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Startup business loans for bad credit with no collateral
Go for a microlender to help you get set up — and watch out for high fees with other bad credit options.
It's possible to get a startup business loan when you have a credit score below 580 and no collateral. But your options are limited, especially when you need funding to get your business off the ground. In many cases, the loans available to you can be expensive or are too small to cover all your costs.
Faster financing options will be more expensive but can help you through an emergency. But watch out for red flags, like lenders that guarantee approval.
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How to get a startup business loan with bad credit and no collateral
Not all types of startup financing can benefit all startups. Different options vary depending on what you need to fund, how much time you have to spend on the application and even your business model.
- Best for: Starting a new business with bad or no credit
Microloans may be one of your only options if you need financing during the "seed stage," or when you're getting your business off the ground. These are usually available through nonprofit organizations with a mission to build up the economy of a specific community.
Usually you can borrow between around $500 and $50,000 your first time around. You'll typically pay around an 8% to 23% annual percentage rate (APR) with repayment terms from six months to a few years — though Kiva offers 0% APR microloans.
Generally, microlenders don't require collateral. Some lenders might require you to take a course while you repay the loan or crowdfund part of the funds. This type of financing can help your business get to the point where you can qualify for a less-expensive, larger bank loan. But it can take over a month to get the funds, and the application is often time-consuming.
- Best for: Buying equipment after your business is up and running
Equipment loans have collateral built into them, making it easier to qualify if you don't have collateral upfront. Some equipment loan providers accept bad credit and only require your business to be around for a few months.
Typically, you can borrow between 80% and 100% of the estimated value of your equipment. And the loan term is based on how long the equipment is expected to last — usually between five and 10 years. Rates can start as low as 5% APR — though with bad credit, rates will often be higher.
Lines of credit
- Best for: Working capital after your business is up and running
Many online lenders offer lines of credit to business owners that might not qualify for a loan from a bank. These often don't require assets as collateral and may be available to business owners with bad credit.
These can give your business access to cash as needed to cover unexpected or recurring expenses — like buying inventory or making small repairs.
Typically credit limits range from $1,000 to $250,000 — though credit lines can top $1 million in some cases. Rates usually run from 8% to 80% APR. Some lines of credit are revolving and have no term. But others turn each withdrawal into a loan with a term of around six to 12 months.
Invoice financing and factoring
- Best for: Business-facing businesses with at least $10,000 in unpaid invoices
Invoice financing and invoice factoring are both advances on unpaid invoices due within 30 to 90 days. Since they're an advance on your invoice, you don't need to back it with business assets. Usually you can receive an advance on 85% and 95% of the unpaid invoice's value, typically in the $10,000 to $10 million range. As your client fulfills the invoice, the advance is paid off.
With invoice financing, you keep control of the invoices and pay a monthly fee of 3% to 5% of your advance as you wait for customers to pay up. With factoring, you sell your invoices to a company at a discount, which depends on how quickly your clients pay their bills.
These can be expensive compared to microloans, equipment loans and lines of credit. And you might not qualify if your customers have bad credit. But your time in business usually doesn't matter with these providers — as long as you have enough unpaid invoices.
Merchant cash advances
- Best for: Consumer-facing businesses that have been around for at least six months
A merchant cash advance is an advance on your business's future credit and debit card sales — or in some cases, monthly deposits. These providers usually don't check your credit, and some require you to be six months in business. And they don't require collateral because they're technically not a loan.
Typically, you can borrow between 80% and over 100% of your average monthly credit card sales and pay it back plus a fee with a percentage of your daily sales. And it's expensive. The fee can sometimes be so high it's equivalent to a 300% APR. And with inflexible daily repayments, it's earned the reputation of being a payday loan for businesses.
How do I get an SBA loan to start a business with bad credit and no collateral?
You can't use a loan backed by the Small Business Administration (SBA) under those circumstances. Most SBA programs require collateral and a credit score around 640 — though it can depend on the lender.
But you might be able to get one in the future. Since SBA loans are sometimes easier to qualify for than a bank loan, they're often the next logical step after you've started to generate revenue. Many microlenders programs can help get your business and your personal credit in shape for this kind of financing.
How do unsecured business loans work?
Unsecured business loans are business loans that don't require you to use a specific asset as collateral. But almost all require a personal guarantee or a lien on your business's assets.
- Personal guarantee means that you and all owners with more than a 20% stake in the company are responsible for paying off the loan if the business defaults on the loan.
- Blanket lien means that your lender can seize whatever assets your business has — equipment, cash or real estate, for example — if it can't pay off the loan.
It's possible to find business lenders that don't require either. But these are often even more expensive than other options available to startups with bad credit owners.
Why are my options so limited?
Startups are risky. Some 50% of new businesses close within the first five years, according to the Bureau of Labor Statistics. Lenders usually rely on good credit and assets to offset the risk that your business will close. And many don't want to take the chance that you won't be able to pay back a loan.
The few lenders that accept bad credit and no collateral have to find other ways to make the loan worth their while. For-profit lenders usually do this by charging high rates and fees with short repayment terms. Nonprofit lenders typically offer small loan amounts and require business owners to take courses that guide them through those difficult early years.
The myth of guaranteed approval
Some bad credit companies might have high rates of approval. But no legitimate lender can tell you that you've been approved before looking at your application. That's because even the easiest loan programs have basic requirements that you have to meet — like being over 18 or submitting a copy of a state-issued ID.
Lenders that use claims to offer guaranteed startup business loans could be a scam — especially those that advertise no credit check. Make sure to thoroughly vet your lender by reaching out to customer service, reading reviews and looking for lawsuits the business might have received. If you're not sure a lender is legitimate, play it safe and don't apply.
While traditional business loans are off the table, you can still find startup financing when you have bad credit and no collateral to offer. But these options can be time-consuming or expensive.
Frequently asked questions
Answers to more questions you might have about getting a business loan with bad credit and no collateral.
Can I get a business loan with a 500 credit score?
However, invoice factoring, merchant cash advances and invoice financing are often available if your credit score is 500 — or even lower — because these lenders typically don't run a hard check on your credit. But these are some of the most expensive options out there.
What is the easiest business loan to get?
Merchant cash advances have historically been the easiest business loan to get. Business car and equipment loans had a slightly higher approval rate at the end of 2020, according to the Federal Reserve. But these might not always be available to startups or business owners with bad credit.
How can I get a business loan with no credit history?
Get a business loan with no credit history by looking for a lender that doesn't require all borrowers to have a credit background. Some microlenders like Grameen America don't require a credit history to help get recent immigrants startup financing.
Bringing on a partner with good credit and investing some of your personal funds can also offset your lack of credit history. As a last resort, you can also apply for a merchant cash advance, invoice factoring or invoice financing.
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