Many small business owners rely on traditional business loans and other debt-based financing methods to launch their ventures. But for aspiring entrepreneurs who need small business funding with bad credit, the ability to secure financing can be challenging and seemingly impossible.
Thankfully, there are alternatives to business loans and lines of credit that make it possible for even those with bad credit to get the money they need to start or buy a small business. These options don’t require borrowing money from lenders so they have less strict eligibility requirements. These are great options for aspiring entrepreneurs struggling with bad credit scores.
What is a “bad” credit score?
FICO credit scores, which are the most common credit ratings, range from 300 to 850. Scores are usually broken down into brackets:
- Excellent Credit: 750+
- Good Credit: 700 – 749
- Fair Credit: 650 – 699
- Poor Credit: 600 – 649
- Bad Credit: below 600
It’s up to individual lenders to determine what credit scores are good enough for someone to qualify for funding. As all business loans and lines of credit carry some level of risk for lenders, they look at credit scores as a way to predict whether a borrower is likely to repay a loan. The higher the score, the more likely the borrower is to make payments on time, and thus, the higher their approval odds.
Surprisingly, your credit score doesn’t have to sit in the “excellent” bracket to qualify for business funding. Some loans, including those from the Small Business Administration, offer funding to aspiring small business owners with scores of 640, as long as other requirements are met. However, most lenders want to see credit well above the “poor” bracket. For those who have experienced financial hardships or just mismanaged their money, this can make small business funding challenging. But don’t give up on your entrepreneurial dreams just yet; you can still get small business funding with bad credit. You just have to know where to look.
What business funding options are available to those with bad credit?
There are two primary small business funding methods available that are ideal for those with bad credit. These include 401(k) business financing and portfolio loans, both of which involve leveraging funds you already have in retirement or other investments as business funding. Because you’re using your own money, there are no minimum credit scores or collateral needed to qualify. For someone with a bad credit score, this can be a dream come true.
What is 401(k) business financing?
Also known as Rollovers for Business Start-ups (ROBS), this option offers the ability to use funds in your 401(k), IRA, or other tax-deferred retirement account as business funding — all without incurring tax penalties or early withdrawal fees. In a nutshell, ROBS involves using your retirement assets to purchase stock in a small business that you have complete control over. Rather than investing in a volatile stock market, ROBS allows you to grow your nest egg by investing in yourself and your own small business. And it’s completely legal, allowed for by the Employee Retirement Income Security Act of 1974.
How do I quality for ROBS?
There is only one requirement to qualify for ROBS: you must have at least $50,000 in an eligible, rollable retirement account. This usually means you cannot be currently employed by the company sponsoring your tax-deferred retirement plan. Because it’s not a loan, there is no lengthy application process involved with ROBS. Your credit score won’t even be pulled as part of the qualifying process.
In order for ROBS funding to maintain its tax-deferred status, there are several guidelines that must be met when setting up and running your business. This includes operating your company as a C Corporation, being a bona fide employee for the business, and sponsoring a 401(k) plan for the benefit of your employees (including yourself). These requirements can be cumbersome, so it’s advisable to work with a financing firm that is well-versed in ROBS to help you maintain compliance at all times.
What are portfolio loans?
Another option for small business funding with bad credit is a portfolio loan, which allows aspiring business owners to access funds in their investment portfolio to start or buy a business. Portfolio loans don’t require you to sell or liquidate investments. Instead, you can borrow up to 80 percent against the value of your portfolio and repay at will, similar to a revolving line of credit.
Because portfolio loans don’t require you to liquidate your investments, your portfolio can continue to grow in value. Plus, interest rates for portfolio loans are low — as little as 3 – 4 percent — and you can have access to funds in as little as 10 days.
How do I qualify for a portfolio loan?
Similar to Rollovers for Business Start-ups, there’s no minimum credit score necessary for a portfolio loan. Instead, qualification is dependent on the total value of your investment portfolio. You must have at least $85,000 in a brokerage account with stocks or securities publicly trading at a minimum of $5/share. As long as you meet those two criteria, you’re eligible for a portfolio loan.
If portfolio loans or funds from a Rollovers for Business Start-ups transaction don’t meet your total funding needs when used alone, they can be used in combination to increase your total access to capital. And both may be used at any stage of the business lifecycle, from start-up to expansion.
Don’t let bad credit crush your dreams of small business ownership. While business funding can be more challenging with bad credit, there are still options available to help you make your entrepreneurial dreams come true without waiting months or years to improve your credit score.
Find out if 401(k) business financing or portfolio loans could suit your needs by completing our quick pre-qualification assessment now.