Why startups with bad credit face a double hurdle
Funders judge a new business on the owner's credit because there is no business history. A low score plus no revenue leaves little to base a decision on.
Established businesses show their ability to repay through bank deposits. A startup can't, so funders lean on the owner's personal credit, experience, collateral and plan. When the score is weak, fewer products are available and terms get costlier.
Credit scores vary by model, but scores in the mid-500s and below are generally treated as high risk. Read credit requirements for business loans and credit scores that matter to see how funders weigh them.
Be wary of anyone who promises a startup with bad credit that approval is certain. No honest funder can promise that.
Keep in mind that a score is a snapshot. Late payments from several years ago carry less weight than recent ones, and a single clean year can change how a file reads. If your problems are old, say so and show what has changed since.
Options that exist for startups with weak credit
Realistic routes include savings, family or partner investment, microloans, equipment seller financing, crowdfunding and a cosigner. Each has tradeoffs.
- Savings and bootstrapping. Slowest but cheapest. See bootstrapping a small business.
- Family, friends or partners. Put terms in writing to protect relationships.
- Microloans. Nonprofit and SBA-backed microloan lenders often work with new businesses and may weigh character and plan more than score. See SBA microloans.
- Equipment seller financing. The equipment itself is collateral, so the credit hurdle may be lower, though rates can be high.
- Crowdfunding. Works for products with a story. See crowdfunding.
- A cosigner or partner with stronger credit. They take on real risk, so be careful.
Compare each option on total cost, not only on whether it is available.
Products to avoid or approach with care
Very high-cost short-term advances, loans with large upfront fees and offers that arrive unsolicited deserve suspicion. Always compute total cost and payment before you sign.
Startups with poor credit are targets for expensive products. Warning signs include:
- Fees that must be paid before the loan funds
- A guarantee of approval before any review
- Pressure to sign quickly
- Daily or weekly payments that you cannot support with your cash flow
- Refusal to explain total repayment
Illustrative example: a $20,000 advance with a total repayment of $26,000 over 6 months costs $6,000. If your business earns only $2,000 a month in profit, you can't carry that. See factor rates and how to calculate the cost of debt to compare offers.
How to improve your odds in 60 to 90 days
Check your reports for errors, pay down revolving balances, avoid new hard inquiries and open a business bank account that shows steady deposits.
Credit can improve faster than people expect if you focus on the main drivers:
- Get your free reports and dispute errors.
- Pay all bills on time starting now.
- Pay revolving card balances down toward 30 percent of limits or lower.
- Avoid opening several new accounts at once.
- Open a business account and run all revenue through it.
- Begin building business credit with vendor accounts that report.
See 7 ways to boost your credit score and how to build business credit.
What a funder wants to see besides the score
A clear plan, relevant experience, some owner investment, collateral where possible and realistic projections can offset a weak score.
If you do approach a lender, bring more than a number:
- A concise plan with costs, pricing and a cash forecast
- Your experience in the field
- Your own cash invested in the business
- Signed customer letters or purchase orders
- Collateral, if you can offer it
A clear story for the weak credit helps too, such as a medical event or divorce that has since been resolved. Keep it short and documented. Our guide to getting a business loan with bad credit explains how funders view these stories.
Prepare a short written explanation if there is a clear cause, such as a medical bill or a past business closure. Attach documents if you have them. Funders read many files, and a calm, factual note can help a reviewer see the whole picture.
Where ROI Funder fits, and where it does not
ROI Funder does not place startup loans for businesses under 6 months. It considers businesses with 6+ months in business, $20,000+ monthly revenue and 500+ FICO.
We want to be direct. If your business is under 6 months old, or earns less than $20,000 a month, ROI Funder is not the right fit yet, and we would rather say so than waste your time.
If you have been operating 6+ months and your score is 500 or higher, a different set of options opens up. Working capital and revenue-based financing look mainly at your bank deposits. Applying takes a few minutes and uses a soft credit pull, so it does not affect your score, and you have no obligation to accept an offer.
Until then, use the steps above, build revenue and keep clean books. See business lines of credit with bad credit for the next stage.
Frequently asked questions
Can I get a startup loan with bad credit?
It is hard. Options include savings, microloans, seller financing, partners and crowdfunding. Be wary of high-cost products and anyone who says approval is certain.
What credit score do startups need?
It varies by product. Many traditional lenders want much higher scores than 500, while some alternative products consider lower scores for established businesses.
Does ROI Funder offer startup loans?
No. ROI Funder considers businesses with 6+ months in business, $20,000+ monthly revenue and 500+ FICO.
How can I improve my credit quickly?
Dispute errors, pay on time, lower card balances and avoid new inquiries. Changes can show up within a few months.