Are you looking for finances to start up a business? then, the good news is that there are many ways to get funded. Even as a small business owner with bad credit, you might be able to start up a business loan.
Here, we will be guiding you on how to get a startup business loan with bad credit to make the procedures easier for you. Keep on reading to gain access to the information it contains.
A startup business loan is a form of financing made available to new businesses that have just “started up.” While “startup” is often used to refer to firms in the tech field, lenders have startup business loans available for companies in any industry. Check What Documents Are Required To Apply For An Equipment Loan?
Lenders who offer startup business loans require applicants to show that they have been in business for at least 6 months to a year, this is because they want to see that your business has existed as an entity for at least 6 months.
It is also important that you should create a business plan so you can understand what sort of costs your young business will have. This will also enable you to communicate this information in your financing application.
What is bad credit?
A person or business is considered to have bad credit if they have a history of not paying their bills on time or owe too much money. Bad credit for individuals is often reflected in a low credit score, typically under 580 on a scale of 300 to 850.
Let’s look at what is bad credit from personal and business credit rating systems.
1. Personal credit score
Because lenders and credit bureaus consider a personal FICO score of 670 or higher to be good credit, anything less than 670 can be considered bad credit. The FICO system breaks down credit score ranges further to define fair and poor credit:
Bad credit: 300 to 579
Fair credit: 580 to 669
Good to excellent credit: 670 and above
2. Business credit score
Business credit scores use different factors and are reported through different credit bureaus than personal scores. The credit score also looks different, typically ranging from 0 to 100.
Dun & Bradstreet is the most common business credit bureau. It provides a PAYDEX score, which mainly reflects your payments to business suppliers and vendors. PAYDEX scores run from 1 to 100:
Bad credit: 1 to 49
Fair credit: 50 to 79
Good credit: 80 to 100
Business Loan Options for Startups With Bad Credit
If you are starting a business with a lower credit score, there are several loan routes you can take.
According to experts, business loan backed up by the Small Business Administration (SBA) is considered to be the gold standard in startup loans. These include:
- SBA 7(a) loans,
- 504 loans
You apply for these loans through a lender, and these financers usually require applicants to have a credit score of about 640.
Startup business loan options and other financing is available from platforms like Lendio with amounts ranging from $500–$700,000.
The repayment period can be as long as 25 years, and interest rates typically max out at 17%. Once approved, your startup will usually have access to the funds in 2 to 4 weeks. These loans usually require a minimum credit score of 680.
If your credit score is too low to meet the minimums for these startup business loans, you should widen your search to include alternatives.
There is a growing number of small business financing products that don’t emphasize credit scores in their applications.
How to Get a Startup Business Loan With Bad Credit
Make sure your credit score is at least 680, if your credit score is at least 680, you can go through the application process for a startup business loan with the knowledge that you meet the minimum score for qualification.
It is best practice, though, to make sure you meet all the other application requirements, like being in business for 6 months—and longer is better.
Think, too, about assets you can offer as collateral. Next, be sure to draft a solid business plan—this will be valuable for lenders, but it will also help you navigate the future of your company.
If you don’t meet the minimum credit score requirements for a startup loan, you should widen your search to find financing products that don’t demand higher scores.
Importantly, many loan applications do a hard pull on your credit, meaning a lender requests a copy of your credit history.
This action usually has a negative impact on your credit score—so be careful about applying for funding, especially if you don’t think you’ll qualify.
There is a slim possibility of getting a business startup with a bad credit score, so to increase your chances of getting a startup loan, it is advisable you get a good credit score. You can reach out to us via the comment section if you have questions on this topic.