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You have a business dream, but your credit rating isn’t stellar and putting up collateral is a problem. Can you still launch a small business or expand one that is on the cusp of growth?
The truth is, it won’t be easy. The Federal Reserve’s raising of interest rates to cool inflation also seems to be cooling business owners’ prospects of getting a bank loan over the last couple of years.
Even with bad credit, it may be possible to secure a startup business loan with no collateral to help you launch your business without putting your personal assets on the line. However, it must be stressed that this type of financing typically comes with high rates that help compensate the lender for the risk being taken.
Learn more about your different financing options as a small business startup, as well as the pros and cons associated with these choices.
Key Points
• It may be possible to get a small business loan for your startup with bad credit.
• A FICO® score of 600 or less is considered a poor credit score.
• Options for financing include small business loans, credit cards, merchant cash advances, invoice financing, equipment financing, and SBA loans.
• Alternative sources of funding for your startup business include grants, the use of crowdfunding platforms, peer-to-peer lending, and borrowing from family members or friends.
Can You Get a Startup Business Loan With Bad Credit?
Getting startup business funding with bad credit is challenging, but it is possible. Traditional banks and credit unions typically impose high interest rates and less favorable terms for such loans. Some lenders may require a personal guarantee, which commits your personal assets to cover the loan if you can’t repay it.
Fortunately, some funders will look beyond a low credit score. You may want to investigate merchant cash advances, invoice factoring, crowdfunding platforms, and similar alternatives.
Read on to learn more about your options.
Understanding “Bad” Credit
As you run your new venture and figure out how much money it takes to start a business, you might also be wrestling with questions about credit scores.
Lenders use different credit scoring models to evaluate your creditworthiness. Some have minimum credit scores that they prefer to see in applicants seeking loans, as these outlays of money may present considerable risk to the lenders.
As a startup, you may not have an established business credit score. In that case, lenders generally evaluate your personal credit history. For personal credit scores, Experian® defines a “good” score as 661-780, a “fair” score as 601 to 660, and a “poor” score as 500 to 600.
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Options for No Collateral Business Loans
With some basic financials in hand, it’s time to explore some of your options for unsecured small business loans, as well as some other approaches that may be worth considering. It is possible to find funding at this early stage, even with bad credit. But these loans may come with higher rates to compensate for the risk, so carefully review the terms of any financing agreement to understand the true cost.
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Online Business Loans
Online business lenders may offer alternative bad credit business loans with less stringent requirements compared to traditional banks. You can also explore small business loans for specific groups, such as women with bad credit. While approval and funding times can be fast, you still need to provide proof showing that you’ll be able to repay the loan.
Remember to consider the drawbacks associated with these subprime online business loans. They usually come with a very high APR and a shorter repayment term. Often startup business loans for bad credit must be guaranteed personally, which means your individual credit score can be impacted for any late payments or delinquency — and your personal assets may also be at risk to pay back the loan if your business isn’t able to.
Credit Cards for Small Business
A small business credit card may be an alternative to help cover early startup costs. You could be more likely to qualify with a strong personal credit score, even if your business credit score is on the lower side of the spectrum or simply not established yet. In fact, you can get a business credit card before you open your business.
Most of these cards come with a required personal guarantee. Many also come with an annual fee and while there may be perks or rewards, it’s wise to compare these costs before applying.
As always, your card’s APR is also an important factor, especially if you expect to carry a balance from the beginning as you get your startup off the ground.
Merchant Cash Advance
If your business accepts credit card transactions, you may be able to qualify for a merchant cash advance. This gives you a lump sum to use as working capital, then you pay a percentage of your daily credit card transactions (known as the holdback amount) until your balance is repaid. Rather than being charged an interest rate, merchant cash advance companies use a factor rate.
This charge is a multiple of your borrowed amount, such as 1.5. A $25,000 cash advance, for example, multiplied by a 1.5 factor rate would bring the total balance to $37,500. In other words, the financing would cost $12,500. Merchant cash advances may have even higher factor rates and other fees which can make them a very expensive form of funding for businesses.
Additionally, because merchant cash advances aren’t considered a loan, generally their regulation is less stringent and regulatory oversight is less rigorous than more traditional loans.
Invoice Factoring
For a startup that already has some accounts receivable, you may qualify for invoice factoring to help your cash flow while you wait for customers to pay you. The factoring company charges a percentage of the invoice amount as their fee (typically around 85%), then fronts you a percentage of the funds before payment is received. They generally manage the payment process with your customers. Once the invoice is repaid, you’ll receive the remaining balance.
Equipment Financing
Equipment financing is a type of business loan that is used to purchase equipment for business purposes. The equipment you are purchasing acts as the collateral for the loan. Needs will vary based on the nature of the business, but some types of equipment that may be purchased with this type of loan include agricultural equipment, office equipment, printers, vehicles, restaurant ovens, and more.
Typically, when the loan is repaid, you are the owner of the equipment. In some cases, the lender may require additional assurances, such as a personal guarantee.
Crowdfunding Platforms
Crowdfunding is a unique form of financing, but it can help launch your startup without you having to worry about credit scores as much. You can create a campaign to garner interest in your business and get financial backing in one of four forms: equity, donation, rewards, or loans.
While crowdfunding allows you to raise money and test the market at the same time, it can be a much more intensive marketing process. Plus, there’s no guarantee you’ll reach your funding goals.
SBA Loans
Many lenders offer Small Business Administration (SBA) loans to startups because they come with a guarantee as long as certain underwriting guidelines are met. In some cases, even startups with credit challenges may be able to qualify for an SBA loan. One option for new businesses is the SBA Microloan program, which lets you borrow up to $50,000.
Peer-to-Peer Lending
Peer-to-peer lending services are another alternative to more traditional lending options like bank loans. With this type of lending, online platforms match potential borrowers with potential investors. Eligibility requirements will generally vary from platform to platform.
Some services have minimum credit score requirements, which can potentially make it more challenging for businesses or individuals with lower credit scores to qualify. The process to funding is generally quick, but borrowers with less-than-stellar credit may find that interest rates are higher than a traditional loan.
How to Improve Your Chances of Approval
Before you launch any applications for unsecured startup business loans, it can help to do prep work to strengthen your pitch. Even with bad credit, you can present an in-depth business plan that outlines your strategies for success and how you plan to use the funding.
A business forecast can also be helpful in giving the lender an idea of your expected cash flow in the coming months or years. As a startup, you may need to provide personal information as well, such as your tax returns.
Build Business Credit
You can help set yourself up for success by properly establishing your business credit. Here are a few steps to get started:
• Officially incorporating your company
• Getting a federal employer identification number (EIN) from the IRS
• Opening a business bank account
It can be difficult to find no–credit check financing options, so it’s generally worth building your business credit score as early as possible. When working on building your credit score, it may be helpful to establish relationships with vendors that report to the business credit bureaus. Also, pay your bills on time. Taking these steps contributes to a stronger credit profile that could help open the door to more favorable financing opportunities.
Demonstrate Consistent Revenue
If your startup has been in business for a while, you probably have records of your monthly cash flow and revenues. Financial statements that show a steady income or a consistent upward trend will demonstrate to lenders how solid your business is.
Consider a Co-Signer or Guarantor
No startup business loan for bad credit is guaranteed to be approved, but adding a financially stable individual with an excellent credit history as a guarantor or cosigner on a loan can improve your odds. Cosigners and guarantors commit to covering your debt in case you can’t repay it, so their backing lowers the risk to the lender. The key difference: A cosigner is equally responsible for the loan right away, whereas a guarantor isn’t on the hook for repayment unless the borrower fully defaults.
Have Realistic Loan Expectations
Startups are unpredictable in themselves, so loans to startups can pose significant risks to a lender. The risks are multiplied if the borrower has no collateral to secure the loan and a low credit score that raises repayment concerns. As a result, it’s prudent to expect smaller loan amounts, higher interest rates, and more fees from lenders to compensate for this increased insecurity.
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Alternative Options for Startups With Bad Credit
When seeking traditional business loans, startups with bad credit often face significant challenges, but several alternative options can provide the necessary capital to get their businesses off the ground.
1. Small business grants: One viable option is seeking small business grants, which are essentially free money provided by government agencies, non-profits, and private organizations. Unlike loans, grants do not require repayment and are typically awarded based on merit, need, or the potential impact of the business. Startups can explore local, state, and federal grant programs tailored to their industry or demographic.
2. Business line of credit: Another option is establishing a business line of credit. While this may seem similar to a loan, a business line of credit offers more flexibility and often has less stringent credit requirements. It allows startups to draw funds as needed, paying interest only on the amount used, which can be particularly useful for managing cash flow.
3. Borrowing from family and friends: This approach requires transparent communication and clear terms to ensure personal relationships are maintained.
4. Personal savings: Funding a business from one’s own savings eliminates the need for external approval and interest payments, though it does come with personal financial risk.
5. Bartering services or equity: This is where startups exchange their products or services with other businesses instead of cash, or offer a percentage of the business in return for investment.
By leveraging these alternative funding sources, startups with bad credit can find creative and practical ways to secure the resources they need to grow and succeed.
The Takeaway
When you start a business, you’ll need to weigh the pros and cons of risk. Unsecured business loans for owners with challenged credit can come with high interest and demanding terms. Exploring multiple options can help you make the best choices for your startup.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Is it possible to get a startup business loan with bad credit and no collateral?
It is possible to get a business loan for a startup with bad credit, but the interest rate might be very high. Some lenders may require a personal guarantee. That means your personal assets could be used to cover the loan if the business doesn’t succeed and that personal credit would also be impacted by the health of your startup loan.
Could I start a business with bad credit and no money?
It’s possible to start a business despite obstacles like a bad credit score and little to no startup funds. In addition to startup loans, other options to explore include things like a business credit card, merchant cash advance, invoice factoring, crowdfunding platforms, and SBA loans. Remember that when looking for startup business funding with bad credit, you may be subject to less favorable terms, such as higher interest rates and lower loan amounts.
Can I get a business loan with a 500 credit score?
Yes, you may be able to get a small business loan with a 500 credit score, but it will be challenging and typically involves higher interest rates and less favorable terms. Traditional banks and credit unions usually require higher credit scores, so you may need to explore alternative lenders such as online lenders, microlenders, or nonprofit organizations that specialize in working with borrowers with poor credit.
Can you get a business loan with your EIN number?
You cannot get a business loan with just your employer identification number (EIN). Lenders will also consider other factors such as your personal credit score, business credit history, revenue, and overall financial health.
What are the best ways for a startup business to get funding with bad credit?
Startups with bad credit will each have their own needs and capabilities; no particular funding option will match every company’s situation. That said, it’s helpful to avoid high interest rates if possible. Crowdfunding, bartering, and small business grants are a few ways to secure funding more cheaply.
Photo credit: iStock/JLco – Julia Amaral
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