional bank loan, as they may have eligibility requirements that don’t include a minimum credit score. Instead of minimum credit score requirements, these alternative or online lenders may look at other things like current assets, future sales unpaid invoices, or business debt obligations to determine if you can get a business loan. This means, you will not have to rely on your personal credit score, or business credit score to secure funding.

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Shop Around

If you have bad credit, you might not have many choices, but you need to explore all of them. Depending on your needs, you want to look at different options to fund your business project, like a business credit card, a business line of credit, invoice factoring, or an SBA loan. The type of lender will also matter since you might be able to get more funds or better terms from one lender than another, especially if you don’t have a good credit score.

Understand The Loan Terms

Before you sign the loan contract, you need to understand the loan terms. Review them carefully and ask questions about anything you don’t understand. You need to know what you’re signing and that you can meet the terms.

Benefits of Working Capital Loans

Before you choose a loan product, you need to know that there are benefits for your company. Here are some benefits that make a working capital loan a good option:

Fast and Easy to Secure

If you need cash fast, then a working capital loan might be your best option. These loans are known for funding quickly and requiring fewer hurdles to jump, such as high credit scores.

Address Immediate Financial Needs

When you’re having cash flow problems in your small business, you need money now. A working capital business loan can provide you with immediate financial relief. These loans can fund in a couple of days.

Funds in a Lump Sum Received Once

With a working capital business loan, you receive your funds in a single lump sum. You can use your funds immediately and all at once if that’s what you need to do.

Not Giving Up Equity and Control of Your Business

It’s never a good idea to hand over control of your small business to a lender or sign over equity, and a working capital business loan doesn’t require you to do these things.

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Working Capital Loan Payments Can Match Business Cash Flow

If you have one great day and the next one isn’t so great, your working capital loan payments can match your cash flow. This makes it easier for you to make your payments and pay off the loan without suffering further financial hardship.

Drawbacks of Working Capital Loans

Of course, a working capital loan does have disadvantages. You need to know the downside to make an informed decision and do what is best for your company.

Higher Interest Rates

Most working capital loans are short-term loans, and they’re made to businesses with lower credit scores. This can increase the interest rate that you pay on the loan. With a higher interest rate, these loans are riskier for the lender.

May Require Your Personal Credit History

You might need to provide your personal credit history to secure a working capital loan. This is especially true if your business is new and hasn’t established credit or if there are a variety of negative marks on your business credit history.

Not for Funding Large Scale Business Initiatives

These loans are meant to be used for everyday expenses. You can’t and shouldn’t use this type of loan to buy new equipment, open a new location, or launch a new product line.

You can secure a working capital business loan to help you overcome cash flow issues. These loans are designed to help you pay your everyday expenses. You need to review the pertinent information and make an informed decision.

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