If you plan on starting a business and you think you’ll need capital, I strongly suggest that you bootstrap for the first few years (or at least until you have a consistent and steady stream of customers or clients). Although borrowing money for your small business could definitely help you grow the business quicker, the first few years you’re in business will most likely be a learning experience. Success in business is not instant and growing the business will take time.
During this time period, I believe you should avoid borrowing (in case the business is unsuccessful and leaves you with the inability to pay back what you’ve borrowed). It’s wise to get a feel for the industry and learn the ins and outs of what it takes to be successful before you jump into borrowing money. Below I give you three ways to prepare yourself to borrow money for your small business (when the time is right).
- Build Your Reputation in the Industry – You’ll want to become established in your industry by building your brand and reputation. You can begin doing this by acquiring a few new customers or clients and providing them with an exceptional product or service and asking for feedback from them. I suggest asking your customers or clients for verifiable written or video testimonials that you can post on your website. When you are ready to borrow money for your small business, if you just so happen to need a business plan to be considered for a loan, you can include the testimonials in the business plan to prove to lenders that you have built a positive reputation in the industry.
- Start Generating Sales & Revenue – You’ll want to obtain a consistent and steady stream of customers or clients that help you generate sales and revenue. Again, once you are ready to approach a lender, if you can prove to them that you already have customers or clients, and sales, they may be more willing to lend to you. Having consistent sales and revenue shows lenders that you will have the ability to service the debt (so you’re less likely to default). It also shows them that you have already put your own money into the business and have taken the time to grow the business on your own dime. That lets a lender know that you believe in the business enough to invest in yourself so they may be more inclined to invest in you as well. (If you are unwilling to invest in yourself, what makes you think someone else will)?
- Build Your Personal Credit History – Building your personal credit history is critical. Lenders will most likely check your personal credit history, even though you are applying for money for your business. It is very unlikely that you’ll be able to get any small business loans without a lender checking your personal credit. Therefore if you have not built and established a stellar credit history, you’ll want to work on that first. I always suggest starting off small when attempting to build new credit. This includes obtaining a small credit card or two that you can use to pay for expenses that you already have the funds to cover (e.g. gas or groceries). I suggest that you do it this way so that you are not tempted to spend what you don’t have to pay back. If you do it this way, you’ll be able to make timely payments and build your personal credit history and score over time. If you have less than perfect credit, the best thing for you to do is to begin rebuilding your credit history by paying off old debts and/or disputing old (and possibly inaccurate accounts). Whatever the case may be (good or bad personal credit), when you are ready to approach a lender to apply for a small business loan, your personal credit needs to be established and in tip top shape.
- Build Your Business Credit History – Building your business credit history and score in this day in age is a necessity. For example, if you plan on applying for an SBA 7(a) loan over $150k, lenders will check both your business and personal credit score. Your business and personal credit score will be combined to form what’s called a “LiquidCredit Score.” The “LiquidCredit Score” is the new business credit scoring model created by the Fair Isaac Corporation for lenders who want to determine if business owners are creditworthy. Business credit is becoming increasingly more important and cannot be ignored. In the early part of 2009, more than 45 million business credit reports were pulled from Dun & Bradstreet, and more than 35 million were pulled from Equifax Commercial, according to Creditera. Those numbers can’t be overlooked. As a startup business owner, you should immediately focus on building your business credit history and score so you can increase your chances of qualifying for a small business loan when you are ready to borrow. Attempting to borrow before you build your business credit history could result in a denial from banks and lenders (depending on what you are applying for).
Can I Obtain a Startup Business Loan After I Have Damaged My Credit History?
Startup entrepreneurs with less than perfect credit often have a misconstrued idea of what type of business financing they can qualify for once they have damaged their credit history. I have worked with numerous entrepreneurs who believe all hope is lost and there is no way they will ever qualify for small business financing. That is simply not the case. Although having damaged credit can increase the amount of time it takes to secure small business financing, it is not impossible. Here are 4 tips you can follow to obtain a small business loan while you work on improving your personal credit history.
- Develop a business plan – Developing a full business plan with marketing plan and at least 3 to 5 years of realistic financial projections will enable you to apply for alternative financing such as microloans. Microloan lenders often require you to submit a full business plan, along with your last 2 years of tax returns and other documentation such as bank statements and/or W-2’s. These lenders have less stringent credit criteria you have to meet to get approved, therefore people with less than perfect credit can often qualify. You can sometimes have bankruptcies and foreclosures and still get approved for up to $50k in microloans. The business plan will help you get approved so if you are serious about getting a small business loan, you’ll begin working on one right away. Companies like QT Business Solutions who specialize in writing and developing business plans and assisting small business owners secure microloans can help you get started.
- Start Credit Restoration – If you have damaged credit, I strongly suggest that you being working on correcting the issues affecting your credit. This can include paying off old debts and negotiating removal of old derogatory and delinquent accounts. Many people believe that paying off the debt will not help improve their credit scores, but that couldn’t be further from the truth. It gives you the chance to start a new beginning. Starting over is one of the keys to being able to qualify for small business loans when you have damaged credit. I suggest teaming up with a credit restoration expert who is experienced in helping people get accounts removed using the “pay for delete” method. This method includes arranging payment with your creditors if they agree to stop reporting the negative account. Some creditors try to shy away from this but remind them that there is no law saying they have to report the account to your credit history in the first place. If they say there’s no law that they have to remove it from your credit report, tell them that if they don’t, there is absolutely no incentive for you to pay it since it hinders you from getting a small business loan. Again, it’s good to connect with an expert credit restoration specialist to assist you with this process to be sure it’s done right. Our experts here at Hawkeye Management, can help you with this – contact us for details.
- Make Timely Payments – Did you know that 35% of your personal credit score is calculated based on your payment history, collection accounts, and public records. You can avoid having collections and public records show up on your credit report by making timely payments. I realize that making timely payments is dependent upon your financial situation – and this is the reason I am giving you my next tip.
- Stay Employed – Most lenders (especially microloan lenders), require that you be employed for at least 6 months when you apply for a small business loan. Lenders need to know that you are capable of paying back whatever you borrow therefore it’s pertinent that you are employed continuously before and after you apply. Staying (gainfully) employed will enable you to make timely payments towards the small business loan and enable you to pay off old debts (and continue to pay current debts on time).
Following these 4 tips will enable you to obtain a small business loan even with your damaged credit history. If you are ready to start restoring and rebuilding your credit history so you can qualify for a small business loan, please feel free to contact one of our advisors today. Also, contact a rep at QT Business Solutions for information on how you can obtain a microloan up to $50,000 with less than perfect credit.