Qualifying For Startup Business Loans With Bad Credit and No Collateral

ByJulija A.
August 23, 2021

School is meant to prepare us for a career, but it doesn’t always provide us with the skillset to deal with problems in the real world such as managing debt or repairing credit scores. So what do you do when you leave these educational institutions and find yourself facing one of the toughest financial conundrums: qualifying for startup business loans with bad credit and no collateral? Our very first suggestion is to read this article, which contains useful tips and tricks that are sure to provide you with a concrete base of knowledge.

What Is a Startup Loan?

A startup loan is a form of financing meant to aid new business owners. The money that you get from these loans can be used for a wide range of things such as the purchase of equipment, stock, and furniture as well as promotional services.

More often than not, startup business loans are hard to come by because lenders look at the five C’s of credit to determine a potential borrower’s creditworthiness. The five C’s refer to:

  • Capital – The amount of cash the borrower has on hand
  • Collateral – An asset that can be put down as security for a loan
  • Capacity – A person’s or business’s debt-to-income ratio
  • Character – An applicant's credit history
  • Conditions – Factors like the purpose of the loan, the amount requested, and the current federal interest rates

As you can see, the criteria for obtaining a business startup loan are hard to meet, especially for those who are still at the very beginning of their careers. But unfortunately, those aren’t the only reasons why lenders are hesitant to take a chance on startups. Namely, investing in a company that doesn’t have any experience nor a customer base is risky. However, we wouldn’t have written this article if there was no hope. There are actually quite a few good startup financing options available.

How to Get Approved for a Startup Business Loans With Bad Credit and No Collateral?

To obtain one of these coveted startup loans with bad credit and no collateral, you should take the following steps:

  • Do your research: Before anything else, you need to see what’s out there. Look for lenders that offer the lowest interest rates possible and repayment terms that are most suitable to your unique situation, as well as those that have lenient eligibility requirements.
  • Review your credit score: You can greatly improve your odds of getting a startup business loan by checking both your personal and business credit reports and contacting the credit bureaus if you notice any errors. Believe it or not, boosting your credit score by just a point or two could potentially tip the scales in your favor. Keep in mind that companies that haven’t been open for more than a year won’t have a credit score, meaning that lenders will only be examining your personal credit history.
  • Create a business plan: A well thought out and clear business plan can go a long way, especially if you’re attempting to get a loan with bad credit. Some lenders make it mandatory, while others don’t. Whatever the case, we recommend that you write one because it shows off your money management skills.
  • Find a cosigner: If all else fails, you can try to find someone that’s willing to be your cosigner – a person who guarantees that they will pay back the loan if you aren’t able to. Before they agree to sign the papers, don’t forget to make sure that the person understands the risk involved with taking on this role and that they are financially stable.

Types of Business Startup Loans for Bad Credit Borrowers

When you think of getting a loan, your mind probably goes straight to the banks, but that’s actually the last place you should look. Not because there’s anything particularly wrong with them but because they aren’t known for taking on clients with poor credit scores. Fortunately, there are alternative funding sources that you could use.

  • Microloans are small loans that are given to disadvantaged business owners. These bad credit loans are, for the most part, funded by either individuals or nonprofit organizations through peer-to-peer platforms. Seeing as these loans aren’t typically backed by any type of collateral, they tend to entail relatively high interest rates.
  • Invoice factoring is a fast way to get cash for your company’s urgent needs. It involves selling your outstanding invoices at a discount to a factoring company. The discount rate ranges from 1% to 5%. Invoice financing shouldn’t be your go-to option as it’s essentially a band-aid and doesn’t solve the underlying problems.
  • Invoice financing is another way to acquire business funding with bad credit through the use of your invoices. However, with this method, your outstanding invoices remain in your possession, and you borrow money by offering them up as collateral to lenders.
  • Lines of credit are designed to assist you in meeting your short-term cash flow needs. They enable you to access a certain amount of funds at any point in time, and once you pay back what you borrowed, plus interest, you’ll be able to use that same pool of funds all over again.
  • Short-term loans for bad credit borrowers are often considered a great choice for small business owners that are unable to fulfil the requirements needed for other types of financing. In most cases, the repayment terms for these loans don’t exceed 18 months, and the amounts range from $100 to $100,000.
  • Equipment financing is meant for purchasing business-related equipment such as ovens, copiers, and trucks. The purchased items act as a type of collateral for these types of business loans. Equipment financing can be particularly useful to companies that need to have the very latest of tools.
  • Business credit cards offer plenty of benefits. Not only do they feature higher spending limits than personal credit cards, but they also help you keep your personal and business finances separate. What’s more, if you keep making your payments on time, you could even see a rise in your credit score. To take advantage of this option, you’ll need to choose a business credit card issuer that reports your good behavior to all three major credit reporting agencies (Equifax, Experian, and TransUnion). But this option also comes with higher-than-average interest rates.
  • Merchant cash advances are short-term low credit score loans provided to business owners in exchange for a part of a business’s income. They are only available to businesses that process credit cards for payment. The payments that you’ll have to make are based on your sales, meaning that your daily instalments will change depending on the amount of money you receive during your work hours. As good as this concept may sound, there is a downside: merchant cash advances have steep interest rates and fees.
Frequently Asked Questions
How can I get a startup business loan without collateral? +

If you don’t have an asset that you can put down as collateral in order to obtain a loan you need to fund your startup, you can try applying for a line of credit, a business credit card, short-term loans, and microloans. Before you start scouring the internet for any of these options, we recommend that you first do everything you can to boost your credit score to increase your chances of being approved.

How can I start a business with bad credit and no money? +

Although it’s possible to get startup business loans with bad credit and no collateral, we wouldn’t recommend getting into debt if you’re low on cash. Instead, you could start small and work your way up. Start by reviewing the things that you already know how to do, like playing an instrument, creating software, or taking care of dogs, and once you settle on a skill, spread the word about the service that you’re offering.

What is the minimum credit score for a business loan? +

Most business loan lenders won’t give you a loan if your credit score is below 640. There are, however, several bad credit loan options available for those with lower sores but some of them come with high interest rates.

Can I get a startup business loan with bad credit and no collateral? +

Even without a good credit score or collateral, it’s still possible to secure a business loan for your startup. Keep in mind that lenders consider such investments high-risk and thus tend to set high interest rates. If you’d like to know more about this topic, we suggest you read our guide on how to qualify for startup business loans with bad credit and no collateral.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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