Do you need a loan to start a business but have no collateral/guarantor? If YES, here are 15 easy ways to get a small business loan with bad personal credit.

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.

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).

15 Ways to Get a Loan to Start a Small Business With Bad Credit

  1. 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.

Ajaero Tony Martins

Founder / Publisher at Profitable Venture Magazine Ltd
Ajaero Tony Martins is an Entrepreneur, Real Estate Developer and Investor; with a passion for sharing his knowledge with budding entrepreneurs. He is the Executive Producer @JanellaTV and also doubles as the CEO, POJAS Properties Ltd.
Ajaero Tony Martins

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