SmallBizResource Blog -- Business Know-How

6 Ways To Start A Business With Bad Credit

Courtesy of Business Know-How Thursday, Jun 11, 2009, 09:27 AM ET

While the state of the economy should never be a deterrent in starting a small business -- people and businesses still need to consume goods and services -- a downturn does have an effect on your ability to find and obtain capital for their ventures, especially if your personal credit is a bit lacking.

But all is not lost.

Most business owners usually have some form of capital to put into their businesses, be it from personal savings, retirement accounts, or loans from friends and family. I have always believed that whatever liquid capital (cash on hand) a business owner has walking into a new venture should be used for the overall development and growth of the business. It's essentially like putting in your own venture capital.

However, would-be business owners usually do not have all of the funds necessary to launch their companies, and they tend to struggle with allocating the money they do have to the numerous start-up expenses they will encounter. No surprise, bad credit (or even no credit) makes it very difficult for business owners to obtain unsecured working capital. But here are six other ways to go about that:

1. Social lending: For unsecured working capital, try the numerous social lending sites that have proliferated the Internet during the past decade. Social lending is essentially where members borrow and lend to each other. Gaining access to capital tends to be easier to obtain because you get to tell your story directly to funders. Further, loan rates are usually lower than traditional bank lending. Though considered personal loans, the funds received can be used for any purpose, including starting and running your business.

2. Microcredit organizations: The purpose of a microcredit organization is to help new and growing businesses obtain capital after being turned down by traditional lenders, like banks. These organizations are typically nonprofit groups, backed by the SBA, and understand the trials you face when trying to get your venture off of the ground. Plus, they offer a plethora of guidance to help ensure long-term success.

3. Equipment lenders: Many new small businesses need all types of equipment for their business, from standard office equipment like computers and copy machines, to tools and machinery to make or provide products and services. That's where equipment lenders can help. They work with start-ups and are extremely flexible in developing programs that can meet your specific needs. Though these loans and leases are secured by collateral (the equipment), less emphasis is put on personal credit histories.

4. Capital resource leverage: A start-up business is considered a business in operation less than one year. During this time, many businesses generate financial assets, which can be used to secure financing to speed the flow of payments, to complete current jobs or orders, or to fund for payroll or additional marketing. Capital resources include receivables (why wait 30, 60, or 90 days to get paid by your customers when you have bills that need to be paid now?), and purchase orders, in which your business can receive cash to complete jobs that are already in the works or funds to bid on jobs. Cash advances for businesses that accept credit card payments also allow them to leverage future sales for growth capital today. The real bonus about these types of financing options is that they are not focused on your personal credit history, but more on the strength of the asset.

5. Government: Given our government's propensity to help people get back to work -- after all, most new jobs are created by small businesses -- an influx of new government and private grants have been created to help people in need, including business owners.

6. Debt consolidation: Should a business owner still face difficulties due to credit issues, then the only step remaining is to eliminate those issues. While bankruptcy and credit counseling will continue to harm your credit after you've completed these programs, debt consolidation can reduce your unsecured debt (including credit card debt) into one low, affordable payment, allowing you to free up current cash flow as well as to improve your credit scores.

Business Know-How