Business loans based on personal credit?

[samie]

I was wondering if its easy to get a loan to start a business without having a good personal credit record. Just curious because i hear of some people who get loans and then have filed bankrupcy on their company but didnt affect them.

Also, how would someone go about with getting an investor?

[ArcSine]

Improbable for the great majority of situations. A bank makes a loan only when it has sufficient collateral from one or more of: (1) the assets of the company; (2) the cash flow and earnings potential of the business; (3) the personal assets / guarantees of the owner(s).

For a new company (1) hasn't yet been built up and (2) exists only as a rosy-eyed forecast on paper with no track record to give it credibility.

You can easily visualize what the exceptions might look like; e.g., a guy who inherited a building worth 250K from an uncle, debt-free and clear, and now wants a 7K loan to start a small retail operation in the building. Most banks would be happy to pony up 7,000 against a 250,000 piece of real estate. Or the lady who only needs a few hundred bucks to start a small biz, and can scrape it up on a combination of credit cards and a title loan against her car.

Outside of those infrequent exceptions, what you're asking about frequently plays out as some variation of this general theme: Some other person(s) besides the low-credit-score-entrepreneur owns the business initially. These might be friends and/or family of Entrepreneur, or might be unrelated investors. They either (a) put enough capital into the company, or (b) have enough personal assets such that their personal guarantees are worth something to the bank, and hence the company is able to access some start-up loan money.

These stand-in owners hire Entrepreneur to run the biz for them in exchange for a chunk of the profits. Entrepreneur uses a portion of these profits to gradually buy out the owners over a period of time. At some point, of course, these erstwhile owners want to be removed from their contingent obligations on the bank debt, and this might require some refinancing maneuvers.

There's 101 different flavors of that basic idea, so play around with it a bit and see if what you have in mind might be a candidate for such a setup.

[phanio]

All lenders will pull your personal credit history - not because they want to but because it is in their policy to protect them. If you can't show that you have paid all your past obligations as agreed, why would another lender take a chance on you? Not sure of what those others did to get loans after filing bankruptcy - probably secured the loan 100%.

Know that many investor will also pull personal credit reports to see what type of person they are dealing with. But, to find investors, I always say; start in your local community and network there. Attend local networking events and speak with everyone - even those you know won't or can't invest as they may know someone that will. Also seek out local professionals, doctors, lawyers, cpas, other business professionals as many of these like to give back to their communities or are looking for better places to earn better returns for their money. Or, those people are usually the gatekeepers for the real local investors and would do you a world of service by introducing you to those investors - so, sell your business idea to them first.

But, for the long-term success of your business. I would recommend that you fix you credit now - before you start your business (it is not as hard as you think). That way, as you move forward, you will not have to constantly face this issue.

[BIZDEV]

What type of business are you trying to start? How much funding do you require? It is true that without excellent credit and strong collateral you won't qualify for a bank loan (not even a microloan). But depending on how much money you're asking for, you might be able to secure a p2p loan. You don't need great credit, but the lower the score the higher the interest rate. Still, if you have a compelling enough "story" or a great business idea, you can still get funded.

[LindaKing]

Samie - you have some good feedback here!

Without knowing what type of business you are speaking about - I would also agree that most ANY finance firm, bank, private investor will look at your credit.
If you already have business credit, you can seek out business loans but I find most people who cannot go the traditional route are those whose credit have been effected.... This is why it is extremely important to protect your personal assets from your business.'

You may have to sacrifice interest for your credit and pay higher fees but if it truly fits your business needs and can make since, creative financing may be possible for you.

I wish you much success in your search!