Are you trying to start a business but have bad credit? The system we use to decide whether someone is financially responsible is very flawed. Everyone is assigned a credit score, which is impacted by their financial history. While in theory this makes sense, it does not properly account for context. It is possible that you were unemployed a few years ago and went through severe financial difficulties. During this time, you may have defaulted on loans. That does not necessarily say anything about your current circumstances.
Unfortunately, no matter what the reason you have a bad credit score, it is going to impact your chances of getting a loan with a reasonable interest rate. This is even true if the loan is not for your personal needs but for your business. You may be in the perfect position to start a business, but your credit history does not reflect this.
The good news is that there are business loans for people with bad credit. If you are in this situation, these are 3 of your best options.
1. Short-term business loans
One of the easiest ways to get a loan for your startup with bad credit is to consider short-term business loans. Most business loans can be paid back over a long period, providing a timeframe in which your business can take off. But if the amount of money you need can be paid off within two years, or you are confident you will make quick profits, a short-term business loan can work for you.
Short-term business loans are less risky for lenders and you can, therefore, qualify even with a poor credit score. However, you will be saddled with high interest rates. Make sure you calculate the potential consequences carefully. The last thing you want is to struggle to even pay back the interest.
2. Secured loans
Ideally, your business will not be tied too closely to your personal life. However, if you have bad credit, you may have to take a secured loan. A secured loan requires you to designate an asset as security that will be seized if you fail to fulfill the repayment terms. Because there is less risk to the lender, you can get a lower interest rate this way, and your credit will not be that big a factor in qualifying for the loan.
You do have to be very careful with secured loans, as a business setback could subsequently cause all sorts of problems in your personal life. Only apply for a secured loan if you have no doubt you will be able to consistently pay it back.
3. Small business grant
Ideally, you will not have to finance your business with a loan but will receive a small business grant instead. Certain fields have grants set up, both by government and private companies, to help startups with great potential get off the ground. Find out what grants are available for businesses in your field. Check with the Small Business Administration (SBA), to find out if they can help.
What to watch out for
When applying for a business loan with bad credit, you need to be very careful not to get drawn in by predatory lenders. Because you have fewer options, some loan companies will offer attractive deals with incredibly high interest rates or unfavorable repayment terms. Any company that seems too eager to give you a loan should raise red flags. Also, do not take anything they tell you for granted. Make sure to research whether the company is reputable and how other borrowers have fared.
A new business may be the perfect opportunity for you to make your fortune. Even if you have bad credit, there are options for you. As long as you are confident in your concept and your ability to carry it out, there is no reason you should not succeed.
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