Updated 23.02.2023

How to Get a Business Loan with Bad Credit

You want to start a business. You don’t have enough capital of your own, so you need to take out a loan.

You just checked your credit score with your bank… and it’s bad. You know there’s no way you’re going to convince them to sign on the dotted line.

What do you do?

How Bad Credit Happens

Here are some actions that cause people to wind up with a bad credit score.

  • Not paying accounts or repaying debts on time.
  • Having huge amounts of debt.
  • Frequently using lots of credit.
  • Sending out many credit applications in a short space of time.
  • Having credit in numerous different categories.
  • Not actively building a credit score, resulting in no score.
  • Not checking and fixing your credit score on a yearly basis.

How You Can Get a Business Loan with Bad Credit

Don’t worry – it’s still possible to secure a loan and start-up that enterprise! Here are our top tried and trusted ways to get a business loan when you have bad credit.

  • From angel investors

Angel investors are individuals who agree to help fund your business in return for business shares. This means that they will own part of the business. They will be involved for a limited period; angel investors need to be paid back, with interest, within two to three years.

Angel investors will only work with you if your business has an extremely high chance of success. Many of these investors will want to help manage businesses. This is an asset: they generally have experience and business skills to bring to the table.

This article contains a comprehensive list of angel investors looking to fund startups in South Africa.

ALSO LEARN: How to Get Start-up Business Loans in South Africa

  • From government grants

The government wants to help small businesses in South Africa. This is particularly true if the entrepreneur is from a previously disadvantaged background, or the new business will help to improve our country’s economy by creating jobs and local wealth. Government funding does need to be paid back.

To qualify for government help, you’ll have to provide a variety of documents that sell your idea and prove its worth, and will need to have the suitable skills or credentials. Once you’ve secured government aid, you’ll be assigned a mentor who will offer valuable advice and know-how.

Here’s an in-depth list – with links to relevant sites – of types of government funding.

  • From family and friends

Many small businesses have been started on capital that’s generously provided by the business owner’s loved ones.

When dealing with family and friends, it’s essential to be extra responsible for your finances and decision-making. Here’s how to keep everyone happy when you’re taking loans from family and friends.

– Don’t skip the business pitch – they’ll want to know that your business will be a success.
– Have a clear idea of what you are going to ask for.
– Request smaller loans from multiple people.
– Write up formal loan contracts that both parties sign. Include amounts and dates for loan repayments.
– Keep everyone in the loop with consistent monthly or weekly updates.
– Some people may be able to offer skills, such as marketing know-how, or equipment, such as office supplies or machinery, rather than money.

How to fix a credit score

It will take time and patience, but fixing your credit score to secure a bank loan with good interest rates is possible.

If you currently have no credit score, start by signing up for a low-interest credit card. Paying off credit each month within the interest-free period will help to convince lenders that you can handle a loan.

If you have a bad credit score, you can do several things to show lenders that you can borrow reliably. Start by sorting out any discrepancies in your credit record: for example, update your information and apply it to fix mistakes. Next, pay off all debts and get your financial affairs in order. Then get shareholders and board members with reliable reputations to join your enterprise. Finally, be honest when approaching a lender for a loan. Tell them about any past issues you’ve had and how you fixed them, so they aren’t taken by surprise when they perform credit checks and investigate your past.

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