Getting a Small Business Loan With Bad Credit
Having a bad credit score is almost always really bad news for your financial well-being. Bad credit can make it harder to buy a house, get a new car, or even apply for credit cards. So it’s no surprise that starting a small business with bad credit carries some unique challenges. If you’re interested in starting your own small business or expanding an existing business, you’ve probably taken a look at the options for small business loans. A loan is often necessary for entrepreneurs like yourself to acquire the initial capital needed to start a businesses. If you’re having trouble getting the small business loan that you need because of your credits core, here’s what you need to know.
Why It’s Hard to Get a Loan With Bad Credit
At the end of the day, you have to remember that lenders are out to make money. Banks and investors are the most interested in lending to borrowers who are likely to pay back the loans with interest and in a timely manner. A lender’s worst nightmare is that their borrower might default on a loan, leaving the lender high and dry.
A credit score is supposed to be a measure of a person’s likelihood to pay off debt based on past credit history. This means that a few big mistakes early on in your financial life can land you with a credit score that doesn’t really reflect your current character. Unfortunately, this credit score is all that lenders have to go on.
With small business loans, lenders’ usual suspicions are multiplied. Unlike mortgages, which are usually given to borrowers with a steady job and stable income, small business loans are given out on the premise that the borrower — and her business — will have a strong income at some point in the future. This additional risk coupled with the warning signs of a bad credit score make many lenders less likely to lend to those with bad credit history.
If you’ve run into trouble getting a small business loan, here are some options for you.
Repair Your Credit
Probably the first and best thing that you can do is to repair your credit score, putting yourself into the category of borrowers who lenders are eager to deal with. A freshly repaired credit score will indicate to banks and investors that you are ready to take on the responsibilities of starting a small business with a loan from their reserves.
In addition to helping you secure that small business loan you’ve been after, repairing your credit will improve your financial life across the board. When you’re a high priority client for lenders, everyone will be eager to deal with you.
The one drawback of waiting until your credit is fixed to start your small business is time. Credit repair doesn’t happen overnight, so if your business idea is time-sensitive, or you’re just eager to get started, you might want to look for other options.
Alternatives Sources for Small Business Funding
Banks are large, impersonal institutions. They don’t have the time or interest to get to know your beyond your credit score, so they’re unlikely to dig beyond hard facts and figures. However, there may be other sources of funding — including loans and grants — that can go beyond your credit history.
- Angel Investors — While big banks are cold and detached, an angel investor can talk to you one-on-one about your vision. This is your chance to show them that you’re more than just a credit score and you are ready to take on the challenge of starting a small business.
- Friends and Family — No one knows you better than your friends and family. These are people who don’t care about your credit score because they know you better than any credit agency ever could. A loan from friends or family could be exactly what you need to get your business idea off the ground.
- Crowdfunding — Tools like Kickstarter are creating more and more innovative small businesses these days. Crowdfunding investors don’t stand to lose as much on a failed startup because, individually, they each donate very little. This makes them more likely to take a chance on an innovative business idea.
- Small Business Grants — Depending on your situation, you may be able to apply for and receive grants to start your small business. Grants are basically free money — you don’t have to pay them back and grant-givers are not going to hold you to any particular result. There are lots of promising grants for minorities in the business world, such as women and members of the LGBTQ community.
If you want to start your own small business, having bad credit is not the end of the world. By repairing your credit or seeking out alternative sources of funding for your startup, you can achieve your business dreams in spite of your credit history.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated February 28, 2019. It was originally published September 10, 2017.