Starting a Business With Bad Credit
You have a great business idea and you have everything planned out.
There’s one problem, unfortunately: money. You dug deep in your savings account, and looked for potential investors to no avail. On top of all that, you have a bad credit rating.
What now? Your traditional business requires capital for the store, the equipment, and the materials. While the main business vehicle (money) may not be in your favor right now, you should not give up.
Some estimates show that only 10 percent of new small businesses are approved for loans from banks and other commercial lenders. Yes, some of those owners have a better credit rating than yours.
Thus, more than your bad credit, the real problem here is the unbelievably strict requirements. Bad credit does not preemptively indicate your success or failure in business.
What can you do to get for your small business more attractive to creditors?
Improve your credit rating
Pretty obvious, right? Unfortunately, many people forget this. You, and in extension your business, becomes more attractive to lenders when you take small steps to better your financial situation.
You need to consider the risk appetite of traditional banks. Would you lend money to someone who usually cannot pay his debts?
Take this as an opportunity to change your spending habits. By exerting effort to improve your bad credit, potential lenders will see how serious you are in starting your small business. In turn, this will increase your chances of getting approved.
Make an attractive business plan
How would do you plan to repay your debt once your loan is approved? This would reflect on your business plan. It should be comprehensive, easy-to-read, and if possible, demonstrates a positive cash flow.
Preparing this requires more than knowing the ins and outs of your small business and doing the math. Aside from its being professional-looking, it should also appeal to the eyes and to the emotions. Make your business plan hard to say no to.
Go into a partnership
If you are open to the idea of sharing your business with someone else, partnering up with someone with good credit rating is a good option. When applying for a loan, banks will look at both your and your partner’s credit history.
Thus, by including a partner in the equation, the chance that you will get approved will shoot up. This, to be clear, is not a motivation to neglect your own credit rating. If both of you have great credits scores, your business may get a loan for lower interest rates.
To make each of your responsibilities clear, have a lawyer draft an agreement where all the legal intricacies of your partnership are indicated.
Where can you get funding for your small business?
Traditional banks and lenders
Now that you have made efforts to tip the scale in your favor, try traditional banks once again. Depending on the type of loan you wish to acquire, they may still offer the best rates in the industry.
However, if you still do not get approved, that is fine. The numbers show that only 25% of the funds you need in the business comes from banks. Therefore, 75 percent of the time, your credit rating does not matter at all.
Nonprofits and Microlenders
Unlike your traditional banks, nonprofits and microlenders do not look at risk in terms of profit. Instead, they look at your experience doing the work involved in your business, your passion in pursuing it, as well as its opportunity for growth.
Even if you get approved for a traditional bank loan, the interest rates will be very high. It is one of the most salient difference of this option. At most, you will only be charged 10% interest rate which is low considering your credit.
Home equity line of credit
Although potentially risky especially for an unrealized small business, putting a part of your home’s assets on credit is a viable option due to low interest rates.
This would suffice for you to start a business, but make sure you do everything to grow your business and to pay back your loan. Else, you will have neither a business nor a home.
If your business revolves around a new product or anything people get excited about, crowd funding is the way to go. Present your idea in a way that would appeal to your audience.
If you do not know how to communicate with people, you can hire a Kickstarter writer who will make sure you will reach people. All you will have to do is set up your account and determine how much you will need.
Here, people value transparency. So it will do you good to show a breakdown of expenses, and currently update them once you receive the fund.
A guarantor is someone, usually a friend or a family member, who wishes to take the burden of loan on your behalf. Thus, to qualify for a loan in the first place, that person has good credit rating.
Your guarantor acts a cosignatory to the loan, but the extent of liability is limited. That limit depends on your agreement as indicated in your contract.
Today, there are a lot of lenders online which advertise themselves as a go-to place for people with bad credit rating. With them, you can enjoy convenience as the application is done mostly online.
However, their interest rates are very high because they do not think you have a choice. They target the “rejected” so consider them a last resort. Chances are, even with high profit margins, what you earn will go directly to loan payments.
Cash may be king for traditional banks, but you have other options if you want to start your small business. These finance options are not limited to loan, contrary to popular belief.
So, yes, even with bad credit, you can begin to build a business. Now that you know where to get the cash, start working on your idea. With luck and effort, you may have an impeccable credit rating soon.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.