How to Qualify for a Startup Business Loan with Bad Credit

Being your own boss has a certain appeal—it’s the primary motivation for 26% of entrepreneurs. Ten percent of startups fail in the first year, with 29% of them resulting from a lack of money. To launch a successful startup, you need to have enough funding to cover expenses and support operations during the beginning. But how can you qualify for a startup business loan with bad credit?

The younger the company, the riskier the loan—lenders aren’t always likely to make deals with startups. This is especially true if they believe the business might go under before the loan is fully paid off. When a credit score on the lower end enters the equation, then it can be even riskier.

To qualify for a startup business loan with bad credit, you need to look beyond traditional lenders for other sources of financing.

Why it’s Tough to Secure Business Funding with Bad Credit

When banks evaluate loan applications, they look at the “five Cs” of credit: character, capacity, capital, collateral and conditions.

By nature of being young companies, startups can have a difficult time demonstrating creditworthiness in these areas. With little to no business history and few assets available, there’s no reliable record of cash flow. For this reason, it’s difficult to prove you’re on track for growth.

This leaves your credit rating to speak to your ability to pay back the loan. Without a stellar FICO score, approvals are quite difficult to get. Operating in an industry with higher risks than others can add to the issue, too.

You could join the 77% of small business owners who launch their companies using personal funds. But by doing so, you can put yourself in a dangerous financial situation—especially if your credit score is already low.

By getting financing from sources other than banks, you can get the capital you need to support your dreams without jeopardizing your personal assets.

Qualifying for a Startup Loan: Beating the Bad Credit Rap

Entrepreneurs in the early stages of their businesses only receive 25% of the funding needed to cover costs from sources like credit cards or bank financing. Nonbank lenders provide additional financing options with fewer requirements. In fact, many cater directly to businesses with low credit scores.

Applying for the right kind of loan makes it easier to qualify for funding. If you have enough capital to cover the basics but can’t afford essential equipment, for example, you can use equipment financing to fund your purchases. Microloans may be another viable option if you don’t need the large amounts of funding small business loans typically provide. Rather than taking a lump sum, some startups seek a line of credit to cover initial expenses, and draw more to cover other expenses as needed.

Compare requirements from different lenders to gauge how likely you are to qualify for the type of loan you want. You may be able to find startup business loans for bad credit with no collateral requirements, or financing with no credit check. However, most will look for at least 6 months in business and $120K in annual revenue. Banks require a long list of documents (like bank statements, tax returns, and more), but fintech lenders often pare the requirements down to:

• Minimum monthly or annual revenue
• Time in business
• A few months of bank statements
• Credit score or financial history

Bad credit lenders may waive one or more of these requirements. But before moving forward with a bad credit startup loan, be sure to investigate the lender. Ask questions to be sure that the rates and fees match what another business owner in your position would pay.

Improving Business Credit Score with Financing

Depending on your position and opportunity, you may consider holding off on getting a startup business loan until your credit score improves. This might work in some cases, but it might also mean forfeiting a profitable business opportunity.

While you shouldn’t take on financing to boost your credit score, borrowing from a reliable lender can be an opportunity to do so if you:

• Borrow from a lender that reports to credit bureaus
• Pay down existing debt
• Make all loan payments on time
• Pay other bills on time
• Monitor your credit rating for incorrect information, and fix errors promptly

With a higher credit score, you’ll have the opportunity to qualify for larger business loans—with better terms and lower rates.

As you utilize financing to grow your business and it becomes more profitable, you’ll be in a better position to qualify for a loan the next time around.

Where Your Startup Capital Goes

How much should you ask for when applying for startup business loans with bad credit? To know for sure, it’s necessary to estimate your startup costs. Requirements vary between industries, but typical expenses include:

• Business insurance
• Licenses and permits
• Real estate
• Furnishings
• Supplies and inventory
• Equipment and technology
• Brand design
• Marketing materials
• Web presence
• Employee salaries and insurance
• Third-party services, such as a lawyer or accountant

After calculating the costs specific to your business model, add a buffer for unexpected expenses. Starting a business always costs more than you expect. You need money left over for day-to-day operating costs once your company is up and running.

Despite the significant initial investment required, 58% of small businesses get started with less than $25,000, and one-third start with less than $5,000. It’s what comes next that can be a problem for those who fail to plan. 

82% of businesses cite cash flow problems as the reason for failure, and 30% of those still in business say they’re “continually” losing money. So, it’s not only about getting the funding you need now, but also preparing for future expenses.

Startup Loans for Bad Business Credit

Although budget and cash flow are vital to success, a startup is more than a money-making machine. It’s a way for you to turn your passion into a viable business, and your credit score shouldn’t stand in the way.

You may not have many options early on. But after reaching the 6 month mark with $120K in annual sales, you’ll have access to a whole new world of opportunities. By this point, lenders will notice your potential—especially if you’re generating $10,000 in revenue per month.

Don’t wait for the “ideal” time to launch your startup. Get started seizing your next opportunity by applying today!