Starting a business with bad credit: how to go about it?
If you have a great business idea or a passion for entrepreneurship, starting a business can lead to a fulfilling career and financial freedom. But starting a business is difficult, and getting financing can be an added hurdle if you have bad credit. But don’t be discouraged! With the right strategy and persistence, many options exist for loans, grants, and startup business financing. Read this article to learn the best tips for starting a business with bad credit.
Yes, you can start a business if your credit is bad. Bad credit is generally defined as a credit score of 580 or lower on the typical FICO scale of 300 to 850. If you have a history of late payments, delinquent accounts, or high debt, your credit score or your credit history may be considered poor. .
Factors contributing to bad credit include a high debt-to-income ratio, late payments, and a high debt percentage. Other factors that could contribute to a bad credit history include:
Not respecting the credit agreement
Declaration of bankruptcy
Be subject to a County Court Judgment (CCJ)
Identity theft
Have no credit history
In addition to making it difficult for startups to get a business or personal loan, you might face high interest rates or issues with inventory, space, and utilities. However, even with bad credit, there are resources available, including the seven listed below.
7 Ways to Start a Business Despite Bad Credit
When you create an LLC or business and have learned the basics, such as opening a business bank account instead of using a personal account and designated beneficial ownership, you are ready to obtain financing for your business. If you need to get financing despite bad credit, here are seven ideas to get you started:
1. Grants
Grants provide ways for small businesses to obtain financing even with bad credit. You may consider USDA grants, SBA grants , or community grants .
2. Social lending sites
Social lending or crowdfunding sites have launched many popular businesses, including multi-million dollar companies like Oculus VR, Allbirds, Peloton, and Brooklinen. In 2022, the United States had 1,468 crowdfunding companies, with one of the largest, Kickstarter, reporting a 39.37% success rate. Other top social lending sites include Prosper, Avant, Happy Money and Upstart.
3. Microlenders
Microlenders are lenders or organizations that, as the name suggests, offer small amounts of money, usually between $5,000 and $50,000 maximum, to entrepreneurs who cannot obtain capital from traditional financial institutions. Microcredits 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 provides credit and financial services to underserved markets and populations. CDFIs are primarily centered in the United States and are designed to help those whose background or circumstances have made it difficult to establish a good credit history. They can help you get a line of credit or loan to start your business.
5. Purchase order financing
If you have already started a business or need to purchase goods and need additional cash, purchase order financing can help improve your cash flow. With purchase order financing, you will receive a cash advance on the value of the purchase orders.
In this case, the lender will pay your third party supplier up to 100% of the costs necessary to produce and deliver the agreed goods to your customers. It is a way for companies to finance their investments in products with initial orders without obtaining financing or start-up capital.
6. Equipment Lenders
If you need to purchase equipment for your business, equipment lenders such as banks, online lenders and specialist equipment finance companies can help you by providing loans to purchase equipment or machinery costly for your business. If you can’t get a traditional loan, equipment lenders can offer you a solution to get started.
7. Trader Finance Companies
Merchant financing services companies have less strict criteria than traditional lenders. Instead, they review the business portfolio and sales figures to determine the reliability of repayment of advanced funds. Terms, payback period, interest and amounts vary, usually depending on the company’s daily transactions.
Since credit score is less important in these types of loans than in trades, you will be able to easily obtain financing if you have poor or no credit but your business is strong.
How to apply for business loans with bad credit?
When applying for a business loan with poor or no credit history, you’ll want to build a strong portfolio to improve your chances of approval.
1. Research and compare lenders and financing options
Some lenders are less strict on requirements and many offer better interest rates with security. Research and compare lenders via online listings to find the most favorable terms.
2. Build a Solid Business Plan
A solid business plan includes a vision and mission, details about the product or service, information about business direction, location, market research, competitive analysis and projections of cash flow.
