If you have a business idea, executing on it could be the best decision you make in your life. You could make an income for yourself, create jobs for others, and grow an appreciating and sellable asset that could set you on the course for financial freedom.
However, starting a business is no easy task. Just having an idea doesn’t mean that you have a business. You need the necessary licenses and insurance, you need a business plan, you need the people in key positions, and you need initial startup funds. Some businesses require even more than this, too! Not only that, but most business owners cannot expect to make a profit from day one.
One common question people ask is whether or not they’re able to start a business with bad credit or no credit history. In this article, you’ll learn all about starting a business and what you can do if you don’t have good credit.
Starting a business isn’t the only thing that is easier if you have a great credit score. Learn about the benefits of having an 850 credit score!
How Do You Start a Business?
Before you start a business, you need to have a business plan. You don’t necessarily need a well-designed business plan in 11 pt font, but you do need a vision for where you see your business going and the action steps needed to get there. Your business plan will help you figure out if what you want to do is financially viable or not.
Do your due diligence and have a robust financial plan before you start. You will need to do the research necessary to determine what licenses, registrations, insurance, and certifications your business needs in order to legally operate. You should have an idea of what the marketplace is like and what everything is going to cost.
If you’re in the United States, you don’t actually need to do much to start a business. If your business doesn’t plan to hire employees at any time in the future and you plan to be the only person performing work, then you can simply act as a sole proprietor without incorporating. This is not recommended for many reasons, so most businesses choose to either create a pass-through entity like a limited liability company (LLC) or limited liability partnership (LLP), or create a corporation.
In order to create a corporation, you will need to get an employee identification number (EIN). This can be done online through the IRS’s secure service.
Corporations and pass-through entities are established within a particular state, and different states & structures have different rules regarding taxation and requirements to create them. To learn more about corporate structures, use this guide from Entrepreneur magazine to help you decide how you should incorporate your business.
Foreigners can start businesses in the United States so long as they have a Taxpayer Identification Number, a registered agent in the state where you want to incorporate, a physical business address, proof of identity, proof of funding, and an EIN.
What Do Businesses Need to Start Running?
Every business will have different requirements depending on the industry, the types of products sold or services rendered, sources of funding, and where the company intends to operate. Your business plan needs to have all of this information in it, otherwise getting funding from banks or investors will be next to impossible. If you are self-funding, the business plan will still be helpful.
Once you’ve obtained your EIN and created your corporation or pass-through entity, you will be able to do a lot more than you could without. You will be able to open a business bank account, point-of-sale merchant accounts, and more. You’ll be able to apply for the licenses and certifications you need.
After you’ve figured out what you need to make your business legal, go through your business plan and determine what else you need to start operating. Do you need:
- A physical location (storefront, warehouse, office space)?
- Employees in certain positions?
- A website? Social media profiles?
- Anything else that represents a cost that you need to incur to start making revenue?
Once you’ve figured that out, now you need to get the funding. You can get funding from a variety of sources. If you’re looking to raise debt, you can do so through a bank, private lender, or peer-to-peer lending groups. If you want to get investors, there are even more options. Angel groups, incubators, venture capital firms, and many other groups will help you fund your business… if it fits their criteria and they believe they can get a return on their investment.
How Does Personal Credit Affect Your Business?
If you’re just starting a business, your business has no credit to speak of and there’s no proof that the new business will be able to pay off its debts. Corporate structures and pass-through entities exist to protect investors, including the founder, from liability if the business finds itself unable to pay its debts.
When a business goes bankrupt, the business will either (1) liquidate everything to pay off as much of its debts as possible, discharge the remaining debt and dissolve the entity, or (2) agree to a restructuring plan and continue operations. Small businesses almost always choose the former option as it is the least expensive.
Because of this, investing or lending to any business presents a risk to the investor or the creditor, and this risk is astronomically higher for brand new small businesses. For this reason, many small business owners decide to take out loans that they guarantee to pay back. Personal lines of credit, home equity lines of credit, and even personal loans can be used to fund the initial startup cost of a business.
Most business loans don’t look at personal credit history but instead look at a business’s revenue history. For this reason, many types of working capital loans and other lines of credit are simply not available to new businesses.
In some cases, an investor or investing group may decide to run a check on your credit report in order to determine whether you’re trustworthy enough to be given money to invest. An investor can turn you down for any reason, and if your personal credit is determined to be a potential risk, they may decide to look elsewhere.
Is It Possible To Start A Business With Bad/No Credit?
The answer is yes, but having bad credit will make it more difficult. Your credit history has no bearing on whether you can incorporate a business or engage in business activity in the United States. Anyone that hasn’t been forbidden to start a business by a court can open a new business. But, as stated previously, your credit will affect your ability to secure funding and sometimes this funding is absolutely necessary to start.
If you need to raise $100,000 to kickstart a new business, you probably won’t be able to do it with debt if you have no credit history, and unless you have an excellent idea or a previous history of business success, you probably won’t be able to get investor funding either.
If you want to start a new business but are uncertain about your ability to get funding because of your credit, you may benefit from credit repair. TheCreditPros can help you build up your credit and get the loans you need to achieve your dreams. Learn about the benefits of credit repair!