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When starting a business, the ideal situation will be to jumpstart your endeavor when you have the resources to do so. When you have the money – and have access to more money — you are in a better position to give your business its best chance for success. You can buy the equipment, materials, and inventory you need; you can hire the best talent to support your start-up; and you have wider options in marketing and advertising your business.
What if you have bad credit and no money? Bad credit is a direct result of having no money, and lack of money can put a damper on your plans to start a business. But does this mean you can no longer start a business when you have bad credit?
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Having bad credit and no money limits your options. It doesn’t mean you cannot start a business anymore, but you must be twice as creative and persistent if you have no money. You can start a business – but it will not be easy.
RELATED: Why You Can’t Get a Bank Loan for Your Small Business
When you have bad credit, applying for a bank loan will be tough. Banks look at your creditworthiness as one of the criteria for giving you a loan. They won’t even bother to read your business plan – no matter how amazing you think your plan is – if they see that you have bad credit. One look at your bad credit report and your chances of getting a loan disappear. Even an SBA loan will be tough; after all, SBA loans are administered by banks that do not look kindly to those with weak credit scores.
So, what are your options if you want to start a business but have bad credit and no money? You can take several courses of action, but you will need to exercise tremendous creativity to improve your business findability.
Get a job and save, save, save
If you don’t have money and can’t find any, take this time to improve your finances. Accept the fact that the doors of traditional lending are closed for people with poor credit. Banks will not lend you money unless you have strong personal relationships with people who matter.
Instead, take it slow and work to improve your creditworthiness. Get a job (or even a second job!) to increase your income. Find part-time income opportunities to help you pay your debts and slowly build your credit score. Take time to review your credit score to correct any inaccuracies or problems. It will take time, but building a positive credit history is important.
Use this time to think through your business
Use this time to think and plan through your business. Given that banks are not likely to lend you money with your bad credit, one option for finding capital for your business is through potential investors.
Investors are not interested in your credit score; rather, they look for the potential of your business to become profitable. Investors are not interested in your ability to pay the loan, or whether you have assets they can go after if your business fails and you cannot pay the loan. Angel investors and venture capitalists look at whether your business can make their money.
Family and friends can also be your go-to source of funds. Present your business idea to them, and invite them to invest in your business. The people in your life may be financial wizards or not know what makes a good business startup. In both cases, you must prove to them that you are prepared. It behooves you to do all the same things you would to prepare for a bank loan application when seeking private investments from friends and family.
Read the article How to Borrow Start-up Capital from Family and Friends
Explore Crowdfunding
If you have a novel business idea or a story that will attract sympathetic supporters willing to bankroll part of your venture, then crowdfunding may be right for you. Crowdfunding pools funds from people willing to support a venture or project.
RELATED: 40 Tips on How to Use Crowdfunding to Raise Money for Your Business
Your key task is to make these people want to support your business idea and give you money. You will be competing for attention on crowdfunding sites, so you need your project to stand out and make it compelling enough that people want to be part of your success.
Read the article Using Crowd Funding Sites to Raise Money for Your Small Business
Pursue Investors for Your Business
How will you attract the attention of investors and make them give you money for your business?
Think through your business to make your business attractive to investors. Ensure you understand your planned business inside and out – e.g., what its profit potential is, what the risks are, and how you will mitigate the risks, among others. Do a (Strengths, Weaknesses, Opportunities, Threats) SWOT analysis. Investors want to see that you know the potential dangers and risks and have a plan for overcoming these risks.
If you are going to pursue investors actively, be sure to:
- Draw up a well-constructed business plan
- Make sure you have all the information on licensing and other legal requirements
- Know what the exact and reasonable expenses will be for your business over at least five years
- Be able to provide a reasonable expectation for profitability
- Think of exit plans for these investors
However, it is important to understand the price of going with an investor. Investors — angel investors or venture capitalists — work differently than banks. They take a percentage of your company in payment for the money. The good side of that is that there are no loan payments to make and no interest. The downside is that you must share your profits with your investors. They also expect you to give them a high rate of return for their investments – from 25% to as high as 50% annually. Investors also ask for equity from the business; if the VC asks for 50-60% of your firm’s equity, you risk losing control over your business and can even be booted.
Build a Credit-worthy Business
If you can’t get a bank loan or investor financing (including family and friends), you can start your business at a very slow pace. Instead of hiring employees, for example, try to do everything you can by yourself (or through the help of volunteers and friends). Take a do-it-yourself approach to most processes, even if you have to learn and study to do it.
With careful planning, you can work to make your business strong enough to get a loan a year or so later. Apply for a vendor account with the businesses you buy your supplies from. As you develop credit with them, start applying for business credit cards. The most important thing to remember as you do this is that even though it will take a little time, you must make all your payments on time.
Keeping your accounts in good standing will create business fundability in your company’s name. If your business has good credit, you can apply for a loan based on its good name and credit rather than your own. This will allow you to get credit through your business and not through your credit.
FAQ on Starting a Business with Bad Credit
1 – Can I get a business loan with bad credit?
Yes, getting a business loan with bad credit is possible, although it may be more challenging. Traditional lenders like banks may hesitate to lend to individuals with bad credit due to the perceived risk. However, alternative lenders, such as online lenders, credit unions, and community development financial institutions (CDFIs), specialize in working with borrowers with less-than-perfect credit. Additionally, you may consider securing the loan with collateral or seeking a cosigner to improve your chances of approval.
2 – What are some alternative financing options for entrepreneurs with bad credit?
Entrepreneurs with bad credit have several alternative financing options available to them. Some of these options include:
- Microloans: Small loans offered by nonprofit organizations or government agencies.
- Crowdfunding: Raising funds from many people through online platforms like Kickstarter or Indiegogo.
- Peer-to-peer lending: Borrowing money from individuals or investors through online lending platforms.
- Grants: Funds provided by government agencies, nonprofit organizations, or corporations for specific purposes, such as business development or innovation.
- Invoice financing: Using unpaid invoices as collateral to secure financing from lenders.
Exploring these alternative financing options can help entrepreneurs with bad credit access the capital they need to start or grow their businesses.
3 – How long does it take to improve bad credit?
The time it takes to improve bad credit varies depending on individual circumstances and the steps to address the underlying issues. Making timely payments, reducing credit card balances, and disputing errors on your credit report can positively impact your credit score over time. However, significant improvements may take several months or even years, especially if you have a history of missed payments or high debt levels. Consistent financial habits and responsible credit management are essential for lasting improvements in your creditworthiness.
4 – Is it possible to start a business without any financing?
Yes, starting a business without any financing is possible, although it may require resourcefulness, creativity, and a willingness to bootstrap. Bootstrapping involves funding your business with personal savings, revenue generated from sales, or by leveraging existing assets like home equity or retirement accounts. By minimizing expenses, prioritizing revenue generation, and seeking low-cost or free resources, entrepreneurs can launch and grow successful businesses without relying on external financing.
5 – What are the risks of starting a business with bad credit?
Starting a business with bad credit poses several risks, including:
- Limited financing options: Difficulty obtaining loans or lines of credit from traditional lenders, which can hinder business growth and expansion.
- Higher interest rates: Even if financing is available, entrepreneurs with bad credit may face higher interest rates, increasing the cost of borrowing and reducing profitability.
- Cash flow challenges: Strained cash flow due to higher expenses or limited access to financing can make it challenging to meet operational expenses or invest in growth initiatives.
- Reputation damage: Defaulting on loans or missing payments can damage your personal and business credit scores, making it harder to secure financing in the future and potentially harming your reputation within the business community.
- Limited growth opportunities: Without sufficient capital, businesses may struggle to invest in marketing, inventory, or equipment, limiting their ability to compete and grow in the market.
Entrepreneurs should carefully assess the risks and rewards of starting a business with bad credit and develop a comprehensive strategy to mitigate potential challenges.
The article was originally published on August 11, 2014. Updated on April 4, 2024.
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