There is nothing like starting your own business. Being an entrepreneur may come more naturally to some, but it still doesn’t outweigh the benefits that everyone can enjoy by operating your own business. Extra income, flexible hours and the ability to live life on your terms is what inspires many to become self-employed and go full time with their ideas.
But for some, the idea of starting a business with bad credit may hold you back. Whether you have big aspirations or are just looking for something to do in your spare time, bad credit doesn’t have to stop you. Read on for our tips to help you make your dream a reality.
Consider your cash flow
When first starting your own business, it’s important to be realistic with its growth, size, and any expectations you have of it. If you are starting a business while maintaining another career, consider putting any extra cash flow you may have towards it.
Kate Horrell, The Military Finance Coach, explains “So many businesses are started with no credit. I understand the power of leverage, but most business ideas are not good enough to start in debt. At least with your cash, you won’t owe someone if it doesn’t work.”
If you are considering to invest your own money, make sure your business idea is mapped out along with actionable steps you can do to move the needle forward. Start small and only invest in actual business tools you will need, not tools that would just be good to have. For example, if you are considering a freelance career, online programs may be a better first investment than purchasing software that could cost you at least five hundred dollars and up.
Look to your clients and suppliers for credit
Assaf Katzir, co-founder of Credit Pilgrim, suggest looking to your clients and suppliers for alternative credit if your business allows it.
“Client’s credit could be done by getting paid in advance for products/services and then delivering them later. Supplier’s credit is quite similar to selling on consignment except it’s not dependent on selling products. Instead, it is an agreed future date for a business to pay for goods they request.”
Client credit is an excellent idea to utilize if you have an actual product you are creating yourself. For example, if you are making goods such as all natural candles or beauty products, you may charge upfront to make sure there is a proper interest. Instead of investing your funds to make the actual product, you are using someone else’s. After the funds are secured, you may then purchase supplies. Client credit is a great model to utilize if you are not interested in taking on debt for your business.
Supplier’s credit may be resourceful if you are considering a business where you sell a manufactured product and not the one you create on your own. Suppliers will invoice you for items and collect payment for said items at an agreed later upon date. By agreeing on a later date to pay, you get a chance to sell the product for the funds you need to pay the supplier. Keep in mind that even if you do not sell the product, you are still reliable for the invoice. This may be an option if you are not adverse to debt.
Private lenders & seed money
If a financial obligation to a bank is too much for a loved one yet, do not despair, they still have financial means to support your business idea. Another suggestion to consider may be having them privately lend you money to start your company or invest in it with seed money. Either investment in you or your business should be taken seriously and agreed upon by both parties.
When a friend or loved one lends you money, you may talk about terms and obligations for your new business loan. This can be something informal such as a conversation or a document that you both sign and notarize. I have taken out small loans from a loved one twice over the years for different endeavors and have paid both back. While we did not agree with me paying interest, we did agree in monthly installments until the loan was paid back in full. The first one was partially forgiven as a gift while the other one was paid in full.
Seed money is given to you by a loved one or someone who is not related to you, yet looking to invest in another’s company to diversify their portfolio. While loans are paid back, with seed money, the investor now has partial ownership and stake in your business.
- Consider whether you want a business partner or are interested in doing it by yourself;
- Make sure you are okay with the terms and conditions an investor has drawn up for you and ensure that you have a contract.
The majority of private investors can believe in your ideas like a friend or family member but will be protecting their best interest and not worry about a relationship with you.
Get a loan by following these steps
If you are not averse to taking on debt so that you can be your own boss or start a new income stream, you may still be eligible to obtain a loan. Some banks may be hesitant to lend a loan to you, but that does not mean you can’t qualify for one.
Things to consider if you are interested in pursuing a small business loan:
- A co-signer. If you have a business partner or a loved one who believes in your dream and work ethic, consider asking them to be a co-signer. If you need a co-signer for your loan, it is best to go with someone who has a full-time job and is already financially established with a high credit score. Their high credit score will offset yours and make banks more willing to lend to you. Do not ask someone to co-sign for a loan you have no intention of paying back or defaulting on; it will definitely ruin your relationship.
- Fixing your credit before you apply. If you are not in a hurry to build your business on a grand scale or cannot find a co-signer for a loan, consider waiting a few months and try to fix your credit. Pay off any outstanding balances or collections that you may owe and try to stay current on loans you already have in your name. Your credit score should start to rise in three to six months and will look good to prospective lenders.
- Keeping your day job. If you aren’t in a hurry, another option to be your own boss is to keep your day job until you can obtain the loan. Lenders will see that you still have a source of reliable income and will consider you a less risky borrower. A steady income can be a source of collateral in a way, as in you would still have a way to pay back the loan.
Business loans can help you move forward with scaling and getting your business successfully off of the ground. But loans also should be well thought out and researched, not taken out impulsively. You will still be responsible for any money you acquire through this method even if your business folds.
The bottom line
There may not be a better time to start your own business than now. If your credit stinks, don’t let that stop you from becoming a business owner so you can call the shots. Our country was built by people like you who dreamed of having a better future than the one they currently had.
Starting your own company may be tough at first but once you lay the groundwork, your earning potential could be limitless when it was once capped by your employer. A successful business can be sold later on down the line for a profit or passed on to future generations.
By taking our actionable advice in this article, you can be on your way to financial freedom.