How to Get a Small Business Loan With Bad Credit & No Collateral
Having bad credit and no collateral doesn’t eliminate the possibility of a loan.
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Even with a poor credit rating and no money, you may still be able to get your new business off the ground, provided you have an idea that appeals to investors.
In order to secure a small business loan, most lenders will need you to prove your ability to repay the funds by providing information such as credit history, equity investment, collateral and business management experience. However, if you have bad credit but still want financial assistance to establish your business, you can achieve your dreams by being creative. There are lenders willing to provide the funds even when you have bad credit and no collateral.
Increase Your Chances
Devise a comprehensive business plan that projects a positive cash flow. If the business looks viable and runs on an excellent idea, more people will be willing to lend you money. In addition, take steps aimed at improving your credit worthiness to increase the chances of getting a loan. Request your credit report and check it for accuracy. Use it as a basis to systematically eliminate factors that are driving your score down, such as hard inquiries, late payments and credit usage.
Peer-to-peer financing, also known as peer-to-peer investing or P2P lending, involves individuals rather than financial institutions providing unsecured business loans to borrowers. To apply, access the website of a lending company that pairs you with potential lenders. The transaction takes place online via peer-to-peer lending companies’ platforms that ascertain your authenticity. The interest rates for loans are set either by the lenders or the company that facilitates the transactions, based on the credit rating of the borrower.
Form a Partnership
If you have a good business plan and the business idea has a high growth potential, you may be able to attract a partner with good credit who can apply to the bank for a loan to start or boost the small business. Your partner is the cosigner and, depending on how you agree to service the loan, both of you are partially responsible for the loan repayment. Discuss the modalities of running the business with your partner — whether they expect to be actively involved in the business or they trust you to operate it.
Family and Friends
You may decide to approach relatives and friends that have the ability to lend you money for starting or expanding your business. If necessary, explain to them that your credit standing is not adequate for consideration by conventional lenders and that you do not have any form of collateral. Chances are they will understand your predicament and be willing to help. Be prepared to compromise – they may want to own part of the venture or be involved in the management of the business. Make a decision that is best for the viability of the business plan, and ensure that your business will generate ample cash flow to repay as per agreed terms to avoid upsetting the relationship.
Ask the Crowds
While not technically a business loan, many people get the financing they need for a new business idea using crowdsourcing websites like KickStarter, IndieGoGo and GoFundMe. This may be ideal if your business is creating a new product and needs money to fund production and distribution costs, or if your business is centered around an idea people can get excited about, like an independent film. If people like your idea, they will give you the funding in exchange for the product when it is finished or other perks, like t-shirts. If you are producing a physical object, you generally need to have a completed prototype to use these websites.