If your credit is bad, you may have some trouble getting a loan to fund your startup. Loan companies are going to pull your personal credit score and if your score is low, they may charge you a high interest rate or reject your startup business loan application altogether.
Ronald Benitez, a private institutional investor who specializes in helping startups get capital, says, “Having good credit makes it easier for a startup to receive funding because it opens up the traditional avenues of financing like a local bank or lender.” However, he adds, “the key for any startup to receive funding really lies in their vision and value proposition. I have worked with several business owners who have had bad credit but still received funding.”
If you have some time, it will be beneficial to focus on repairing your credit so you can increase your score and qualify for better terms. However, if you need to get your funding now, here are several options to consider.
Your inner circle
One of the first places you can turn is to your inner circle of friends and family. Four out of five businesses get funding from a combination of their personal resources and friends and family, according to the Global Entrepreneurship Monitor’s report.
People who know you won’t use a credit-based algorithm to decide whether they should lend to you. Instead, they will base the decision on their knowledge of you and your business plan. If you have shown yourself to be responsible and trustworthy, they may decide to lend to you. If they can’t, they may have a connection in their circle that is willing to.
While borrowing from a friend or family member can result in a more reasonable cost, your relationship with the person is securing the loan, which can present a high level of risk. If you don’t follow through or things go sour, you may damage the relationship and have to bear unpleasant social repercussions. Be sure to consider all of the potential benefits and consequences of this option.
Personal loans for bad credit
While most lenders that offer business loans require businesses to have a year or two in business before they can qualify, there are several lenders that offer personal loans which can be used for your business. Some are more lenient with their minimum credit score requirements than others and may consider factors in addition to your credit score, such as your bank account history and online accounts.
Personal Loans for Poor and Fair Credit
|Lending Partner||Minimum FICO Score||APR Range|
|No Min||36% – 299%*||Apply|
|No minimum||36% – 199%*||Apply|
|600||15.49% – 34.99%*||Apply|
|600||5.99% – 35.89%*||Apply|
|No Min||35% – 155%*||Apply|
|580||9.95% – 35.99%*||Apply|
If you’d like to find out what you qualify for with a number of lenders, check out SuperMoney’s personal loan prequalification tool. You’ll answer a few simple questions and can receive personalized rates from several lenders, and it doesn’t hurt your credit score.
Check your rates to find the best personal loan you can get with your current credit standing.
If you have no luck getting approved for a personal loan, also consider getting a person to cosign for you.
Next up is crowdfunding. There are many crowdfunding platforms in which you can create a campaign for your startup. Once your campaign launches, you attempt to raise the money you need from the “crowd.” Some platforms like Kickstarter, Indiegogo and FundRazr target the general public and campaigns offer rewards in exchange for contributions. Others like CircleUp and Crowdfunder offer equity-based crowdfunding, which means accredited investors contribute to your campaign in exchange for equity in your company.
Shop and compare crowdfunding platforms to see whether it’s the route you want to take.
Grants are not loans but they are better because you don’t have to pay them back. The catch is, they are funded by tax dollars so have strict requirements on how they can be used. The U.S. SBA does not provide any grants to small businesses but check with state and local programs, nonprofits and other local groups.
The Microloan program was created and funded by the SBA to help businesses with startup and expansion costs. Loan amounts go up to $50,000 but the average is about $13,000, says the SBA. Funds for microloans are given to nonprofit intermediary lenders that are community-based and offer assistance in addition to the loans.
The funds can be used for working capital, machinery, supplies, inventory, equipment, furniture or fixtures but not real estate or existing debts. You can find lenders in your area to apply with by contacting the SBA District Office closest to you or by checking this report, which has a list of lenders.
Another available route is to get venture capital, which is when an investor gives you cash in exchange for equity in your company. The investor also typically will want to play an active role in your company’s decisions. According to the SBA, this kind of funding is different from traditional loans and financing because investors typically do the following:
- Focus on young companies with high-growth potential
- Take higher risks to potentially earn them higher returns
- Have a longer investment horizon
- Actively monitor businesses they invest in
“Over the past few years, wealthy individuals have looked for new ways to invest their money and at the same time have their money used in a meaningful way,” Benitez says. “Startups offer the perfect solution. They allow investors to be a part of a team and incentives for success are very lucrative.”
The venture capital application process requires you to have a business plan and the materials prepared to allow investors to perform due diligence on your business. If an investor decides to invest in you, you will get the money in exchange for giving a stake in your company’s equity and/or debt. Then, the investor will take an active role in your business. At some point, they may exit your business, typically after they have made their desired return on investment.
This article has some great tips on how to find the right investor for your startup.
Even with bad credit, you have loan options
If you are getting discouraged because you have a great business in the wings but don’t have the funding to get it off the ground, don’t worry.
“Never get discouraged by your credit report. Focus on building a great product, app or idea that people will love and the money will find you,” Benitez says.
There are many avenues you can explore to get a loan, even with bad credit. Research the options listed here to find out which will work best for you, and then you can get on with growing your startup to its full potential.