Do you need a loan to start a business but you have bad credit history? If YES, here are 50 ideas on how to get a business loan with bad credit, no collateral and no guarantor.
One of the worst things that can ever happen to you is to delve into business without having the required start up fund to sustain yourself in your industry. In the business world, when you are tagged as someone with a bad credit history, you can hardly get banks or any loan issuing organization to give you a loan.
As a matter of fact, you would find it very challenging to get business partnership and credits if you have bad credit history. Bad credit is a tag that most organizations and business people don’t want to be identified with.
What is Bad Credit History?
Bad credit history simply means having very low credit score and such persons usually find it difficult to access credit, and if they eventually get an organization to give them credit, they are usually charged higher interest rates when compared to people with good credit history. A person’s credit history is a record of his credit from a number of sources including banks, credit card companies, collection agencies and government agencies.
Getting a Business Loan vs Accessing a Line of Credit: What is the Difference?
A line of credit can be said to be similar to a credit card or a home equity line of credit, where there are credit limits that the owner of the card can draw from till it reaches his credit limit. A line of credit is usually structured on a variable rate and can be adjusted periodically in line with the prime rate or other benchmark interest rate.
As an aspiring entrepreneur, it is only fair that you want what is best for your business when it comes to financing. However, in determining what should be the best financing option for your business as an aspiring entrepreneur, you will need to check on the advantages and disadvantages between both options. Some of the factors you can use to do this are;
- Timing-: While a line of credit can be set up long before you need it and can serve various purposes, a loan is usually applied for when it is needed and it must be used for a specific purpose.
- Renewal-: A business loan cannot be renewed even after the term has ended, as a new loan must be applied for again; this is unlike a line of credit which is usually revolving and can be used as many times as possible.
- Monthly Payments-: When you take a business loan as an entrepreneur, you usually have to pay back your loan monthly regardless of whether you have started using the loan or not. However, with a line of credit, your payment only reflects the amount which you have borrowed and so if you have a balance that is zero, you will not need to pay anything.
- Terms or Repayment Periods-: The terms of repayment for a business loan are usually fixed which makes the monthly repayment higher when compared to a line of credit.
- Closing Costs-: The closing costs are usually higher for a loan than for a line of credit. The closing costs for most loans usually include processing; appraisal (for loans that come with collaterals) and credit check fees and can fall between 2 to 7 percent of the overall cost. That of line of credit usually includes processing, credit fee, withdrawal or transaction fees (for additional cash against the line of credit) and is usually charged at the barest minimum.
- Interest Rates-: Interest rates vary depending on the financing option. For instance, for a business loan, the interest rates are higher and it is usually fixed; while a line of credit usually offers the entrepreneur lower interest rates that are variable. However, one thing with a line of credit is that late repayment or exceeding the credit line might cause your interest rates to increase. Therefore, those that use line of credits have to be wise so as to be able to lower their rates.
- Long-term vs short-term-: A business loan, both principal and interest, usually has to be paid off within 1 to 10 years, this is why a loan is best for long term purposes. Lines of credit on the other hand, are meant to be repaid within a short period and best for short term purposes. Those who use lines of credit usually use it for account receivables such as payroll or marketing.
Types of Business Loan
There are basically two types of business loans and they are;
- Secured Business Loans
A secured business loan is one that is secured by either a personal guarantee or a valuable asset as collateral. This means that you are telling your lender that should you not be able to repay the loan, the collaterals or personal guarantees can be used to legally recoup the lender’s losses. However, secured business loans usually come with lower interest rates and longer repayment period.
The reason why a secured business loan is used is so as to protect the interest of the lenders especially if lending to the business is quite risky for the lender.
Terms to note under secured business loans
i. Collateral: Collateral can be referred to as something that is owned by the entrepreneur or the business and can be turned to cash. Collateral is often used to reduce the risk of the lender so that if you default on your loan, the collateral can be seized and liquidated so that the lender doesn’t lose all their money. Collaterals are usually assets such as property, savings, invoices, inventory, and blanket liens; and the lender holds the deed or title till the loan is paid in full.
ii. Personal Guarantee: A personal guarantee can be referred to as an agreement between the borrower and the lender, where the personal assets of the lender are used to guarantee the loan. A personal guarantee is not so different from collateral as it is also a way for the lender to minimize the risk of the loan.
However, while collateral deals with your asset, a personal guarantee means the entrepreneur will be held personally liable to repay the loan. The lender in this case can claim personal assets such as the borrower’s house, investment accounts and any other personal assets that can be used to repay the loan.
The difference between collateral and personal guarantee is that with collateral, particular assets are staked, while with a personal guarantee any asset can be seized even assets that will be obtained in future.
iii. Traditional Term Loan: These are referred to as medium term loans and are the most common form of secured business loans. A traditional term loan cannot only be gotten from a bank; it can also be gotten from online lenders. A traditional term loan usually falls between a particular amount that mustn’t exceed 5 years with interest rates ranging from 5 to 25 percent depending on the amount of loan and the repayment period.
Small Business Administration (SBA) Loans: The SBA is a federal agency that is aimed at helping entrepreneurs improve on their small businesses by allowing them get better access to small business loans or take advantage of contracting opportunities. Contrary to the belief that the SBA lends money to entrepreneurs, instead it acts as a guarantor for the borrower who must borrow only from banks that participate in SBA financing. Collateral demanded by the SBA and the lender (bank) usually falls between real estate, heavy equipment, vehicles, mutual funds, jewelry, stocks and bonds.
The interest rate for SBA loans is usually low and the repayment terms are longer as well. SBA loans usually come via 3 of their loan programs such as CDC/504 Loan Program, 7(a) Loan Program and the Microloan Program. The CDC/504 Loan is usually for entrepreneurs who are looking to purchase major fixed assets. The 7(a) Loan is usually for general business purposes, while the Microloan is for new or small businesses that are looking for loans under $50,000.
2. Unsecured Business Loan
An unsecured business loan is a loan that does not require any sort of collateral before the borrower can be given a loan. However, while the entrepreneur might not have to put down any sort of collateral, they usually have to face higher interest rates from the lenders or put up a personal guarantee.
This is to say that even if the business fails; an entrepreneur shouldn’t assume that his assets wouldn’t be seized as most lenders usually include personal guarantees as a condition. This type of business loan is not really favorable to the entrepreneur as any asset could be seized even one that hasn’t been acquired yet.
There are however ways that lenders ensure that their risk is highly minimized and they include;
a. Personal Guarantee: A personal guarantee as explained under secured business loan is an agreement between a lender and a borrower where the latter puts up their personal assets, thereby making the borrower to become the co-signer of the loan. If you are therefore looking to get a loan using a personal guarantee, you should note that not all guarantees are the same and should therefore carry out a thorough investigation on which personal guarantee will most likely suit your business without having a negative impact on your financial future.
b. Unlimited Personal Guarantee: An unlimited personal guarantee means that you have agreed for the lender to recover 100 percent of the loan and any legal fees – which are most times inflated – that are associated with the loan should you default in any way, from your personal assets which may include your retirement, life savings, house, car or even kids college funds. The lender’s recovery does not stop with you as it can even be extended to the personal assets of your spouse. It is however important to note that the assets that your lender can seize and liquidate are those that are directly connected to the loan you owe.
c. Limited Personal Guarantee: This sets a limit on the assets that can be collected from you by the lender should you at any time default on your loan. This kind of personal guarantee only comes into play if several business partners come together to take a loan to start or run a business. According to SBA policies, those that can take part in the guaranteeing process are those that have at least a 20 percent stake and so the guarantees are defined according to the individual’s stake should there be a default on the loan.
The limited personal guarantee can be further split down further and they are; Several Guarantee and Joint and Several Guarantee.
Blanket Business Lien: A blanket lien is one that puts all the assets listed in the balance sheet of your business at risk of seizure should your company default in the repayment of its loan. It should be noted that a business lien is often included in the terms and conditions of all small business loans so that lenders can be protected should the borrower default. Some business liens only target specific assets within the business such as any asset that was purchased with the loan.
How Possible is it to Get a Loan to Start a Business When You Have Bad Credit History?
You see, every business savvy individual would experience that crucial moment, once in their lives – when you have a very solid business idea but you don’t have the required funds to invest and move your ideas to the point of reality. For people who have good credit scores, this really isn’t a problem because you can simply walk into a bank and ask your manager for a loan.
However, for people with bad credit scores, it is a different ball game because with a bad credit score, the only way you can get a bank loan is when you have a guarantor who is willing to co-sign or guarantee your loan, or when you are willing to part with ridiculously high interest rates because the banks do not trust you enough to give you their money, and would rather slam you with high interest rates because you are considered a high-risk individual.
But in a situation where you have bad credit history and no one wants to stand as a guarantor for your loan, then your chances of getting a loan is very slim. In fact, it is easier for a camel to pass through the eye of a needle than for you to get a loan to start a business when you have bad credit history and no guarantor.
However, there are a few work around which we are going to explore in this article that will help you access the finance you need despite your situation. Now since a person’s credit history has a lot to tell about the person’s ability to manage money and his or her financial life. It is for that reason that it is very important to always maintain good credit history especially if you intend going into business or managing people’s investments (business portfolios).
So, if you want to start a business and you have a bad credit history, then you must consciously make some amendments. Here are 20 practical steps to take before starting a business especially when you already have a bad credit history.
20 Steps to Take Before Starting a Business When You Have Bad Credit History
- Take a Course or Lesson on Financial Management and Budgeting
The first step you need to take before starting a business especially when you already have bad credit is to take a course or lesson on financial management and budgeting. The truth is that one of the major reasons why you fall into bad credit rating is because you lack financial management and budgeting skills. If you have good financial management and budgeting skills, you will sure work your way out of bad credit ratings and of course build a successful business from the scratch and maybe without external financial assistance.
- Always Work with a Budget
One of the chief reasons why people fall into bad credit is their inability to work with a budget. The truth is that if you strictly follow your budget when carrying out expenses, you can hardly fall into bad credit and when you have good credit ratings, it is easier for you to access loans to start a business or re-invest into your business for the purpose of expansion. Besides, if you are able to work with a budget, you are sure going to successfully build a business.
- Minimize the Debt/Credit You Collect
One bad thing about bad debtors is that they always find it easy to fall deep into debt. This trap is very difficult to come out of. It is bad in itself that you have bad credit history, so all you need to do is work hard to turn around your bad credit history.
Part of what you need to do when you fall into this category is to work hard to minimize the debt or credit you collect. If you can be successful in this regard, you are one step away from turning your bad credit ratings around and when you successfully turn your bad credit ratings around, it is easier for you to build a successful business.
4. Learn to Always Pay Your Bills on Time
If you take your time to study people with bad credit history, you will find that one common denominator with them is that they hardly pay their bills on time. As such, if you don’t want to fall into bad credit ratings, then you must be discipline enough to always pay your bills as at when due. If you must defer the payment of any of your bills, let it be for a genuine reason and try as much as possible not to allow it repeat itself.
5. Hire a Financial Coach
No human is a custodian of knowledge and one of the reasons why people fall into bad credit is because of their lack of knowledge on how to handle finance. If you know you are already in bad credit, then on of the steps you need to take before starting a business is to hire a financial coach.
A financial coach will guide you from bad credit ratings to good credit ratings especially if they are well – experienced and if you are willing to follow their counsel and leading. The truth is that when you work with a financial coach, you stand to learn a lot and it will help you when you start a business of your own.
- Leverage on Payment Reminders
Another step that you need to take before starting a business especially when you have a bad credit history is to leverage on payment reminders. As simple as it sounds, it can actually prevent you from falling into bad credit rating.
7. Maintain Low Public Life Profile
One of the culprits why people fall into bad credit ratings is simply because they want to please everybody therefore living life above their means. The truth is that no matter how hard you try to impress people by living above your means, you can never impress everybody. So, a good step to take before starting a business especially when you have a bad credit history is to maintain a low public life profile and never live above your means.
If you take your time to study the lifestyle of successful entrepreneurs like Bill Gates, Mark Zuckerberg and co, you will realize that they don’t live their lives to please or impress anyone; they are known to always maintain a low public life profile despite the fact that they are world celebrities. Maintaining a low public profile will help you build your business faster than you think.
- Never Get Involved in Impulsive Buying
If you are always buying everything you like or come across, you will fall into bad credit and if you already have a bad credit history, you can never come out of it if you continue to buy every and anything that you feel you need. In order words, a good step that you need to take before starting a business especially when you have bad credit history is never to get involved in impulsive buying.
- Learn to Always Save
If you have ever heard the aphorism that says ‘savers are earners’, then you will agree that it pays a lot to save. A man that has good savings culture can hardly fall into bad credit ratings. In essence, one of the steps that you need to take before starting a business- especially when you have bad credit history is to cultivate good savings culture. You are not expected to save only when it is convenient for you.
- Understudy a Businessman or Businesswoman with Good Credit History
The type of knowledge that can be garnered when you closely understudy a person cannot be compared to that which you read about. This is one of the reasons why it pays to give time to understudying one who is in the line of business you aspire to go into. There are several people out there who are the ideal picture of the kind of person we want to become.
So, if you have a bad credit history, one of the steps you need to take before starting a business is to understudy a businessman or businesswoman with good credit history. You can choose to study them from afar or from a close range via a mentorship or intern platform. The bottom line is that you will gain business and financial management insights that will help you build your business to success while maintaining good credit history.
- Start a Small Business (Experiment with a Mom and Pop Business)
Another step that you need to take before starting a business especially when you have bad credit history is to start a small business. Experiment with a mom and pop business; a business that does not require you to source for business loan.
The bitter truth is that if you have bad credit history, you can hardly get any bank or loan issuing organization to give your business a loan and if you get a bank to give you loan, you will be expected to pay high interest rate. But if you can successfully build a small business and keep a good financial record, you can be lucky to get support or low interest loans from banks.
- Start a Business from Your Savings
If you have bad credit rating, you will find it difficult to access business loans with good interest rates. So, a good step to take before starting a business when you have bad credit history is to start a business from your savings. If you can successfully start and build a business from your savings, it won’t be too long before you turn around your negative credit history and be able to access business loans from banks and other lenders to build your business. It is a good step to take and a way to show the world that you want to truly turn your bad credit ratings around.
- Partner with a Person with Good Credit History When Sourcing for a Business Partner
Another step that you can take before starting a business especially when you have a bad credit history is to partner with a person with good credit history when sourcing for a business partner. It might sound like a shortcut, but is indeed a good way to re – invent your business and financial life. Just ensure that you allow your business partner to know about your bad credit history and let them know that you are partnering with them so that you can learn how to keep good credit history as a businessman or businesswoman.
14. Build Your Business by Re- Investing Your Profits
Building and expanding your business while re-investing your profits is a good pointer to the fact that you want to turn your bad credit history around for good. As a matter of fact, it is a good way to start especially when you are struggling with bad credit history. The bottom line is that you must work hard to earn your startup capital from a petty business. It will go a long way to show that you are determined to come out of bad credit and of course build a successful business.
- Track Your Daily Spending (Keep Record of Your Daily Expenses)
Accountability is one of the things that every aspiring business person ought to hold dearly. If you take your time to track your daily spending, you will be amazed at how much you spend daily and how much such money can multiply for you if you can successfully save them and invest them in a business venture.
- Be Discipline
Being disciplined is one of the best things that could possibly happen to a focused entrepreneur. In fact, most people fall into bad credit because they are not disciplined with their finance. The truth is that you can hardly find a successful businessman or businesswoman with good credit history that is not disciplined.
17. Be Quick to Seek Help
Your ability to source for help when you need one is the key to staying afloat not only in business, but in life generally. One good step you need to take when you want to start a business especially when you have bad credit history is to be quick to seek help when you need one. Some people fall into bad credit ratings simply because they think they can handle business and life challenges all alone by themselves. If you seek and get help when your challenge is just surfacing, you will succeed in taming the challenge before it grows into a monster.
- Read Relevant Books
You can never estimate the solutions that are buried in a good book. A good way to start if you want to start a business when you have a bad credit history is to look for good books that address your situation. There are good books out there that can guide you on how to turn your bad credit history around within record time and in some cases such books are available for free as e – books on the internet.
- Learn the Art of Goal Setting
One good step you need to take before starting a business especially when you have bad credit history is to learn the art of goal setting. If you are good with setting goals and achieving goals, you can hardly fall into bad credit ratings. So before starting a business when you have bad credit ratings, first start with setting smaller goals and work hard to achieve those goals. It will sure put you in a good state of mind (positive mental attitude) to build a business no matter the negative status of your credit history. Just ensure that you set smart goals; goals that are achievable.
- Work as an Intern
If you have bad credit history, you can hardly access business loan and even if you come by a bank or lender who wants to give your business loan, you will get it at a very high interest rate. In essence, you must source for startup capital from somewhere else and one of the means of generating startup capital is to work as an intern.
If you are lucky to find a job as an intern in a business that is similar to the business you want to start, you will be getting double benefits. You will get the money you need to launch your business and you will get the required business experience needed to build your business. So, one of the steps you need to take before starting a business especially when you have bad credit history is to work as an intern to raise money and get the relevant business experience.
At this juncture, you should know that hope is not completely bleak for people with bad credit scores. It is also important to categorically state that the fact that you have bad credit history does not in any way stop you from starting a business and becoming a successful businessman or businesswomen with good credit history; as there are few smart ways you can raise funds for your business even with a bad credit score and no guarantor.
15 Smart Ways to Get a Business Loan When You Have Bad Credit and No Guarantor
- Home Equity Line of Credit (HELOC)
This is a simple explanation for how HELOC works- you use the equity on your home as a collateral security for your business loan.
This is like taking a second mortgage on your home because the paid-up portion of your mortgage is used as collateral security for your loan. However, you are not given the entire equity as loan; you would be confined within a credit limit which you can use as a line of credit to borrow funds within a specific time-frame. HELOC is a great way to raise funds for your business but it should be used with care and only for viable businesses because you can end up losing your home if you are unable to repay the loan and interest rates.
2. Equipment Financing: Oftentimes, the funds you require for your business is meant to purchase some of the necessary tools and equipment required for the business. In such cases, equipment financing would come in very handy. Equipment financing also known as equipment loans, allow you to access funds to purchase equipment for your business so that the equipment that you purchased are used as collateral security for the business.
So let’s say you approach an equipment leasing company and you ask them for $20,000 to buy equipment, they give you the money and then add an interest rate of between 8%-30% depending on the amount and type of equipment. If you default on repaying the loan, the lender has the right to take back the equipment, sell it off and recover their funds regardless of how much money you have paid in the past.
This type of loan is very great for you if you have poor credit score and no guarantor because this category of lenders are hardly concerned with your credit score or financial history since they can always take back their equipment if you fail to pay up, and you will be the one at the losing end because you would lose the funds you have already repaid should they decide to repossess.
3. Credit Card Financing: It is possible for you to get a credit card even with a bad credit score and you can use the credit card to purchase some equipment and tools that you need for your business. There are some companies that specialize in issuing credit cards to people with poor credit scores but they would mostly expect you to make a security deposit against the credit limit or be willing to pay interest rates that are way higher than the average market rates.
Whilst this is a very convenient way to raise funds for your business, you should only use this method when you don’t have any other alternative because you don’t want the high interest rates crippling your business before you even start.
4. Angel Investors: Angel investors are deep-pocketed individuals (could be businesses or other corporate bodies) who provide you with funds to setup your business. An angel investor is worth at least $1,000,000 and earns at least $200,000 or $300,000 yearly.
These guys are rich and they want to make extra money without having to do all the dirty work, so they look for guys like you who have smart business ideas and they give you the funds to start your business in exchange for equity participation in your business or repayment with interests in the future.
These guys are not really interested in your credit score; what they look out for is a good business idea and once they are able to ascertain the viability of your business idea, they would give you a loan to fund it.
5. Venture Capitalists: An alternative to angle investors is venture capitalists. Venture capitalists are like groups of deep-pocketed individuals who come together to form a Limited Partnership and with this, they are able to invest in viable business ideas.
The Limited Partnership would usually have a General Partner whose responsibility would be to scout for great business ideas that the company can invest in so that they can make good returns for the partners. Again, this type of investors are less concerned with your credit score as long as your business looks like it is going to make them a lot of money.
6. Government Grant: A government grant is a financial award given by the government for specific purposes including business, research or personal use. The government gives out these grants to businesses that it believes has the capacity to improve the quality of life of people living within the community, provide employment opportunity or reduce government expenditure.
Government grants are usually highly competitive because a lot of business owners apply for them, but with the right proposal and business idea, you should be able to get one. Since it is a grant (like a gift) and not a loan, your credit score or lack of a guarantor doesn’t matter here.
7. Business Partnerships: If you have a very smart business idea, you can look for a friend or family member who has a lot of money, and get them to join their funds with yours and invest in the business together.
Although you would need to have some funds saved up that you can add to those of your friend, but the financial burden significantly reduces and your credit score is no problem at all.
However, you may have to pass off on some perks like making business decisions alone or taking all the profit for yourself because your partner would have to share from your profit and be equally involved in the decision making process.
8. Unsecured Loan: Some financial institutions would still offer you loans without a guarantor and with a poor credit score. These types of loans are known as unsecured loans and they usually attract ridiculously high interest rates when you compare them with traditional loans.
Just like unsecured credit card financing, you should only take these loans if you are confident that your business would make you enough money to repay the loan and interest rates conveniently.
9. Get a Trusted Person to Borrow for You: If you have a friend, spouse or family member with a good credit score, you can get them to obtain a personal loan in their own name so that you can use it to fund your business. But you must be very careful here because you could ruin important relationships if it turns out that you are unable to repay the loans as at when due. Another alternative to this is to borrow directly from your friends and family.
10. Roll Over for Business Startups (ROBS) Retirement Account: A Roll Over for Business Startups is a business investment method that legally allows you to use part of your retirement savings fund such as your IRA or 401(k) to fund your business without having to pay any interests, taxes or penalties.
Normally, you can only take money out of your retirement account when you are 59 1/2 years old, otherwise you would have to pay a 10% early withdrawal penalty and also pay income tax on the fund. But with the ROBS, you are not making an early withdrawal or taking a loan against your retirement account, it is simply a rollover plan that allows you to invest in your own business and earn interest from your investments much like a mutual fund.
With a ROBS, you can buy an existing business or obtain capital for expanding your existing business and your ROBS account would be able to own shares and share profit from the business.
11. Microloans from Non-Profit Organizations: Microloans or microcredit as they are sometimes called, are small loans offered by nonprofits organizations mostly to disadvantaged individuals so that they can set up businesses that would help to improve their standard of living.
It is also sometimes designed to alleviate unemployment or promote entrepreneurship within a community. These types of organizations do not consider credit history before issuing out loans as they are mostly concerned with bettering the lives of the people whom they see fit to be offered the loans.
12. Credit Union Loans: This is one of the best types of loans that you can get with a poor credit score because the rates are usually very friendly. To access this type of loan, you would have to become a member of a credit union and then participate in the union’s activities for a specific length of time (the rules differ from union to union) after which you would be able to apply for a loan from the union.
The loans are usually guaranteed by other members of the union so credit score is never a challenge.
13. Small Business Administration (SBA) Loans: The Small Business Administration is a US government initiative aimed at providing financial support to citizens of the country for funding their business startups or for business expansion.
The organization offers both loans and grants and every US citizen can apply for a loan as long as you are able to meet its conditions. If the fund that you need to start your business is less than $35,000, you can apply for the SBA 7(a) loan with bad credit and no guarantor because the loans are backed by the government. When you apply for this loan, the SBA would give you a list of participating lenders with the most suitable loan offer for you.
14. Life Insurance: Another smart way to raise funds for your business is by using the cash value of your life insurance as collateral security, and many people do not know that you can legally do this.
Famous businessmen like Walt Disney of Disneyland, Ray Kroc of McDonalds and J.C Penney of the J.C Penny retail chains raised funds for their businesses this way. Universal life insurance, Whole Life insurance and Variable life insurance are examples of life insurance policies with cash values that you can borrow against.
15. Participate in Business Funding Competitions: There are a lot of them these days and they are hosted by individuals and organizations willing to offer grants to business enthusiasts with great business plans. You can find a lot of them online, submit your brilliantly written business plan to them and you just might get lucky enough to get a loan with minimal interest rates or a business grant.
It is most likely that you would be able to get funding for your business from one or two of the lending options listed above. But if everything else fails, you can try downsizing your home (you know, like live in a smaller home, sell off things you don’t need or enter into a buy-sell agreement with the seller of an existing business so that you can take over the business and make installment payments for the business.