Things in life do not always go like we planned, and sometimes financial crisis or personal events like a divorce have a negative impact on your credit score. If you want to start a home-based business, this can sometimes be an issue. You will need money to start your business, and it is much harder to get funding if you have a low credit score.
It is certainly not impossible though. Plenty of people have done it and been successful at it. The key is that you need to be creative and start to turn that credit score around. How do you do this while starting a business at the same time? Here are some keys to starting a home-based business even with bad credit.
Your Personal Credit Score and Your Business
One thing you need to understand right away is that until you build up your business and it gets a credit score of its own, your personal credit score is the business credit score. The funding you get will largely be dependent upon you.
Even if you have an LLC, your personal credit and assets will often be used to secure loans, get credit cards, and even set up lines of credit with vendors. This means the better your score, the more funding you will be likely to get with the lowest interest rates.
Your goal, while building your business’s own credit score is to improve your own. The combination of both will make you a more viable credit risk.
Develop a Savings Plan
This the safest and best way to start a home business. Put money in the bank, in savings, and use it to get your business going. It is a great idea, but one that is seldom used.
One of two things usually happens: either the person starting the business keeps their savings and borrows to start the business, or they run out of money from savings pretty quickly.
Here is the rule of thumb: if you are going to start a business out of savings, you need to understand that the business may not turn a profit for six months or longer. That means you need six months of personal income plus business expenses to get started without having to go into debt.
As you can see, that is a lot of money. Let’s say you make $5,000 a month at your day job, and you estimate it will cost you between $2,000 ns $3,000 to run your business each month. That means you will need between $40,000 and $50,000 in savings to be “safe” and even then it might not be enough.
This is why it is vital, even if you plan to borrow, that you have a solid amount of money in savings. This nest egg will carry you through the first part of starting your home-based business until it starts being profitable.
Get a Personal Loan
You can get a personal loan to help you start your home-based business. In fact, most business owners do. It might cost you a little more in interest than if you had good credit, but there are personal loan options out there even if you have bad credit.
The risk here is that your personal credit score and your personal finances are at risk. This should be a short-term solution that is just for getting you up and running. Continually using personal loans to run your business can put you in a really bad debt position where the rules that cover an LLC really don’t shield your personal assets.
However, when you are just getting started, sometimes you need to use whatever means you can to get funding, and a personal loan is one way to do that.
Leverage Your Assets
There are two types of assets you can leverage. You can leverage your personal assets or business assets. It is best in this case if you use business assets.
Using them to acquire a secured loan is one way to build your business credit score. Your business might not have many assets to start out though, especially since home-based businesses are often service or small product based.
You can also leverage your personal assets like your home, your 401K or other investments. Borrowing against those investments or assets lets you secure funding even if your credit is not the best. You are creating and installment loan with your property as the security.
The risk, much like a personal loan, is that you are risking your personal assets if your business should fail. Be careful with this kind of loan, and be sure you have a plan to pay it back, and never borrow more than you can afford.
If you have poor credit though this is one way to get your business up and running.
Look into Working Capital
Sometimes certain business accounts, or even PayPal will offer working capital loans or lines of credit. This capital is designed to help you grow your business in some way that you could not without the right finding. Marketing, inventory, new equipment, and even adding personnel are all good uses of this funding.
Rather than interest, working capital is often an up-front fee based on how much you borrow. If there is interest, it often works in a similar way to a line of credit. You only pay interest on what you borrow at the time and the balance you carry.
Working capital only requires that you show your business is making steady money month after month. This can be a great way to level out cash flow issues and get your home-based business solidly on its feet,
There are funding options for nearly anyone even if you have bad credit. At the same time, work to improve your credit score and that of your business, and you’ll find success in starting your home-based venture.