Negosentro.com | Starting a Business When You Have a Suboptimal Credit History | The current business climate offers a lot of potential for entrepreneurs. Your access to business resources — from software to training — is greater than perhaps any other time in history. Not to mention that new remote working methods mean that you can connect with diverse employees and customers from across the globe.
That said, it still takes some initial capital to both get a business running and to maintain it through those inevitable financially-rocky early days. For those of us whose credit history is somewhat less than stellar, or one of the 45 million Americans who are credit invisible, obtaining finance can be particularly challenging. Without a solid history that shows you to be a low risk gamble to lenders, your entrepreneurial vision can be subject to obstacles, or you may have trouble getting off the ground at all.
However, your suboptimal credit doesn’t take you out of the running entirely — and neither should it! Let’s explore some of the options and strategies that can make your goals more achievable. What can improve your chances of gaining funding, and where can you start looking?
Repair Your Credit
Before you start heading to banks to apply for your business loan, it’s important to see whether you can take action to improve your credit score. We don’t mean that you need to bring yourself up to a perfect score before you start your business. But even bumping it up to a level higher than you are now can make a difference. After all, having a score defined as fair (580-669) rather than good (670-739) can be a factor on whether you qualify for a small business administration (SMA)-backed loan.
Many of us have some form of debt, and it’s important that you take steps to manage it more effectively. For larger debt, such as student loans, it can help to research your repayment options. It may also be more prudent for you to consolidate your various smaller loans into a single, manageable payment. This can also help to simplify your strategy for credit reparation, as you won’t be overwhelmed by juggling various lenders and payment dates. It’s vital to keep paying these loans down as much as possible; any additional windfalls such as tax refunds should go toward these efforts.
It may seem counter intuitive, but taking out other forms of credit can also make a difference to your score. Get a credit card, and be certain to keep meeting your payment dates. Just as important, though, is how much of the credit on the card you use. Your ratio of the limit you use should stay below 50%, and keep it there. If you can reel in the temptation to actually use your maximum spending balance, your score will start to climb higher.
Review Lending Options
Don’t fret if you’re unable to make much of a dent in your credit history. It’s still possible to obtain a business loan with a suboptimal score. However, it’s likely to be the case that you’ll have to accept loans that have a higher rate of interest. In which case you’ll have to factor this into your business plan, and how this is likely to affect your balance sheet until you build a healthier business credit history.
That said, your approach to loans can include:
- Bring on a Guarantor or partner. It can be a big ask, but if you don’t have a great history, you can leverage this with someone who does. If a friend or family member has faith in your concept and your abilities, it may be worth convincing them to help out by guaranteeing your initial loan. You might also want to float the idea of bringing them on as a partner, giving them an incentive for helping to shoulder some of the financial risk.
- Provide Proof. For the most part, lenders want to see that you can make payments, and for some this requires evidence that you are gainfully employed. Outline exactly what guarantees of income you have coming to you, and demonstrate that this is sufficient to keep making at least the minimum repayments. This can be particularly effective if your business is starting as a side hustle and you’re planning on keeping your day job for a while.
- Use Micro Lending. One of the keys to success in any industry is starting small. You might have grand ambitions, which is great! But when your credit history is poor, it can be sensible to initially scale back. Similarly, if you can minimize your budget requirements, you may be able to qualify for a business microloan. Some of these lenders, such as LiftFund and Opportunity Fund are specifically designed to help entrepreneurs with poor credit history or a low household income.
Explore Grants and Investments
If you have a poor credit history, it may be the case that the thought of taking out another loan is a bit overwhelming. Perhaps you’ve been able to take out a small loan, but it’s not quite enough to get up and running. In either case, it can be useful to explore what investment or grant opportunities can help you top up your starting capital.
It’s a common misconception that your business needs to be a nonprofit in order to qualify for grants. In fact, the small business administration (SBA) works with local and national organizations to provide federally funded grants to certain small businesses. The administration also provides access to counselors that can meet and talk to you about financing options.
You should also seriously consider seeking out angel investors. These are professionals or businesspeople that are committed to helping out the next generation of entrepreneurs and their startups. You can usually get information about nearby investors from your local chamber of commerce, and the Angel Capital Association (ACA) keeps a list of verified investors by region. Your passion for your project can be key to successfully gaining funding from angel investors, so it’s important that you prepare an effective pitch before you arrange to meet them.
Your poor credit history might throw up a few roadblocks, but you can still get funding for your burgeoning enterprise. Place some focus on repairing your credit score, and research the best loan approach for your circumstances. Don’t forget that grants and investments can be key sources of funding, too. So long as you keep your eye on the prize, and work on where you may fall a little short, you’re sure to find the funds and success you ultimately need.