Credit Loans

How To Open a Business With Less Than Perfect Credit?

If you are trying to open a business but have less than perfect credit, you may wonder if it is possible and how to go about it. The good news is that starting a business with imperfect credit may be possible. 

Through alternative business loans and building business credit, you can get your business off the ground. Keep reading to learn about turning your business idea into reality, even with bad credit. 

Separating a Business’ Credit from Personal Credit

Business structure is essentially the company’s legal structure when establishing a new business. 

This structure will determine whether your personal credit will impact your business credit. This structure also defines your personal liability if things do not go as planned. 

Your personal credit will intertwine with your business’s credit if you are the sole proprietor. Therefore, in this scenario, any financial activity for a business, such as taking out a business loan, affects personal credit. 

However, a company classified as a Partnership, a Limited Liability Company (LLC), or a Corporation will separate your credit history and credit score from your business.

Whether your business is a sole proprietorship, has multiple owners, or is a corporation, a credit score will be attached to it. Variables such as payment history, the debt-to-income ratio, credit account types, etc., determine a business credit score.

Getting a Loan to Open a New Business with Bad Credit

Almost every business will need a loan at some point. This is especially true when you’re just starting or in a growing phase. 

Business lenders will ask about your business structure, gauge the potential risk, and ask about how much money is coming in or expectations. Lenders may also inquire about the product or service that you have set up as a business idea. 

If you have bad credit and require a loan, consider the following bad credit loan options:

A Business Loan With a Down Payment

If your business credit isn’t great, providing a down payment with cash may help you secure a business loan.

Sign a Personal Guarantee

A personal guarantee is a clause that can be a part of a business loan. The borrower takes on the personal liability to repay the loan if their business cannot.

Providing Business Assets as Collateral

Another option to consider when applying for a business loan with bad credit is using an asset as collateral against the business loan.

Look For Loans and Grants From the SBA (Small Business Administration)

Funded by the federal government, The Small Business Administration provides various forms of support for small businesses and small business owners. When working with bad credit and securing a business loan, the SBA is a great place to start. 

They offer loans for all kinds of credit histories and can even provide free business counseling to help you plan your next business venture.

There are also all kinds of grants available from the SBA that you can apply for if you meet eligibility. 

Considering Personal Loan Options and Personal Assets

Many business owners, especially small business owners, tend to use personal loans to fund their businesses. 

When using a personal loan for a business, any defaults and missed payments will impact your personal credit.

Another option to take care of business costs if you cannot take on a loan is using personal assets. Simply selling assets for funds or using them for loan options can be one option. Be sure to review the advantages and disadvantages of unsecured vs. secured debt before choosing the loan option that is right for you. 

Getting a Business Bank Account with Less Than Perfect Credit

A business bank account is an integral part of paying taxes, building partnerships, and growing your business. These accounts also allow a company to borrow money, get a business credit card, and take payments from customers.

It can sometimes mean more complications when you have bad credit than when applying for a business bank account with good credit. Banks will pay attention to your business as a whole, from the business idea to things like payments to past lenders. 

If you have no credit history, some banks/credit unions will ask that you build credit.

Look Elsewhere for a Business Bank Account

Suppose you need a business bank account with bad credit. In that case, your options may be limited to financial institutions that don’t look at credit history. Or you may have to accept limited credit options with a business bank account.

Consider Whether Your Business Plan Needs To Involve Credit

A business that operates from an in-home office space may not need to focus on credit to get started. Here are some potential costs that new business owners face but can be avoided depending on your business plan: 

  • The need to hire employees or a business partner
  • Have a business website
  • Buy business insurance
  • Purchase a brick-and-mortar business location 
  • Buy equipment 

Many freelance and independent contractors that are web-based or skill-based may avoid these costs. Below are a few examples of businesses and skills that don’t come with start-up costs: 

  • Working as a web developer 
  • Project management
  • Working as a writer 
  • Graphic arts and visual arts 

And so, it is possible to offer a product or service that can become a business without incurring start-up costs.

Improving Your Business’ Credit

Suppose you have a new business or are working with an established one as the business grows. In that case, building and maintaining a credit score can help grow your small business. A few business essentials linked to credit score are; raising capital for insight with thorough market research, focus groups, and legal advice.

Although some small businesses and start-ups may not need credit to start, many will need credit for a competitive advantage over other companies offering a similar product or service.

When maintaining or building good business credit, approach it in a similar way to your personal credit:

Make On-time Payments for Business Credit Cards and Loans 

Making on-time payments to any debts your business is carrying will be an essential part of building positive credit. 

Keep Track of Your Credit to Debt Ratio

As a business owner, it will be vital to do some financial planning with an accounting system or simple budgeting. You will spend money; however, it can impact your business credit score when that money is through credit.

Check Your Business Credit With All the Major Business Credit Bureaus 

Another thing that will be helpful is to check your business credit report from all major business credit reporting agencies. Check for inconsistencies and mistakes, and correct your credit reports right away.

Know The Connection of Your Personal Credit to Your Business

Whether your personal credit relates to your business will be determined by your business structure. Make sure you understand what your business structure is before making any major lending moves. 

Opening a Business with Less Than Perfect Credit is Possible!

When working with bad credit as a business owner, there are ways to get started and grow your business. There are bad credit loan options for business owners, ways to open up a business bank account, and not needing credit to get started.