How to Finance With Bad Credit to Start a Business

Prepare a business plan to woo investors if you have bad credit.

Individual entrepreneurs face many challenges when starting a business, not the least of which is securing start-up financing. Potential investors look at the financial viability of a business, the history of the management team, the products offered, market share and potential competitors when deciding whether to invest in a business. These banks, individuals and other possible financiers are primarily interested in getting their money back with an appropriate return on their investment. A future business owner's bad credit poses a risk some financiers will not take--though tenacious entrepreneurs can overcome this obstacle.

Instructions

1. Write a business plan. If you have bad credit, you must try to keep the potential financiers' focus on the viability and creditworthiness of the new business rather than your personal credit situation. Flesh out the new business idea, discussing management, products, a business overview, the competitive landscape, the projected market share, and financial projections. Convincing investors the business will do well enough to make them money may negate the effects of your personal bad credit.

2. Invest your own money into the business. Also known as owner's equity, your own money invested into a business shows other potential financiers that you have confidence the business will succeed. Many banks and government organizations will loosen lending standards as the ratio of owner's equity to financing required increases.

3. Partner with the Small Business Administration for a start-up loan. The SBA does not make loans directly to entrepreneurs. They do, however, partner with banks to provide guaranteed loan financing to start-up businesses. Approach your local bank and ask to submit an SBA loan program application. The three main SBA loan programs include the 7(a) Loan Program, the 504 Loan Program and the Microloan Program.

4. Ask family and friends for seed capital. Hitting up family and friends for start-up financing provides an alternative to other private lenders. Provide your business plan to your family and friends, explain your thoughts on profitability and return on investment and see if any will offer to help finance the business. Treat family and friends as you would other third-party investors--professionally.

5. Approach angel investors for financing. Angel investors, typically high net-worth individuals, invest in small companies during the start-up stage. In exchange for providing financing, angel investors seek an equity piece of the business. Post your business plan to angel investor networks online to see if any angel investors will provide financing.

Tips & Warnings

• Work to improve your credit score so obtaining financing becomes easier.

• Provide potential investors with an exit strategy (recovering their investment and a return) to maximize interest.

References

• Innovations.org: Funding Your Invention
• Small Business Administration: Write a Business Plan
• Small Business Administration: Wisconsin
• Small Business Administration: Guaranteed Loan Programs
• Small Business Administration: "How to Seek Venture Capital, Debt Equity or Find Angel Investors"

Resources

• Wells Fargo: Wells Fargo Small Business-SBA Loans
• U.S. Small Business Administration: U.S. Small Business Administration-Your Small Business Resource