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Startup Business Loans (Bad Credit and No Collateral)

Start Up Business Loans (Bad Credit and No Collateral)
Lauren Ward
Lauren WardUpdated March 9, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
You have a business dream but your credit rating isn't stellar and putting up collateral is a problem. Can you still launch a small business or expand one that is on the cusp of growth?The average business loan interest rate ranged from 4.90% to 9.83% at banks in early 2023. The Federal Reserve’s raising of interest rates to cool inflation could also be cooling business owners’ plan to get a bank loan.Even with bad credit, it may be possible to secure startup business loans with no collateral that could help you with your launch without putting your personal assets on the line. It must be stressed that this type of financing typically does come with high rates that compensate for the lender’s risk. Learn more about your different financing options as a small business startup, as well as the pros and cons associated with each one.

Understanding “Bad” Credit

Not only are you running the nuts and bolts of your new venture and figuring out how much money it takes to start a business, you have to wrestle with questions of credit.Lenders may use different credit scoring models to evaluate your creditworthiness. Some have minimum credit scores that they prefer to see in applicants for loans.As a start up, you may not have an established business credit score. In this case, lenders generally evaluate your personal credit history.For personal credit scores, FICO® Scores below 669 are generally considered either fair or bad. VantageScore, another scoring model used by lenders, considers scores between 500 and 600 poor, and scores between 300 and 499 very poor.

Getting Start Up Business Loans With Bad Credit and No Collateral

Before you start to apply for unsecured startup business loans, it can help to do some prep work to strengthen your pitch. Even with bad credit, you can present an in-depth business plan that outlines your strategies for success and how you plan to use the funding.A business forecast can also be helpful in giving the lender an idea of your expected cash flow in the coming months or year. As a startup, you may need to provide personal information as well, such as your tax returns.Recommended: Tips for Starting a Small Business: Mistake Proof Your Idea

Options for No Collateral Business Loans

With some basic financials in hand, it’s time to explore some of your options for unsecured small business startup loans, as well as some other options that may be worth considering. It is possible to find funding at this early stage (and with bad credit). But carefully review the terms of any financing agreement to understand the true cost, since these products may come with higher rates to compensate for the risk.

Online Business Loans

Online business lenders may offer alternative bad credit business loans with less stringent requirements compared to traditional banks. You can also explore small business loans for specific groups, such as women with bad credit. While approval and funding times can be fast, you still need to provide proof showing that you’ll be able to repay the loan.Remember to consider the drawbacks associated with these subprime online business loans. They usually come with a very high APR and a shorter repayment term. There also may be a requirement for a personal guarantee, which means your personal credit score can be impacted for any late payments or delinquency—and your personal assets may also be at risk to pay back the loan if your business isn’t able to.

Credit Cards for Small Business

A small business credit card may be an alternative to help cover early startup costs. You could be more likely to qualify with a strong personal credit score, even if your business credit score is on the lower side of the spectrum or simply not established yet. Most of these cards do come with a required personal guarantee. Many also come with an annual fee and while there may be perks or rewards, it’s wise to compare these costs before applying.As always, your card’s APR is also an important factor, especially if you expect to carry a balance from the beginning as you get your startup off the ground.

Merchant Cash Advance

If your business accepts credit card transactions, you may be able to qualify for a merchant cash advance. This gives you a lump sum to use as working capital. Then you pay a percentage of your daily credit card transactions (known as the holdback amount) until your balance is repaid. Rather than being charged an interest rate, merchant cash advance companies use a factor rate. This charge is a multiple of your borrowed amount, such as 1.5. So, a $25,000 cash advance multiplied by a 1.5 factor rate would bring the total balance to $37,500. In other words, the financing would cost $12,500. Merchant cash advances may have even higher factor rates and other fees which can make them a very expensive form of funding for businesses. Additionally, because merchant cash advances aren’t considered a loan, generally their regulation is less stringent and regulatory oversight is less rigorous than more traditional loans.

Invoice Factoring

For a startup that already has some accounts receivable, you may qualify for invoice factoring to help your cash flow while you wait for customers to pay you. The factoring company charges a percentage of the invoice amount as their fee (typically around 85%), then fronts you a percentage of the funds before payment is received. They generally manage the payment process with your customers. Once the invoice is repaid, you’ll receive the remaining balance.

Equipment Financing

Equipment financing is a type of business loan that is used to purchase equipment used for businesses purposes. The equipment you are purchasing acts as the collateral for the loan. Needs will vary based on the nature of the business, but some types of equipment that may be purchased with this type of loan include agricultural equipment, office equipment, printers, vehicles, restaurant ovens, and more. Typically, when the loan is repaid, you are the owner of the equipment. In some cases, the lender may require additional assurances, such as a personal guarantee.

Crowdfunding Platforms

Crowdfunding is a unique form of financing, but it can help launch your startup without having to worry about credit scores as much. You can create a campaign to garner interest in your business and get financial backing in one of four forms: equity, donation, rewards, or loans. While crowdfunding allows you to raise money and test the market at the same time, it can be a much more intensive marketing process. Plus, there’s no guarantee you’ll reach your funding goals.

SBA Loans

Many lenders offer Small Business Administration (SBA) loans to startups because they come with a guarantee as long as certain underwriting guidelines are met. In some cases, even startups with bad credit may be able to  qualify for an SBA loan. One option for new businesses is the SBA Microloan program, which lets you borrow up to $50,000.Some lenders require a minimum personal credit score of just 545, although you may find some requiring at least 620 to 640. Just like most other business loan applications, you may need to provide a business plan. SBA microloans also generally require collateral and a personal guarantee.

Peer-to-Peer Lending

Peer-to-peer lending services are another alternative to more traditional lending options like bank loans. With this type of lending, online platforms match potential borrowers with potential investors. Eligibility requirements will generally vary from platform to platform.Some services have minimum credit score requirements, which can potentially make it more challenging for businesses or individuals with lower credit scores to qualify. The process to funding is generally quick, but borrowers with less-than-stellar credit may find that interest rates are higher than a traditional loan.

Building Business Credit

When you’re first starting your business, you can help set yourself up for success by properly establishing your business credit. Here are a few basic steps you can take to get started:
  1. Officially incorporating your company
  2. Getting a federal employer identification number (EIN) from the IRS
  3. Opening a business bank account. 
It can be difficult to find no credit check financing options, so it’s generally worth building your business credit score as early as possible. When working on building your credit score, it may also be helpful to establish relationships with vendors that report to the business credit bureaus and pay your bills on time. Taking these steps may contribute to a stronger credit profile that could help open the door to more favorable financing opportunities in the future.Recommended: Checking and Understanding Your Business Credit Score

Comparing Your Options

When you start a business, you’ll need to weigh the pros and cons of risk. Finding the right small business loan takes the same skill set. Exploring multiple options can help you make the best choices for your startup. With Lantern by SoFi's online debt financing marketplace, you can compare small business loan rates without scouring the web and checking multiple sites. With one short application, you’ll be matched with loan offers that meet your company’s needs and qualifications.Ready to find a startup business loan? Compare your options with Lantern by SoFi.

Frequently Asked Questions

Is it possible to get a startup business loan with bad credit and no collateral?
Could I start a business with bad credit and no money?
What is no credit check financing?
What credit score is needed for an SBA loan?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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