A great idea comes with great responsibility—or money.
Any good businessman knows that starting a business requires more than just grit and effort. For a business idea to come to life, significant costs are incurred whether you like it or not. From your administrative operations to production costs, starting a business is like bleeding your bank account dry for the first few months or even years of operations.
Most business owners turn to secure loans as an efficient way to acquire working capital because it is not cheap to start a business, and it is not very smart to invest all your available personal cash either.
However, here comes the dilemma—what if I have a terrible credit history?
You’re not alone. And it is not impossible.
Starting a business even with poor credit is more than possible. With the right options, ideas, and cash sources, you can get enough funding to kickstart your business ideas.
What is a good credit score?
A business credit score is quite different from a personal credit score. A personal credit score can range from 300 to 850, while a business credit score ranges from 0 to 100. A 0 business credit score means you are a high-risk account, meaning financial institutions would be hesitant to offer you financial help. Those businesses with credit scores above 75 are generally considered in excellent standing.
The acceptability of your credit score differs depending on the type of credit you’re applying for (e.g., car loan, housing loan, etc.). While a business loan has no standard credit score requirement, a good credit score allows for lower interest rates and higher loanable amounts.
A good business credit score also allows business owners to have secure personal credit, which means you reduce your personal liability from the business and can protect your assets.
What impacts credit score?
Many factors may impact your overall credit score, including:
- Payment history
- Credit utilization
- Credit history
- Credit mix
- Recent credit line
In addition, industry size, SIC or Standard Industrial Classification and company size also matters when computing for business credit scores.
Anthony Martin, Founder and CEO of Choice Mutual, says,
Many people think that only payment history affects your credit score. While this metric has one of the biggest impacts, the age of your credit accounts, how much of your credit limit you’re using, and how recently you applied for a credit line also play a huge role in determining your credit score.”
How to start a business with poor credit
Chances are you’ll find it hard to secure working capital through traditional credit lines (like banks) with very poor credit scores.
Don’t fret, though. With some self-awareness, preparation, planning, and sourcing, you can still start a business even with a poor credit history.
Here’s how:
1. Accurate self-assessment
Needless to say, a poor credit score is a result of bad financial decisions and excessive spending habits.
At the end of the day, this all boils down to how you perceive money and the role it plays in your day-to-day living.
Pay attention to how much money you’re spending compared to how much you’re earning.
2. See where you are in your credit ratings
After being self-aware, the next step is to be financially aware—especially if you are planning to start a business. This includes getting yearly reports of your credit score.
You can get your credit score from each of the three agencies (Equifax, Experian, and TransUnion) for free once a year through AnnualCreditReport.com, which will also include your bill payment history, loans, current debt, bankruptcy history, and lawsuit records.
You can use the FICO score or VantageScore metrics to assess how good or bad your credit score is. Use the following chart to compare both metrics:
| FICO/VantageScore Rating | FICO Score | Vantage Score |
|---|---|---|
| Exceptional/Excellent | 800 – 850 | 781 – 850 |
| Very Good/Good | 740 – 799 | 661 – 780 |
| Good/Fair | 670 – 739 | 601 – 660 |
| Fair/Poor | 580 – 669 | 500 – 600 |
| Poor/Very Poor | 300 – 579 | 300 – 499 |
Both credit scoring methods also value various factors differently on your overall credit score. As they are both different entities that provide credit reports to lenders, they won’t have the same metrics and would place different weights on your credit performance. This is why it’s important to ensure that you’re using a FICO score, VantageScore, or any other credit score metric before assessing your credit score.
3. Get a clear view of your finances—and fix them
Your credit score report will include all your existing loans—from mortgage to credit card to student loans—as well as the date they were distributed, any balances and delinquencies in payment, and your payment history. It can also include incurred bankruptcies, lawsuit files, foreclosures, and the companies that have pulled your credit score reports and when they were made.
With a credit score on hand, you’ll get a clear view of who and how much you owe, and put these data into play into managing your finances effectively and eventually improve your credit score.
You can start fixing your finances simply by watching what and how you spend, or by:
- Using an application or Excel document to track your income and expenses
- Creating a monthly budget—and sticking to it
- Creating a line between your wants and needs
- Paying off high-interest loans first
- Avoiding late payments or delinquent accounts
4. Develop a solid business plan
You can’t jump into a fire without any protective gear, the same way you can’t start a business without fully preparing the ins and outs of your business operations.
Before you can secure a working capital for any credit source, it is very important to make sure that you have a solid business plan to assess how profitable or viable your business idea is.
To develop a business plan, you must:
- Have a vision and mission for your business—a clear definite goal and direction
- Determine your business structure
- Perform market analysis
- Determine your niche and our target market
- Outline your initial working capital
- Outline a short-term and long-term budget and financial plan
- Develop a marketing plan
- Get business insurance—including bank loan insurance
5. Apply for business loans
If you have a poor credit score history, chances are most traditional bank loans and lending companies would be hesitant to extend you a loan—and even if they would, would only give a small amount at a ridiculous interest rate.
Here are some business credit sources you can consider as capital sources even with a poor credit history:
Credit cards
Credit cards are easy sources of funds that won’t ask for your credit score before taking out money or any other financial documents. Most credit card personal loans offered by banks come with a fixed interest rate that can be higher or lower than traditional bank loans (especially when some credit card companies offer special promotions for personal credit card advances).
The challenge with credit cards as a source of funds is that you are limited within your existing credit limit, or any additional limit that may be offered by your credit card company. If you need a higher working capital, a credit card may not be enough and you may need to secure other capital sources.
Andrew Pierce, CEO at LLC Attorney, emphasizes the non-payment of credit card debt, saying:
Although no person or entity can be detained for non-payment of debt as non-payment constitutes a civil nature and not a criminal one, non-payment of debt, especially credit cards, can only worsen your credit history in the long run.”
Merchant cash advance
A merchant cash advance (MCA) is a type of working capital funding that lends your business cash with repayment made as a percentage of your credit card sales, also called a holdback. Simply put, you need to have card transactions so that the lending company can take a percentage of these credit card sales until you are fully paid, including fees and interest.
The advantage of MCAs is that they don’t require a lengthy approval process, as well as hefty documents—including a credit score report. Most MCA companies will only look at your daily credit card sales to determine if you can pay.
Invoice financing
Invoice financing is also a great way to secure working capital even with a poor credit history because, like MCAs, invoice financing is focused on accounts receivable accounts instead of credit scores.
In invoice financing, you get a credit line from an invoice financing company to extend you a portion (up to 90%) of a certain invoice receivable, collect from your customers, and pay the company your borrowed amount plus dues.
Invoice financing should not be confused be invoice factoring wherein you “sell” your invoices to a third party, who is now the one responsible for collecting payment from your customers—although both are viable options for business financing that does not require a credit score.
The challenge with invoice financing and factoring is that both come with high borrowing fees, at 1% to 5% of the invoice value per transaction plus other fees.
Business grants
A business grant is money given by a government body, company, or philanthropist to you to finance business operations without any kind of repayment.
Business grants are essentially free money to help a community or fund a good business idea for the good of society.
Ryan Zomorodi, Co-Founder and COO of RealEstateSkills.com, says,
Because business grants are free money, competition is high and they’re hard to find, or they come with very specific requirements or with specific strings attached. These conditions include a time limit on research and development, working closely with your grantor, or creating detailed reports on the use of the grant.”
You can find business grants from government postings or industry announcements, or they could come from anyone interested in giving a business grant.
Online lending sites
Another option for a working capital source, even with a poor credit history, is through online lending companies.
Online lending companies extend you a loan with little to no document requirements, and a quick cash turnover—typically the same day you requested the loan. What’s more, most online lending companies promise no impact on your credit scores.
However, even with no impact on your credit score and a surefire way to acquire working capital funding, online lending companies still look at your credit score to know how much money or what interest rate to apply to your loan.
The takeaway
Starting a business with a poor credit history is more than possible, especially with the vast financing options available like grants, credit card and merchant cash advances, invoice financing, and online lending sites.
While interest rates can be higher for these unsecured financing options as compared to secured traditional loans, starting a business is and has always been a difficult challenge to conquer, especially for those with poor credit.
Starting a business starts with a well-established business plan and a forward-thinking mindset, even with a poor credit history.
These views are made solely by the author.
This is not intended as legal advice; for more information, please click here.
