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By Brenda

Comprehensive Guide on How to Start a Business with Bad Credit

Oct 27 2017 Parent Category I


One of the most exciting things in a budding entrepreneur’s life is starting a new business. You have a spectacular idea and you can’t wait to share your product or service with the rest of the world. There’s just one small problem. You don’t have the financing you need to get your business off the ground. You head to the bank to request a loan, but you get denied because you have bad credit. Starting a new business when you have bad credit can be challenging. Banks don’t really like to lend money to individuals with poor credit ratings (typically a score below 600). While it can be disheartening, getting your new business off the ground is not impossible. Here is a comprehensive guide on how to start a small business when you have bad credit.


The Basics of Starting a Business

Starting a business is so much more than simply having a great idea. It is important that your idea be something that will draw in customers. This may require some research into your competitors. If there are others out there who are already offering something similar, how are you going to stand out? How are you going to improve on what already exists?

Once you have your idea, it’s time to create your business plan. A business plan will help you determine the end goals of your business, what direction it will take. It will also allow you to plan out how you will deal with potential issues and what things (equipment, materials, staff, etc.) you will need to keep your business running.

Starting a business will require some sort of funding, whether you need money for materials, equipment, a location, or something else. If you don’t have your own capital to invest in your business (or you don’t have enough), you are going to need help. While a bank is a great place to start, not everyone can get a business loan this way. That doesn’t mean all hope is lost. Once you have your funding, it’s time to determine your legal structure, register with the government and the IRS and get yourself an insurance policy. You will also need to create your team (whether it’s one or two other people or a larger staff), brand yourself and start marketing. In today’s technological world, marketing can be done not only with a great website, but on social media platforms as well.



Options for Funding When You Have Bad Credit

Funding can be a major issue when you have bad credit. Generally speaking, banks don’t like to (and won’t) lend money to those with poor credit scores, as they base their decision heavily on this one factor alone. It’s easy to forget that banks are businesses too, and a poor credit score tends to indicate that you are too much of a risk. Fortunately, traditional banks are not your only option. Some companies offer bad credit loans that are specifically for this purpose.



There are several options available to those looking to start a new business and have a bad credit score. If you are a small business, a microloan might be the way to go. Microloans are smaller loans (generally less than $50,000) that are designed to help small businesses just getting started. Microlenders don’t rely too much on credit score. It is still important that these loans be repaid though, as it is treated just like any other type of loan and is reported to the credit bureaus.


Peer to Peer Lending

Another option is peer to peer lending. Sites like Lending Club, Avant and more involve individuals (instead of institutions) that provide unsecured loans. These websites act like a middleman and pair you with potential lenders. They also help to reduce the amount of red tape involved with getting a loan. Many peer to peer lending sites are very willing to work with individuals who have less than stellar credit scores, but your score is a big factor in determining your interest rate.


Angel Investor

There are still other options that don’t necessarily involve a loan. One of these options is an angel investor. An angel investor is a successful businessperson who is looking to invest their money (as well as their time and energy) into helping a new business get off the ground. They provide you with the funds you need in return for a portion of the profits. Angel investors aren’t interested in your credit score. Instead, they are more interested in your idea and that you have a solid business plan.



You might consider crowdfunding, a process in which different investors provide you with money in return for receiving perks (such as the goods or services you plan on offering). Crowdfunding can be done easily online.



You might also look into grants. Grants are essentially free money that doesn’t need to be paid back. The biggest hurdle with a grant is that everyone wants free money, so you will need to have some patience.



Getting a Business Credit Card

When you have bad credit, getting a regular credit card can be difficult. A secured business credit card is a much better option. This type of credit card is designed for businesses that have poor credit, and can enable you to finance your expenses while building your credit. A secured business credit card provides you with a credit limit based on a cash security deposit that you make following your approval. The deposit is a type of protection for the lender as your line of credit is financed by your own money. It is still important to treat the card like any other type of credit card, which means keeping your usage below 30% and paying back in full every month. Doing so will not only help to keep you out of debt, but will also help improve your credit score.


What if I Need a Lease?

One important question you will need to consider is where you will do your business. If you have poor credit, leasing a space is yet another obstacle you will need to overcome. Some businesses can avoid this hurdle simply by running the business right out of their own home. Not every new business owner has this luxury, however. If you are in need of a commercial space, there are a few things you can do. One option is to find a trustworthy business partner or cosigner with good credit. Make sure all details about your agreement are put in writing and signed by both parties. If you personally know the landlord, you may be able to work out a deal and get a lease based on your reputation. Look for motivated sellers. These individuals tend to be more willing to work with you, regardless of your credit score. If you can, you may also be able to get a lease with a large cash deposit, or even use cash to purchase the space outright.



Improving Your Odds

When you don’t have good credit, a great idea and stellar plan are often what your potential lenders will base their decisions upon. You will also need to prove to your potential lenders that you are willing and determined to not only repay them, but keep your finances in order and improve your credit score. Any small steps to improve your credit will help. If you are behind on credit card debt, negotiate with the creditor to pay down the balance. You may also settle with an account in collections. Make a few on time payments before you seek out lenders. Even having just a few months of on time payments in your history can help show these lenders that you are serious and they will be more willing to work with you. Once you have your financing, keep making payments on time. The more on time payments you have, and the longer you have been in business, the more financing options will become available to you, allowing you to grow and expand your business.


Just because you have bad credit, that doesn’t mean your dream of starting a small business is shattered. It is actually quite possible to get your business off the ground; you just need to know where to go. Improving your personal credit score can help to improve your loan offers. It is also important to improve your business credit score once you are up and running. As your credit score improves, your financing options become greater, and you will be much better equipped to both run and grow your business.


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