It’s a real Catch-22. You need money to launch your startup, but you need a credit record to get the money. Problem is, your business is new and doesn’t yet have any credit history. If you have a less-than-perfect personal credit score, you might think all financing doors are closed. It might surprise you to learn there are indeed business loans for startups with bad credit.
Bad credit might hinder your startup in some ways, but don’t assume it’ll stand in the way of getting some cash to get you started. Here are 10 possibilities to finance your new business.
1. Microloans
Microloans offer lower amounts than other business loans and are often repaid in months, not years, depending on the amount. They generally provide business loans for startups with bad credit, as many microlenders look at other factors besides credit to approve an application.
One lender specializing in microloans between $5,000 and $250,000 is Accion. To qualify, your business has to have been operating for at least 12 months and generate $50,000 or more annually.
Is it right for you? If you need a smaller sum and you’re a member of an underserved community—such as a veteran, woman, immigrant, person with disabilities, or member of a minority group—microloans might be just the thing for your business.
2. Online lenders
Online lenders come in every shape and size, making it likely you’ll find one that offers a financial product you qualify for—even if without a high credit score.
Some online lenders offers short-term loans of $5,000 to $600,000. Rather than just your credit score, the lender looks at the overall health of your business, which makes it a great source for business loans for startups with bad credit. Your business must be at least six months old.
Is it right for you? If you need a larger amount and need it fast, consider an online loan. Many online lenders give instant approval, and funds can be deposited in as little as one business day.
3. Community Development Financial Institutions (CDFIs)
CDFIs exist for a simple reason: to help grow local economies and provide financial services to communities that need resources. They often approve low-interest loans for businesses with bad credit, and they offer low interest rates, more flexible terms, and smaller down payment requirements than traditional bank loans.
These lenders are certified through the U.S. Department of Treasury and include credit unions, banks, loan funds, or venture capital funds whose primary mission is serving low-income communities. Another perk of going through a CDFI is the training, coaching, and support they offer to start and grow your business.
The Opportunity Finance Network—an organization of CDFIs nationwide—has a CDFI locator that can help you find the right organization to approach for funding.
Is it right for you? If you can benefit from advice from business experts, and if you don’t mind waiting for your application to process (funding time with CDFIs can be longer than other options), search for CDFI lenders in your area.
4. Peer-to-peer lending platforms
A startup with bad credit might consider peer-to-peer (P2P) lending. Instead of using a bank or private financial institution for a loan, you can turn to private individuals and investors for funding. Each lender may have its own criteria for approval, but generally, credit scores are less of a focus.
There are lenders who offer P2P loans of up to $15,000 at 0% financing. There’s no catch—this mission-driven nonprofit provides funding where conventional lenders won’t. They aim to serve microbusinesses in low- and middle-income areas. They don’t consider credit scores, net worth, or years in business when making decisions. Other organizations offer P2P loans of $2,000 to $50,000.
Is it right for you? If you don’t need more than $50,000 and don’t qualify for other options, consider P2P loans.
5. Business credit cards
One alternative to a traditional loan is a secured business credit card. Secured credit cards could be easier to get approved for because they require a deposit into your bank account. Your credit limit may be low in the beginning, but if you make payments on time each month, you could rebuild your credit and snag a higher credit limit. Once your credit score increases, you can apply for an unsecured credit card, which may have perks like cash back.
Is it right for you? A secured card is a great option to pay for purchases by credit card, and it allows you to rebuild your credit.
6. Crowdfunding
You may have seen invitations on social media for a range of crowdfunding efforts, from cookware to backing a group of marathon runners. Crowdfunding platforms allow businesses to post a campaign and invite people to contribute or invest. There’s no need to repay the money, though businesses generally find it’s a good idea to offer something enticing to funders: Early access to a product or t-shirt with the company logo are common rewards.
Kickstarter is one of the best-known crowdfunding platforms. It’s ideal for businesses in creative spaces like theater, art, craft, and technology looking to raise money.
Is it right for you? If you have a large following you can persuade to support your cause, crowdfunding is a fantastic way to raise money that you don’t have to pay back.
7. Invoice financing
Another financing option that doesn’t demand a good credit score is invoice financing. This could work when the payments for goods or services don't arrive right away. You can borrow against the value of those unpaid invoices—that’s where the name comes from. Here’s how it works. You submit your accounts receivables to an invoice financing company. They approve financing—about 80% to 90% of your unpaid invoices—once they decide your clients are likely to pay. When the customer pays, you receive the rest, minus a fee.
Invoice factoring services can lend on outstanding invoices of $100,000 or more.
Is it right for you? If you have high-value invoices and want access to cash, invoice financing could be a good fit.
8. Merchant cash advances
Here’s a way to get fast cash: It’s called a merchant cash advance. It’s not a loan but an advance against future credit and debit card sales. (The merchant cash advance provider takes a fee.)
BusinessLoans.com offers merchant cash advances of $5,000 up to $2 million, with repayment terms of 3 to 24 months.
Is it right for you? If you accept debit or credit card payments, a merchant cash advance can be an easy way to get capital. Keep in mind that the fees may be higher than they’d be with other types of financing.
9. Local and state government programs
You may be eligible for any government-backed programs that want to support small businesses. The first place to start is Grants.gov, a database of thousands of grants—that’s money you don’t have to repay—for companies from all backgrounds.
State and local governments want to boost economic development in their region, and every state has programs to empower and support businesses. Check your state or local government for grants, tax credits, or loans. The Small Business Administration also provides loans up to $50,000 through its network of community nonprofits.
Is it right for you? If you qualify for a low-interest loan or grant with a government agency, you have nothing to lose by applying.
10. Friends and family
If none of these options for business loans for startups with bad credit work for you, consider asking friends or family for a loan. You may be able to negotiate no or low interest and a long repayment period. That way, your startup can begin making money before repaying the loan. Keep it professional, and create a loan agreement that both parties sign.
Is it right for you? If you have a willing friend or family member, and the two of you can treat it as a business agreement without it impacting your friendship, this could be a low-cost financing option.
