You have finally decided to take the first step to starting a business!
However, there is one hindrance – you have bad credit. Anyone in the same situation would know how frustrating such can be! Lenders will see you as a risk, and hence, it can be difficult to find financing solutions to provide you with the necessary resources to pursue your entrepreneurial endeavor.
Read on and find out how you can start a business even if you have bad credit.
Do Not Let Bad Credit be a Hindrance
Seeing a report from the major credit reporting agencies can be disheartening. A poor credit score is a nightmare for anyone who wishes to start a business. Nonetheless, this does not mean that you are a hopeless case. Below are some of the best things to do.
1. Find the Right Lender
The best thing that you can do is to work with the right lender. Go beyond banks when you are looking for a lending institution to finance your business needs. You can find many organizations that specialize in working with people who have poor credit ratings.
It is exasperating to submit multiple loan applications to various lenders only to end up being rejected. Why would you waste your time? Instead of applying just to any institution, narrow down your choices by finding those that specialize in dealing with applicants who have bad credit.
The most popular type of bad credit loan is an unsecured loan. This means that you do not have to present any collateral. Although, some people opt for a secured loan. By presenting collateral, which the lender will gain ownership of in case of a default, you can increase the chances of being approved and having a lower interest rate. The collateral reduces the risk on the part of the lender.
If you are looking for bad credit loans, apply with CreditNinja. The latter offers a convenient online loan application process, so you can save time and effort. Once your application is approved, you can get the money the next day, so you can use it right away. It provides personalized recommendations, so you can find one that works best for your needs.
2. Rectify Your Credit Report
Credit reports are not always accurate. In some instances, errors can be present. With such, take the time to review every item on the report, making sure that they are correct. You may have a poor credit score because of the errors committed by the credit reporting bureau. The good news is that such can be rectified, and once corrected, you might end up being more appealing in the eyes of lenders.
When you see an error, the first thing to do is to contact the credit reporting company. You will need to write to them about what you believe is wrong and attach supporting documents that can prove your claim. You can send the letter online or via mail. Alternatively, you can also call their hotline and explain what is wrong with the report.
Take note, however, that rectifying the report does not mean you can see results overnight. It can be a lengthy process. On average, the investigation can take anywhere from 30 to 45 days.
Aside from rectifying the contents of the report, you must also be proactive in looking for ways to improve your credit standing. For instance, such can include consolidating your debts and paying your bills on time. It can take up to a year before the report can change, but at least, you are doing something to improve your creditworthiness.
3. Create a Detailed Business Plan
While credit reports matter, this is not the only thing that lenders will consider when approving your application for a loan. Among others, one of the most important is the business plan. This is a detailed document that will help you convince the lender that their money will be put into good use. If the business plan is thorough and persuasive, there is a higher chance that your loan application will be approved despite having a not-so-favorable credit rating.
To create a business plan, you need to start with a vision. It is impossible to have a game plan without knowing your goal. With your vision, it will be easier to identify the things that you need to do to get to where you want to be.
Your business plan should include your marketing strategies. Such will detail how you will promote the business to achieve your goals. More so, it should also include a financial forecast. This is one of the most important as this is your opportunity to convince the lender that you have a sound idea, and hence, you will have the financial resources to repay the loan.
4. Explore Alternative Financing Options
While the most common option is to apply for a business loan from traditional institutions like a bank, this is not your only choice. Below are some types of business loans and financing alternatives worth exploring for people who have bad credit.
- Secured Loan: To increase the chances of being approved for a loan, consider one where you need to present collateral, such as your car, house, or any other property. If you are unable to make loan payments, the lender has the right to seize the collateral.
- Equipment Financing: Some lenders specialize in providing the financial resources necessary to invest in expensive equipment. The money is exclusively for machinery that your business needs to operate.
- Line of Credit: A type of flexible and short-term loan, a line of credit is a pre-set borrowing limit. You can borrow as much money as you want until the limit is exhausted. It has no fixed monthly payment, so you can pay it out anytime.
- Purchase Order Financing: Once you have purchase orders coming in, you can use them as a guarantee for loan repayments. It will provide the needed working capital in lieu of the receivables.
- Micro-Credit Lending: If you have been turned down by banks and other traditional lenders because of your credit score, micro-credit lenders can give you hope. There are specific groups that specialize in helping new and growing businesses. Many of these are non-profit organizations.
- Peer-to-Peer Lending: Also called social lending, this alternative financing for new businesses eliminates the bank as an intermediary. This means that there is no financial institution acting as a middleman. Instead, you will obtain loans directly from people who are pooling their money, making it available for others to borrow at a set interest.
- Friends and Family Members: If you are confident about your business idea, do not hesitate to ask friends and family if you need financial assistance. Someone might be willing to lend you money with no or low interest!
5. Look for a Guarantor
If you have bad credit, another good way to be approved for a business loan is to have a guarantor. It can be a family or friend with a better credit standing. This way, someone will vouch on your behalf, increasing the possibility that your loan will be approved. In case you default on your payments, the lender has the right to go after the guarantor of the loan.
The decision of the lender to approve or deny your loan will not be solely based on your financial capacity. Instead, it will also consider the situation of the guarantor. Hence, if the guarantor is in good financial standing, including having an excellent credit score, you are likely to get a business loan. Make sure that the guarantor knows what he or she is getting into.
6. Get Help from the Government
Depending on where you live, consider the support that the government can extend. They have several programs to assist their people.
The Canadian government is actively helping its citizens in starting a business. If all else fails, then you can consider government support to pursue your entrepreneurial endeavors. Through the Canada Small Business Financing Program, it is easier for a small business to apply for a loan since the government is sharing the risk.
Through this program, you can apply for term loans, which will provide financial assistance for the following:
- Buildings and land for commercial purposes
- New or used equipment
- Leasehold improvements
- Working capital costs
Some of the most common instances when you can use the term loan are for purchasing production equipment, buying a franchise, and investing in commercial vehicles. Meanwhile, for day-to-day business operations, you can use a line of credit.
Through this program, the borrower can be eligible for up to $1.15 million in financial assistance. Out of which, $1 million is for term loans and $115,000 is for a line of credit. In the past decade, the program has already financed over $10 billion for qualified small businesses.
To get started, you will first need to talk to a finance officer of a bank, credit union, or caisse populaire. Make sure that you have a thorough business proposal as this will be the basis for the approval of the loan.
At the end of the day, bad credit should not discourage you from starting a business. As mentioned above, there are several things that you can do to have the financial resources that you need.