Published By Janet Gershen-Siegel at October 20th, 2018
It is easy to think all your small business ownership dreams are slipping away when you have bad credit. The truth is, however, you can still make your dreams come true. It may take a little creativity. You might have to think outside of the box when it comes to funding. In fact, the box may disappear altogether, but that isn’t necessarily a bad thing. Small business startup loans, bad credit or no credit friendly, do exist. They are out there. You just have to know where to find them and how to use them wisely.
Where do you find these small business startup loans, bad credit not being an issue? True loans that fall into this category are generally come from alternative lenders. Most operate solely online. There are other options as well, but most of those are not technically loans.
Well, they do get a bad rap. Is all of it undeserved? Probably not. There are some bad seeds out there. Some of them are truly trying to provide a needed service. You are not the only person with bad credit trying to start a business. That mean you are also not the only one that needs small business startup loans, bad credit not a deterrent.
How do these alternative lenders offer loans to people that have bad credit? Why can they do it when traditional lenders say they can’t? The whole point of a lender even caring about your credit score is risk reduction. In theory, the higher credit score a borrower has, the lower the risk associated with lending to them.
Alternative lenders use other methods to lower their risk. Most often this comes in the form of higher interest rates and less flexible repayment terms. This is where that bad rap comes in.
These loans may have high interest rates and low limits, but they can be the catalyst you need to get things going. Think of it like starting a fire with a match or rubbing two sticks together. One is harder, but if you stick it out, you get fire either way.
The wrong way is the way that most people go, and that is why all the bad stories about these lenders are out there. Here is what you shouldn’t do. You shouldn’t take out a loan that you cannot afford to repay. When the monthly statement comes, you should not ignore it.
If you use your small business startup loans, bad credit or not, the right way, good things can happen. Use what you get to start things up. That is why they call them startup loans, after all. Here is what you do:
1. Use the money to do what you need to do to get started.
2. Lay the foundation for business credit (discussed later in this article.)
3. Make certain your make your payments on time, consistently.
4. Watch your business credit score grow.
Of course, it is a little more involved than that, but the brass tacks are that simple. Lay the foundation, use the funds, and pay them back, on time.
This part can begin before you even have your small business startup loans bad credit funds in the bank. The idea is that you want your new business to have its own credit score. For that to happen, you have to establish it as an entity separate from you.
There are a few ways to make this happen. The most common is to incorporate your business. There are several options for incorporation:
This is the most expensive, but it also offers the most protection. The problem with corporations is that they are subject to tax twice due to some quirks in the system. The corporation pays tax on its earnings, and the shareholders pay tax on their part.
The major difference, for the purposes of this article, between a corporation and an S-corp, is the lack of double taxation. It costs less to incorporate as an S-corp as well.
A limited liability partnership costs less still. There is still some protection also, and it serves the purpose of establishing the business as an entity separate from the owner.
You can also apply for a “Doing Business As” name, or DBA from the IRS. There is not a lot of protection in this. It is the cheapest option that will also establish the separation needed to establish business credit, however.
The next step is to obtain contact information for the business separate from your own. This should include a toll-free telephone number, a fax number, and a business address. Don’t stop there either. Make sure you get your business listed in the directories under the business name.
Then, open a separate business banking account. If you have already been doing business, start now running all business transactions through this account. If you are just getting started, it will be even easier because you can use this account for all business-related transactions from day one.
The first place you should look is online lenders. These lenders are the ones we have been discussing that often have lower minimum credit score requirements.
If you have been in business for at least 6 months and have $120,000 annual revenue, you qualify. The credit score for a line of credit can be as low as 600. If you want invoice factoring, you can get approval with a score as low as 530.
This is a little bit of a different monster all together. The interest rate is 0%, so even though you have to pay it back it is absolutely free money. They don’t even check your credit. The one catch is that you have to get at least 5 family members or friends to throw some money in the pot as well. You also have to pitch in a $25 loan to another business on the platform.
If your personal credit is okay, Accion may be a good fit for small business startup loans bad credit. It is a microlender, a nonprofit, that offers installment loans to both startups and already existing businesses. The minimum credit score is 575. In some places they will go as low as 500. You don’t have to already be in business, but if you are not, you must have less than $500 in past due debt. In addition, your business needs to be home or incubator based.
Loans are from 6 to 60 months and interest rates range from 7% to 34%. A personal guarantee, and sometimes specific collateral, is necessary in most circumstances.
This is also a good option for small business startup loans bad credit if you are already generating some revenue. They offer short term loans for both business expansion and working capital. You must be in business for at least 6 months to qualify, and they will approve loans to those with credit scores as low as 500.
There is a revenue requirement of $15,000 per month. Working capital loans have terms that range from 6 – 17 months. Business expansion loan terms range from 18 to 24 months. The interest rate varies greatly based on what your credit score is.
You get your funds quickly, and there are flexible options for repayment.
There are options for funding that do not involve small business startup loans, bad credit or not. These options include crowdfunding, angel investors, and even grants.
Crowdfunding is a way to gather several investors that are willing to pitch in smaller amounts so that you can piece together the funds you need. On a crowdfunding platform, you can present your business to the public. Those with an interest can invest as much or as little as they want.
Different platforms have different requirements, but in general, you have to post a thorough business plan first. You also need to offer some sort of reward for those who invest in your business. Sometimes it is a piece of the profits, or it may be a free product. Often, it is something different for each level of investment.
The most popular crowdfunding platforms are Kickstarter and Indiegogo. They are very similar in how they work. The main differences are that with Kickstarter, you must set a goal, and you do not get your money until you reach that goal. With Indiegogo you can choose whether to get your money as you go or after you reach your goal.
Also, there is a 5% fee after a successful campaign on both platforms, but Indiegogo offers some flexibility in how you pay.
This is another way to find informal investors. Literally anyone can be an angel investor. Usually they are high net worth individuals that swoop in to save the day. They may be silent investors or they may want to have some say, but they do usually get a slice of the pie.
The main thing to remember is that they are informal, so they do not have to register. Even your mom or Cousin Sally can be an angel investor.
To be fair, they don’t really offer small business startup loans, bad credit or otherwise. What they do is make it possible for lenders to offer loans to borrowers that would otherwise be out of luck due to a bad credit score.
This is because they guarantee certain loans to small businesses. So, it could be worth it to look at lenders that work with the SBA and see if they have anything to offer.
They also offer grants to small businesses within certain categories. For example, business owners that are women, minorities, veterans, or opening a business in a low-income area may be eligible for grants. The best part about grants? You do not have to pay them back, and the approval is not dependent on your credit score.
Say you find your small business startup loans, bad credit and all. What do you do next? The first thing you do is what you need to do. Whatever you needed the funds for, do that. Purchase inventory, secure your location, or pay off debt. Whatever it was, get it done.
Once complete, it is time to work on that credit score. If your problem was no business credit, make sure you have your business established as a separate entity following the steps mentioned earlier. If your problem is bad credit, and your business is already a separate entity, you can jump right into building business credit.
After you establish your business finances as separate from your personal finances, you can begin building business credit. The first step is to start making payments that creditors will report to the credit agencies. If you were successful in finding small business startup loans, bad credit or not, you have already made this first step. Now all you have to do is make consistent, on time payments.
You may also consider trying to find a vendor or two that will allow you to make payments and report them to the credit agencies.
If you handle things properly by making your payments on time, every time, you will see your business credit score begin to increase quickly.
What’s the moral of this story? It is simple. If your credit isn’t great, don’t stop. There are resources out there to get you the funding you need to get started. Once the ball is rolling, you can work to build your credit score. The next time you need financing, you won’t even have to worry about small business startup loans. Bad credit will not be an issue. You can simply go apply for a loan, a line of credit, working capital, or whatever you need and watch your business grow.
Learn more here and get started toward getting small business startup loans bad credit.