How to start a business when you have a poor financial history

Starting a business is never easy, but if you have poor credit it is even more difficult to persuade lenders to hand over any start-up capital. If you start small, you may not need much in the way of capital, but sooner or later the business will require an injection of funds in order to finance the purchase of equipment or pay for business supplies. So what are your options if you have a fantastic idea for starting a business, but are shackled by a poor financial history?

Use personal savings

If you have any cash in the bank, you may need to use this to get the business off the ground, but be careful to leave an ‘emergency’ fund to cover any unexpected eventualities.

Borrow from friends and family

Your friends and family won’t be as hung up on credit scores as the banks, as hopefully they trust your ability to make your embryonic business a success. Therefore it is worth approaching friends and relatives for some financial help. Do be sure to draw up a loan agreement if they are happy with the idea, so there are no misunderstandings about repayments, interest, etc.

Crowd funding

Crowd funding is a good place to look for funding if you have a good business idea. Because you are given the opportunity to tell potential lenders your story when creating a profile, you are more likely to find individuals who are willing to overlook a chequered financial history. Success is not guaranteed, but if your business idea is rock solid and you launch a great campaign, your effort will be rewarded.

Micro lenders

Peer-to-peer micro lenders specialise in extending loans to entrepreneurs with poor credit. It allows people who have been refused credit by bigger lenders to access cash. As the name suggests, you can’t borrow huge sums of money, but for small working capital loans, this type of borrowing can be useful for cash-strapped new business owners. Micro loans are unsecured, but interest rates on the loan will be higher than traditional lending.

Bad credit lenders

Some lenders such as themoneyhub.co.uk specialise in bad credit applicants, but whereas micro lenders only lend small sums, with a bad credit lenders you can borrow as much as £200,000.

Gifts and grants

Don’t overlook the possibility that there might be “free” money available if you know where to look. Lots of organisations offer grants and subsidised loans for start-ups and budding entrepreneurs, but you will need to go searching for them.

Invoice factoring

Invoice factoring is helpful if you have managed to secure customers and are waiting to get paid. Instead of waiting, you sell your receivables invoices to a third party company and receive the cash up front. The downside is that you receive less than the value of the invoice and customers need to have good credit.

It is perfectly possible to start a business with bad credit, but you will need to be creative and willing to look beyond the most obvious sources of start-up capital.