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Owning your own business and being your own boss is a dream come true for many people. And, what could be better than working for yourself and calling all the shots? The only problem is that unless you have a trust fund or other sources of cash stashed away, starting a business usually means going into debt. Unless you have impeccable credit, most banks won’t loan you money to invest in your own company. But that doesn’t mean starting your own business has to be delayed indefinitely or abandoned as an impossibility. There are several financing options out there for small businesses with less-than-perfect credit – it just takes some digging to find them. Here are five steps to get the loan you need for your business with bad credit.
Credit is a three-digit number that is calculated to show how risky it is for a company to loan money to you. Your credit score is determined by several factors, including the amount of debt you currently have, your payment history, your credit history length, and any bankruptcies or collection accounts on your record. If you have bad credit, that means you have a low credit score, which is a sign to lenders that you are a high risk and they might not want to give you a loan. There are several reasons you might have bad credit, including owing too much on current debts, having a short credit history, having one or more collections or charge-offs on your record, or filing for bankruptcy. Before you start applying for small business financing, sit down and find out what’s stopping you from getting a loan. Figure out what you need to do to improve your credit score and get that loan. Your business will thank you.
While you’re working on getting your credit score up and getting your finances in order, you can also apply for a small business loan. Small business loan companies are often willing to work with people who have less-than-perfect credit. They also charge higher interest rates and have more strict payment terms than banks do, but they are an option. You can apply for a small business loan with a credit repair company, but be careful. Some businesses will advertise a “no credit check” loan, but they’ll charge you an exorbitant interest rate. Others will want you to pay thousands up front to “clean up” your credit report. Credit repair is usually a long and arduous process, but it’s worth it for your future business.
Peer-to-peer lending is a relatively new form of financing that matches investors with borrowers. The idea is that investors purchase a small piece of your business (often as low as $1,000) and then you pay them back with interest. The nice part about peer-to-peer lending is that it doesn’t require you to have pristine credit. You just need a business plan and some collateral, such as your house, car, or other item of value. Peer-to-peer lending is a risky form of financing, but it’s worth looking into.
An investor loan is like a peer-to-peer loan, but instead of loaning money to you, they invest in your business. This type of financing is often used by small businesses to fund expansion or purchase large pieces of equipment that they don’t have the cash in their business account to purchase. An investor loan is often called a “bootstrapping loan” because the business owners rely on their own bootstraps to pay the loan back. Investor loans are a great way for young, high-growth companies to get the money they need to expand, but these types of loans often have very strict terms and require collateral. You should look into investor loans if you have a high-growth company with a strong business plan and good growth potential.
Finally, if you have absolutely no shot at getting a loan from a bank, an alternative lender might be your best bet. An alternative lender is a company that makes loans to people who have bad credit. You’ll likely have to pay a higher interest rate than someone with good credit, and it’s unlikely you’ll qualify for a low interest rate. But, if all else fails, you might want to consider a secured loan. A secured loan is a loan where you put up collateral, such as a piece of real estate, as security for the loan. Putting up collateral means that the lender has something to fall back on if you default on the loan. If you can’t pay back the loan, the lender can take the collateral to repay the loan. It’s not the best option, but it is a way to get a loan if you have bad credit.
Owning your own business is a dream come true for many people, but it can also be a nightmare for people with bad credit. In order to fund your business, you’ll likely need a loan, but banks may turn you down because of your low credit score. Don’t despair though! There are several financing options out there for small businesses with less-than-perfect credit – you just have to look for them. From small business loans to peer-to-peer lending, there are a variety of financing options for people with bad credit who want to start their own business.