If you’re thinking about starting a business and have bad personal credit, you’re not alone. According to an Experian study, more than one-third of Americans have subprime (i.e., below 670) credit scores. This is generally considered the cutoff for prime loans.
Lenders feel that subprime borrowers present a higher level of risk and tend to have a history of late or missed payments. They also have a high debt-to-income ratio. As a result, lenders typically charge higher interest rates on loans to subprime borrowers. This is unfortunately one of the side effects of bad credit.
Despite this, can you still start a business? The answer is yes – you can start a business even if you have bad credit or a subprime credit score. It might be more difficult, and lenders will be less likely to approve your loan application, but the situation is not as bleak as you might think. Here are 5 strategies for starting a business even if you have bad credit:
1. Look For Alternative Financing Options
There are a number of different financing and loan options available for small businesses, even if you have bad credit. Loans from family and friends, microloans, payday loans, and credit cards designed for small businesses are all viable options. Nevertheless, be sure to watch out for the following:
- Be careful of unscrupulous lenders
- Choose the loan amount carefully.
- Consider both the pros and the cons of the loan period
- Don’t forget to read the fine print.
2. Apply For A Secured Loan
For a secured loan you have to put up collateral, such as your home, to secure the loan. This means that should you default on the loan, the lender can take your collateral. This type of loan may be easier to get approved for, but it’s a high-risk loan since you could lose your home if you default on your payments.
3. Find A Co-Signer
You may be able to find someone with good credit who is willing to co-sign for you if you can’t get approved for a loan on your own. Co-signing a loan for you makes them equally responsible for the loan, so it’s a big risk for them. Make sure you have a solid business plan and can demonstrate that you’re a good credit risk before asking someone to co-sign.
4. Consider Using Social Lending Sites
Social lending platforms (also known as lending crowdfunding) connect borrowers with investors willing to fund their loans. This can be a great option for people dealing with the consequences of bad credit, as there are usually no credit requirements. More advantages include:
- Lower interest rates than traditional loans
- Prepared to grand smaller loans than banks or building societies
- May offer the option to settle the loan early with no penalty.
5. See If You Qualify For A Small Business Grant
While a subprime credit score can make it difficult to get a small business loan, you might still be able to qualify for a small business grant. These grants can come from the government, nonprofits, or even private companies. While the eligibility requirements will vary, most of these organizations will consider factors such as the size of your business, your credit history, and your business plan. Funding is often limited, so it’s important to get your application in as soon as possible.
If you’re feeling weighed down by your bad credit, don’t worry – there are plenty of ways to get started on the road to small business ownership. The five strategies we’ve outlined here can help you get over the initial hurdle of bad credit and start building a successful business. You can also check out our infographic on the weight of financial stress to help you build some healthy financial self-care habits.