Starting a Business When You Have Poor Credit

Starting a business from scratch is one of the greatest accomplishments that an entrepreneur can achieve. However, though creating an idea and making it a reality is incredibly satisfying, actually doing so can be much easier said than done. There are many things that you need to put in place before you can get your business off of the ground, including creating a business plan, researching market trends, and of course, securing the capital you need to get things off the ground. 

If you have a poor credit score, getting the money you need can seem next to impossible, and without the credit, you can’t improve your score. Facing this reality can be incredibly daunting and can stop some great business ideas before they even get started. However, some options could provide a bit of footing. Let’s talk about credit and how to get your business rolling.

The Effects of Poor Credit

When it comes to the world of finances, there is nothing more important than having a good credit score. Essentially, this number gives new lenders an idea of how you operate when it comes to borrowing and paying back your debts. If your score dips below 600, then companies will be hesitant to loan you money, and even if they do, it will be with an incredibly high interest rate that may be too extreme to overcome. And that is just the beginning.

Not only can a bad credit score lead to a denial of a business loan, but if you need to get a new mortgage on an office space, you could be declined for that option as well. If you find that you are being turned down by all the major banks for the money you need, then you may have to consider providing collateral or finding a cosigner with good credit to sign on with you. This cosigner will also be on the hook if the debt is not paid on time, so lay down solid ground rules and a payment schedule. There is always the chance that working with a friend could backfire, so proceed with caution.

If you are trying to take out money, then you need to review your credit report regularly and ensure that everything listed on there is accurate. It is always possible that you could be on the hook for a debt that you never took out, and if you see something wrong, you need to report it to the credit bureau immediately and have it removed. That last thing you want is to have lenders denying you left and right, and you have no idea why.

Finding Funding With Low Credit

One way to improve your credit is to take out a loan and pay it back over time to show that you are trustworthy. While your poor credit may leave you with fewer options, there are other avenues you can attempt. One idea is to try a peer-to-peer lender that cuts out the bureaucracy of the large banks and instead involves a person or group that is willing to provide the money you need. These lenders will still charge interest and have payment plans like the banks, but they may be more willing to loan to those with bad credit. Before agreeing to anything, though, it’s a good idea to do some quick financial math and consult a loan calculator to make sure you can afford the payments.

If you have poor credit and this is your first business, then you may have to lower your expectations and take out a microloan. These are smaller loans typically in the $500 to $10,000 range, but they can be enough to get your company off the ground so you can at least open a storefront or start accruing the equipment you need. Again, these microloans are often not available at the bank but instead are provided by individuals or groups that are willing to take a chance. You can research microloan lenders in your area, or you can apply for a loan through the government.

You might also try obtaining a business credit card. The initial limit may not be exorbitant, but you will have a credit line to start buying supplies. This card will be on your credit report, and as you pay it off, your on-time payments will be reported monthly.

If you are still declined at every institution, large and small, then you might also consider asking a friend or family member to take a vested interest in your business and loan you some money. This loan may not be listed on your credit report, but if you can get your company up and running and start making a profit, you may not need to take out those larger loans in the future.

You’ve Got the Loan, Now Improve Your Credit

Now that you have some money in your pockets and you are starting to see the light at the end of the tunnel, it is time to take steps to improve your credit so you can borrow more in the future if necessary. 

Make sure that you are paying your bills on time and keep an eye on your credit report. As time goes on, you may be tempted to close some of the older accounts you no longer use but refrain from doing so. When you close your older accounts, you are lowering the average age of your credit, and these older accounts are what prove that you have a long history of paying back your debt. Also, if you are currently working with vendors for your supplies, and you are in good standing, then ask for them to report your on-time payments to the credit bureau, so you have a better case if you decide to borrow more money.

Keep in mind that even if you aren’t approved for a large loan upfront, there is plenty you can do in the meantime to put your business in a good place for when you open your doors. There are two schools of thought as to the better way to start a business. Should you find potential customers first or start the business and try to lure in customers after the fact? 

For someone in your situation, it may be better to find your customers first. That way, you can determine if people will be interested in your product in the first place. When you already have a product that you know people will buy, it will be easier to start making money once you open for business. 

Starting a company is a major endeavor and also a significant risk, especially if you don’t have the funds to get it off the ground. Take some time to build your credit and look at your options now, and you will be more prepared when it comes time to greet your first customer.


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