Finding funding for a small business startup can be a difficult challenge. And if your personal credit score is less-than-perfect that process can seem even more grueling. It is definitely not impossible though. The path to funding might have to be a little more creative, but the following tips can help your business overcome your past credit foibles.
1. Borrow From Friends and Family
While it may be uncomfortable, family and friends are often the best places to start for small business financing. They care about you and want to see you succeed. Rather than judge you by your credit score, your friends and family members will give or loan you money based on your character and your passion for the business idea.
2. Look to Non-Bank Lenders
Big banks and other large lenders today begin their process of weeding out applicants based on credit score, so if your FICO score is below 650 you can pretty much forget about a bank loan as a startup. Fortunately today there are plenty of alternative lenders that will make loans to those without pristine credit. Many companies make microloans in the range of $5,000 to $25,000 and specialize in lending to borrowers with poor credit. There are peer-to-peer lending websites that allow individual investors to get behind your business idea. Merchant cash advance loans may also be an option. Just be aware that the loan choices for those with bad credit almost always come with much higher interest rates.
3. Create and Maintain a Business Credit Score
As soon as possible, create a business credit profile for your startup by getting a tax ID number for your company. This will help separate your personal credit score from that of your business and allow your firm to build its own credit history. You can get a tax ID number even if your business is not incorporated yet. Firms that are LLCs, partnerships or just sole proprietorship status can all qualify. Once you have that number any business transactions reported to the credit bureaus will go on your business credit. Asking your vendors to report your payments to bureaus can help build and boost your score.
After taking these steps and securing your first round of funding, you will hopefully have strengthened your business credit enough to be accepted by more traditional lending channels for your next round.