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By Alison K Plaut
Published on 4 Sep 2023 6 min read
If you have a great business idea or passion for entrepreneurship, starting a business can lead to a fulfilling career and financial freedom. But starting a business is difficult, and securing funding can be an additional hurdle if you’ve got bad credit. But don’t be discouraged! With the right strategy and persistence, many options exist for startup business loans, grants, and financing. Read this article for the best tips for starting a business with bad credit.
Can You Start a Business if You Have Bad Credit?
Yes, you can start a business if you have bad credit. Bad credit is generally defined as a credit score of 580 or less on the typical FICO scale of 300 to 850. If you have a history of late payments, accounts in default, or high debt, your credit score or credit history might be considered poor.
Factors contributing to bad credit include a high debt-to-income ratio, late payments, and a high percentage of debt. Other factors that might contribute to a bad credit history include:
- Failing to stick to the credit agreement
- Declaring bankruptcy
- Being the subject of a County Court Judgement (CCJ)
- Only paying the minimum amount due each month
- Identity theft
- Having no credit history
The implications of bad credit when starting a business are far-reaching. In addition to making it difficult to secure a business or personal loan for startups, you could face high-interest rates or problems with inventory, space, and utilities. However, even with bad credit, resources are available, including the seven listed below.
7 Ways to Start a Business Despite Bad Credit
When you’ve set up an LLC or corporation and got the basics, like opening a business bank account instead of using a personal account and designated beneficial ownership, you’re ready to secure business financing. If you need to secure funding despite bad credit, here are seven ideas to get started:
1. Grants
Grants offer ways for small businesses to secure funding even with bad credit. You can consider USDA grants, SBA grants, or community grants.
2. Social Lending Sites
Social lending or crowdfunding sites have launched many popular businesses, including million-dollar companies like Oculus VR, Allbirds, Peloton, and Brooklinen. As of 2022, the US had 1,468 crowdfunding companies, with one of the largest, Kickstarter, reporting a 39.37% success rate. Other major social lending sites include Prosper, Avant, Happy Money, and Upstart.
3. Microlenders
Microlenders are lenders or organizations that, as the name implies, offer small amounts of money, usually a maximum of $5,000 to $50,000, to entrepreneurs who can’t secure capital through traditional financial institutions. Microloans can make it possible to start a business even with bad credit.
4. Community Development Financial Institutions
A community development financial institution or CDFI is an institution that offers credit and financial services to underserved markets and populations. CDFIs are mostly centered in the US and are designed to help those whose background or circ*mstances have made it difficult to build a good credit history. They can work to help you secure a line of credit or loan to start your business.
5. Purchase Order Financing
If you’ve already started a business or need to purchase merchandise and need extra cash, purchase order financing can help improve cash flow. With purchase order financing, you’ll receive a cash advance on the value of purchase orders.
In this case, the lender will pay your third-party supplier up to 100% of the costs required to produce and deliver the agreed-upon goods to your customers. This is a way for companies to fund product investments with initial orders without securing funding or startup capital.
6. Equipment Lenders
If you need to purchase equipment for your company, equipment lenders such as banks, online lenders, and specialized equipment financing companies can help with loans to buy costly equipment or machinery for your business. If you’re unable to secure a traditional loan, equipment lenders might offer a solution to get up and running.
7. Merchant Financing Companies
Merchant financing service companies have less stringent criteria than traditional lenders. Instead, they look at the business portfolio and sales numbers to determine the reliability of paying back their advanced funds. Terms, payback time, interest, and amounts vary, usually by the company’s daily transactions.
Because credit score is less important in these types of loans than transactions, you may be easily able to secure funding if you have poor or no credit but have a strong business.
How to Apply for Business Loans with Bad Credit?
When you apply for a business loan with low or no credit history, you’ll want to build a strong portfolio to improve your approval chances. Below are some key points to consider:
1. Research and Compare Lenders and Financing Options
Some lenders are less stringent with requirements, and many offer better interest rates with collateral. Research and compare lenders through online listings to find the most favorable terms. Remember, you only need one approval with fair terms to start your business!
2. Build a Solid Business Plan
A solid business plan includes a vision and mission, details about the product or service, company leadership information, location, market research, competitor analysis, and cash flow projections. You should also include financial information and growth plans to help secure financing.
3. Gather All Necessary Documents
Necessary documents may vary by lender but usually include:
- Loan application
- Business plan
- Government-issued ID and tax information for owners or applicants
- Resumes of leadership
- Business credit report if available
- Income tax returns for owners or the business
- Financial statements or projections
- Collateral information
4. Submit Your Application
Once you have everything prepared, many lenders will allow you to apply online. Alternatively, you can apply personally at the bank or local lender.
5. Improve Your Credit Score
Remember that a bad credit score is a temporary state and not a life sentence. Even in six to 12 months of working to improve your credit score, you could see significant improvements.
Tips to improve your credit score include:
- Pay all bills and credit cards on time each month.
- Pay off debt or aim to keep total available credit utilization below 30% of available credit.
- Consider becoming an authorized user on the card of someone with a good credit score.
- Get a secured credit card to build a positive credit history.
- Consider a credit-builder loan to build credit.
- You can use a rent reporting company to get credit for past on-time utility or rent payments.
To start, check your credit report at annualcreditreport.com. Be sure to check the accuracy of all information and dispute any incorrect information with the relevant credit bureau.
Securing Funding with a Low Credit Score
As the list above demonstrates, entrepreneurs with low or no credit have great opportunities to secure funding. From micro-loans and crowdfunding to government grants, you’ve got options!
While setting up your new business, you want to focus on building a strong business plan and securing funding. Doola business formation and compliance services can help with the rest. Doola can help form your company, get your EIN, and open a business bank account. Get doola to form an LLC in all 50 states and ensure compliance here.
FAQs
Can I use a co-signer to help me secure a loan for my business if I have bad credit?
Yes, a co-signer might be able to help you secure a business loan if you have bad credit. You can speak with individual lenders about opportunities.
What steps can I take to minimize the impact of my bad credit when seeking financing?
To minimize the impact of bad credit when seeking financing, you can offer collateral and a strong business plan, and consider getting a co-signer. You can also look for alternative financing options or work to improve your credit score before applying for the loan.
Can I use alternative forms of collateral to secure a loan with bad credit?
Whether you can use alternative forms of collateral to secure a loan with bad credit will depend on individual lenders’ policies. Keep in mind that some lenders charge high interest rates or fees for secured loans if you have bad credit.
Should I consider taking on a business partner to help with financing if I have bad credit?
Yes, you can consider taking on a business partner to help with financing if you have bad credit. But, you should only add a business partner for reasons that support the business. You can secure financing through alternative funding options mentioned above without getting a business partner.
Is it possible to negotiate better loan terms or a lower interest rate despite having bad credit?
Yes, you can always try to negotiate better loan terms or interest rates, even if you have bad credit. Shop around and compare the best available rates from lenders before settling on specific terms.
