Dear Business Banter,
I want to start a business, but I have bad credit. What are my options? – James
Although an impressive credit history and high credit scores aren’t required to start a business, they sure help! After all, you may soon want to borrow funds from a financial institution so you can do everything from pay for the costs of a launch to managing ongoing operations.
To appeal to a lender, your past credit history will be relevant. Thankfully, you can overcome the problems associated with bad credit to qualify for a business credit card—and a loan, since that might be necessary too.
Have a business question for Erica? Drop her a line at the Ask Bankrate Experts page.
Build up your score
Since your business has yet to begin, you don’t have a business credit profile that can help you qualify for credit products. Therefore, lenders will assess your personal creditworthiness to determine qualification and set terms.
To know what is dragging your credit scores down, pull your credit reports up. You can get a report from each of the three credit reporting agencies—Experian, TransUnion and Equifax—once a year for free from annualcreditreport.com.
The information listed in the sections for trade lines, public record, and credit inquiries of your credit report is all inputted into scoring models, so read your reports carefully. If you spot any inaccuracies, file a dispute with one of the credit reporting agencies. The one you use will notify the other two, and your files will be updated.
To improve your scores (even when the negative data is still being listed):
- Pay all credit accounts on time. Although late payments hurt credit scores (especially when there are many, or accounts are seriously delinquent), establishing a perfect payment history from this point forward will help mend the damage.
- Reduce credit card debt. If you have credit cards and they’re maxed out, reduce the balance to well below the credit limit.
- Open up a credit card. Consider opening a personal credit card. Many credit cards are created specifically for people with bad credit. Once you have it, choose a small bill to charge each month, then pay it off in full and on time.
- Add utility and cell phone accounts to your report. The more on-time payments you have on your credit report, the better. Experian has a free Boost program where you can add non-credit accounts to your file. Those payments should help give your FICO 8 credit score at least a few extra points.
With this strategy, your credit score will increase over time.
See related: Do I need a business credit score to start a business?
Get a business credit card
Although you can use a personal credit card for your business, it’s better to get one specifically for your company. They offer benefits that are designed to help business owners do everything from handle their enterprise’s expenses to helping with accounting.
Just be aware that these cards remain your personal responsibility. Even if it’s in your business’s name, you will be on the hook for all payments and any outstanding debt.
So, how can you get a business credit card with bad personal credit? When your scores are at least in the “good” range, start looking into the business credit card options that are available. As you’ll see, there are many from which to choose, so give this task plenty of time.
Be aware that some business cards are charge cards while others are credit cards. With a charge card, there is no preset limit, but you’ll need to pony up the entire balance within about 30 days. With a credit card, there is a maximum amount you can charge, but you can pay at least the minimum requested payment and then revolve the rest. Ultimately, you may want one of each.
When your scores are at least in the “good” range, start looking into the business credit card options that are available.
Almost all business cards have rewards programs attached to them, so read over the program’s details and focus on those that you’ll use. For example, if you think traveling will be in your future, concentrate on a card that gives you the best perks for flights, airport amenities, hotels and car rentals.
Many business credit cards offer excellent sign-up bonuses, too, where you would receive a large amount of points, cash or miles after spending a certain amount with the card within a few months of activation.
Some also offer 0 percent APRs for a fixed number of months, which will give you a nice amount of time to pay for your venture’s needs before financing fees are assessed. As long as you pay the debt in full before the real rate begins, you get a free loan! As you use the card, you’ll be racking up rewards.
These programs differ, so make sure it’s a good match. One card may offer an exceptional reward value for restaurant meals, while another gives the most for things like office products.
Finally, prepare for annual fees. Not all cards charge them, but if you get more out of the account by way of perks and rewards, you’ll come out ahead. Choose wisely.
Look into loans
Credit and charge cards tend to be great for short-term financing, while business loans are preferable for big-ticket expenses that you want to pay off over several years.
To get a business loan with the best terms, it’s best to wait until your credit is in decent shape. However, if you must borrow a significant amount of money right away and then pay in equal installment payments, there are startup business loans for bad credit.
Loans with no credit checks still pass through an approval process, but the lender analyzes your assets and income for approval instead of your credit history. If it appears that you can make the payments that are associated with the loan, it should be approved. Other lenders do check credit reports and scores, but the standards for qualification are low.
In either case, loans that are developed for people with bad credit tend to be smaller and come with higher interest rates than those for people who have good credit.
Whichever loan you get, simply pay it off according to the agreement. Assuming the lender furnishes information to the credit reporting agencies (most do, but if you get a “no credit check loan,” ask the lender to be sure), it will help your credit scores rise.
Take these simple steps and you’ll not only repair your bad credit but will have the good credit products for your business!
To qualify for a business credit card (and a business loan), take action to improve your personal credit history.
Shape up your FICO score, identify the right business card for your needs and consider a business loan.