It’s a fact: Bad credit is bad for business.
When you’re a budding entrepreneur with the drive and ambition to build your brand from the ground up, and a unique business model that’ll set you apart from the competition, you’ve got the makings of success written all over you.
Sadly, that hardly means anything if you have very little seed money or savings to start your business. If your credit is poor (basically anything under a 600 credit score), you’ll likely be rejected left and right for even the smallest of small business loans and other sources of capital. Lenders aren’t willing to take the risk with businesses that haven’t proven themselves, making it more difficult to obtain the necessary funding to start your new venture.
This can create a dilemma for a business that can’t start making profits without funding, and can’t get funding without profits and stellar credit. One way around this is seeking alternative financing that re-establishes your credit and preps you for future borrowing opportunities.
A secured business credit card
If you’ve heard of a personal secured credit card, a secured business credit card is very similar. Designed for businesses without the credit strength to qualify for a regular card, it’s the most basic way to start building your credit and finance your expenses.
A secured business credit card gives you a credit limit that’s secured by a cash security deposit you make into your account once you’ve applied and been approved for the card. Like other secured cards, the deposit is a form of risk protection for the lender, since you’ll be extended a line of credit financed with your own money.
This doesn’t mean, however, that you’ve got a debit card on your hands; the card needs to be treated as any credit card would, so borrowing modestly (no more than 30 percent of your credit limit) and paying your balance in full each month keeps you out of debt’s way and improves your business credit score, increasing your chances of getting approved for other business loans or credit accounts.
Asking your bank or credit union for financing may prevent you from having to hunt high and low for a business loan. If you do your banking with them and your personal credit score is on the higher side, they may consider you for a loan even if your business score is low or zero.
Getting the green light from a financial institution you’ve done business with still may come with some drawbacks like higher interest rates, a price you may have to pay until you’ve shown progress in building your business credit score. Banks still adhere to assessing loan customers by their credit scores, but yours may be enough to find some funding until your financial situation improves.
Business cash advances
If your credit score is low and you don’t mind sacrificing some of your future profits, a merchant, or business, cash advance can provide some quick cash flow until your business finds its financial footing.
When a provider grants you a cash advance at an agreed-upon amount, you’ll have the money in your hands right away, and you’ll pay it back with a portion of your credit card revenues. Though it isn’t really a loan, per se—it will still carry a hefty interest rate in case your sales don’t cover the cost of the advance, so it’s only recommended as a last resort if your business has already pursued every other funding avenue.
Because the "micro" in microloan represents a smaller loan amount, usually up to $50,000, you don’t need stellar credit for your business to qualify for one. A microloan might be an ideal choice for the solopreneur with poor credit, but without too many business costs or overhead at the moment. They also cater to women business owners, or those who work in low-to-moderate-income areas. The average microloan, according to the Small Business Association, is $13,000, and it can be used for anything from working capital to supplies office equipment or furniture.
A microloan may be small, but its impact on your credit can be huge, since it’s treated like any other loan, and your borrowing and repayment are reported to each credit reporting agency. To start, check out the SBA’s microloan page; most loans are available through various nonprofits, community organizations and other lenders, such as Prosper, Accion or Kiva.
Seeking a loan from your peers cuts down on the red tape you might encounter through traditional lending, one of the benefits of P2P, or peer-to-peer, lending. Several P2P websites, like Lending Club or Avant, build their reputations accepting borrowers with less-than-stellar credit. P2P lenders don’t necessarily lend you money directly, but instead act like the middleman between you and an investor, which may be an individual person or other organization.
Not every P2P lender deals with small business loans, and many won’t accept borrowers below a certain credit score; the ones who do may also impose high interest rates, so prepare yourself for the potential cost if you’re early in your business career and in need of financing.
Home equity loans
If you own a home, and you’ve built up equity in it by paying off some of your mortgage, you may consider taking out a home equity loan for your business, borrowing against the inherent cash value of your house without the need for a third-party lender in the picture. Don’t confuse home equity loans with a HELOC, a home equity line of credit designed for home-related (not business-related) costs.
Proceed with caution if you’re thinking of a home equity loan. You’re putting your house on the line as collateral, and you risk losing it if business doesn’t turn over and you’re unable to pay back the loan. A home equity loan is recommended only if your credit is slowly on the rise.
Loans from friends and family
The most personal of personal loans might be the one you find from a relative, friend or family member who may be happy to help finance your new business, even partially. Unlike a lender, friends and family are invested in your success and happiness, not in making money. The trust and relationship between you and a lender you know personally is what counts most, not credit scores, interest rates and other aspects of conventional lending.
Building your business credit
Even with bad or zero credit, there are lending options out there if you’re launching a new business. If you’re lucky enough to find funding through just one of the above options, great. But there’s a better chance of getting financed with a combination of approaches. Go into your pursuit of finding the right loan with the mindset of getting a microloan, asking a family member and getting a secured credit card, so you might fare better than counting on just one of them to come through.
As you build your business credit, treat it with the same respect as you would your own personal credit. Pay your loans, bills and other revolving business expenses and creditors on time, in full; you’ll bypass penalty interest rates, leave a good reputation and see it reflected in your credit score. Budget wisely, and take unexpected costs into account, or you could underestimate how much capital you’ll actually need for your business to survive.
By running a profitable yet frugal business, your credit will grow, your operations will thrive, and a world of lending opportunities will open up because you took a creative approach to borrowing money.