By Benjamin Pimentel
If you need to borrow money to buy a house or a car, a FICO score of 500 probably spells bad news. But if you need a small-business loan, a suboptimal personal credit score isn't necessarily a deal-breaker.
Bad-credit business loans are no longer that tough to get. Although your FICO score can adversely affect your interest rates and payments, alternative lenders look at a wide variety of factors when determining whether to do business with you.
Here are three tips to shore up your chances to score financing even with poor personal credit:
1. Strengthen your business finances and operations
"We care about the business, so we want to make sure we understand your business much more than we understand what your credit score is," says Molly Otter, chief investment officer at Lighter Capital. "We don't really think of personal credit. We're primarily focused on the business."
If you apply for a small-business loan at Lighter Capital, which focuses on loans to tech companies, you'll be asked to submit financial and business records. If you're using a cloud-based service for managing finances or customer relations, such as those offered by QuickBooks or Salesforce, Lighter Capital might mine the data in those accounts.
Your financial history, including how long you've been in business and whether your revenue flow is consistent, is important, says John Swanciger, CEO of Manta, an online networking platform for small-business owners.
"Two years is often the sweet spot" in terms of the age of your business, he says. And predictable revenue flow makes a difference, even if the company is not growing.
After considering these and other factors, Swanciger says, "there are many lenders that are stepping in" even if a business owner has a poor FICO score.
In fact, some lenders see using FICO scores as potentially bad for business.
"Using FICO can eliminate a lot of owners who might otherwise qualify," David Gilbert, CEO of National Funding, told NerdWallet in April. "The way owners handle their personal credit can be far different from how they handle business credit."
2. Bolster your social media presence
Lenders are also turning to "public and semi-public data," such as LinkedIn and Facebook profiles, to learn more about you and your business, Manta's Swanciger says.
"They get a reputational component," he says, "which heavily influences how much and if they are willing to lend to you."
Lighter Capital also uses social media to evaluate a borrower. If you're interested in a loan from this lender, you'll have to provide access to your LinkedIn profile.
But what about that FICO number? "We don't have a credit score that knocks you out of getting a loan from us," Otter says.
3. Take steps to clean up your credit
Nonprofit small-business lender Opportunity Fund considers a range of data, but "the role of the credit score doesn't go away," says Opportunity Fund marketing and communications director Caitlin McShane.
Opportunity Fund uses the score to "get a sense of your other debt obligations," she says.
Credit scores really come into play when determining the particulars of a loan. A low credit score generally means you'll have higher interest rates and larger payments, says Karen Massey, a banking analyst with International Data Corporation, a market research, analysis and advisory firm.
Patricia Greene, a professor of entrepreneurship at Babson College, confirms this. Small-business owners "going to these alternative sources, if they have more risk in their books, are going to have to pay more for the money," she says.
That's why it still pays to take steps, even small ones, to improve your credit score -- including renegotiating debt and sticking to a payment plan. It's also smart to avoid taking on additional debt.
Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: bpimentel@nerdwallet.com. Twitter: @benpimentel
To get more information about funding options and compare them for your small business, visit NerdWallet's small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet's Ask an Advisor page.