Even with good credit, starting a new business is not without its share of challenges. Many new business owners have no choice but to use their personal credit, or put their personal assets on the line, in order to get their business off the ground.
This is because lenders are generally unwilling to extend credit to new businesses, and is sometimes a necessary evil, especially when time is in short supply.
But, what about those entrepreneurial spirits with poor credit? How are they to navigate the world of business financing? And what can be done to clear the way to their success?
Alternate Sources of Financing
New business owners with less-than-ideal credit are extremely unlikely to qualify for business credit cards or business loans, even if they are willing to sign on as a personal guarantor.
The problem is that the personal guarantee of someone with shaky credit history is not very effective, when it comes to reassuring lenders. Therefore, those with poor credit should look for alternate sources of financing.
Friends and Family
Many businesses have been started with loans from close friends and relatives. Borrowing money from loved ones has a lot potentially going for it. After all, the terms are likely to be reasonable, the approval process simple, and the payment schedule a bit more flexible than those of traditional lenders.
Additionally, those close to the business owner are likely to base their lending decisions on their knowledge of the borrower’s character, rather than on past financial missteps.
However, it is important to be honest about the risks involved with those who may be willing to assist. Many personal relationships have been soured by business deals gone wrong, which is an unpleasant situation, and of course, best avoided through full disclosure.
Utilizing personal assets as a source of financing a new business venture may be another option, for those with the means to do so. Of course, a home equity loan is an option for homeowners, but may be a bit risky for most people’s taste.
There are still other options. For example, one could sell an expensive car, buy more affordable one, and use the money to finance the business. After all, the fancy car can wait until after the business starts turning a nice profit.
Credit-challenged entrepreneurs may be able to acquire financing through non-traditional lenders, such as online microlenders.
True, the interest rates on these loans are likely to be higher than those offered to business owners with sterling credit, and they may only be available in smaller amounts, but they represent a source of capital for those who might not otherwise be able to qualify for financing.
Not only that, but many of them report good payment history to the credit bureaus, which can help pave the way for future cash flow needs.
Build Credit as You Go
Just because one currently has poor credit, there is no reason they should not work on building it up. Personal credit should be a high priority for anyone starting a business, for the reasons mentioned earlier. Building a good business credit rating is also a key component in a business’s potential for eventual success.
Fortunately, many of the best practices for building personal credit also apply to business credit. Those interested in building both should:
- make all payments on time
- check credit reports for errors
- dispute any errors present
- regularly monitor credit
The consumer credit bureaus offer monitoring services for those who are serious about correcting bad personal credit. For business credit monitoring, services such as CreditMonitorTM from Dun & Bradstreet Credibility Corp. can prove invaluable as credit building tools.