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 that you need; you can hire the best talent that could 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 in your plans to start a business. But does this mean that you cannot start a business anymore when you have bad credit?
Having bad credit and no money limits your options. It doesn’t mean that you cannot start a business anymore; but you need to be twice as creative and persistent if you have no money. You can start a business – but it will not be easy.
When you have bad credit, it will be tough to apply for a bank loan. Banks look at your personal creditworthiness as one of the criteria for giving you a loan. In fact, 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 for getting a loan disappears. Even an SBA loan will be tough to get; 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? There are several courses of action you can take, but what you will need to exercise tremendous creativity in order to improve your business fundability.
Get a job and save, save, save
If you don’t have money and can’t seem to 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. Unless you have strong personal relationships with people-who-matters, banks are not going to lend you money.
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 up your credit score. Take time to review your credit score to correct any inaccuracies or problems. It will take time, but it is important to build a positive credit history.
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 in the event your business fails and you cannot pay the loan. Angel investors and venture capitalists look at whether your business can make them 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 they may not have a clue about what makes a good business startup. In both cases you will have to prove to them that you are prepared. It behooves you to do all of 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
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 is the pooling of funds from people willing to support a venture or project.
Your key task is to make these people want to support your business idea and give you money. You will be competing for attention in 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 are you going to attract the attention of investors and make them give you money for your business?
Think through your business, with the goal of making your business attractive to investors. Be sure that you understand your planned business inside and out – e.g. what are its profit potential, what are the risks, how are you going to 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 that you have a plan how to overcome these risks.
If you are going to actively pursue investors, 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 for 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 will have to 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 face the risk of losing control over your business and can even be booted out of it.
Build a Credit-worthy Business
If you can’t get a bank loan or investor financing (including family and friends), then you can start your business, albeit 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 in order 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 keep in mind as you do this is that even though it will take a little time you must make all of your payments on time.
Keeping your accounts in good standing will create business fundability in the name of your company.If your business has good credit you will be able to 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 personal credit.
- Pros and Cons of Financing a Business
- How to Raise Money to Finance a Franchise
- Why Investors Say “No”
- Minimize the Risk to Your Personal Credit When Starting a New Business
- Why You Can’t Get a Bank Loan for Your Small Business