Getting a job as an ex-offender can be tough. Setting up your own business can be a great way of making a new start. This guide will tell you everything you need to know about small business loans for felons. We’ll tell you where to go and how to apply to give yourself the best chance of getting finance.
Do you really need a small business loan?
Before we begin we should point out that you don’t always need a loan to set up a business. Instead of getting a loan many businesses don’t get a loan start small and build up over time. Of course, that isn’t always possible. There will be times when you need money to buy equipment or rent premises.
Having a criminal record will not prevent you getting a loan. There are small business loans for felons available – so long as you can make a good case for why you need one and how you plan to pay it back.
Give yourself the best chance of
MAKING YOUR BUSINESS A SUCCESS
You need a good, practical business plan. Be realistic about how much money you can make. And understand the steps you need to take to make the business a success.
We’re not trying to put you off here but it’s a fact that most small businesses fail in the first couple of years. You need to know what you’re doing. It’s obviously better to go into business in an industry you already know well. But of you feel like doing something new then make sure you do lots of research. Go online and search for articles or blogs written by people in the same business and see what problem they have faced. Starting a business is exiting but also a risk. Learn from other people’s mistakes J
SMALL BUSINESS LOANS FOR FELONS
Since the crash in 2008 the banks have become much stricter on who they lend to. It’s not impossible to get a small business loan for felons through a bank. But it is probably only realistic if your felony is more than 10 years old and you’ve got a decent credit score. So, what are the alternatives?
The easiest way to get small business loans for felons is through a ‘peer-to-peer’ service.
‘Peer-to-peer’ lending brings together people who want to borrow money with people who have money to lend. For the people borrowing the money it can be easier and cheaper than going through a big institution. And for the people lending the money they can get a higher return than they would if they kept their money in a savings account. The investors all put their money into a big pot which they use to lend. So you could have 30 or 40 people each lending you a small amount.
The great news is most peer-to-peer lenders don’t do a background check so your record will have no effect on your chances of getting a loan. And you can often get approved for a loan within a few minutes.
Most peer-to-peer lending today is done online through what are called intermediaries. One of the leading peer-to-peer intermediaries is Prosper.com.
How to get a peer-to-peer loan
You can go to their website and choose the loan amount you’d like. You explain that you’re borrowing for a small business and what your plan is. If your loan looks like a good investment, they will set the conditions you need to agree to. This will include the length of the loan period and the interest rates (anywhere between 5% and 35%) and approve your loan. (Companies like Prosper.com make their money by taking a small one-time fee for arranging the loan)
There are no background checks so they have no idea of your history.
It can be that simple. But just because the money is relatively easy to get hold of it doesn’t mean you should rush into it. You need to know you can afford it.
A peer-to-peer loan is like any other.
- You must make a payment every month.
- Defaulting will impact your credit.
Peer-to-peer lending on sites like Prosper.com are a great alternative to traditional ways of getting a small business loan. And because they don’t do a background check it is particularly good for felons.
Watch this video to see how easy it can be to raise the money you need with Prosper.com (but make sure you have a business plan and a good idea of how you will pay it back. Yes, we know we’re getting boring repeating this!)
The Small Business Administration (SBA) may give loans to felons, but it depends on the felony. They won’t give a loan to a business where the owner has a conviction for crimes of ‘moral turpitude’. If you don’t know what ‘Moral turpitude’ means don’t worry. No-one does. The law doesn’t define it but it’s usually seen as things like serious violent crime, embezzlement etc.
The SBA have 6 different loan programs – SBA 7, CDC, Line of Credit loan, Export loan, Disaster loan and Microloan. They don’t specifically offer small business loans for felons. But the Microloan is the one of most interest to us and the one you are most likely to be able to get. (Unless you have a credit score over 700 and own a property with a lot of equity. If you are lucky enough to have those things you might qualify for one of those other loans and you can read more about them here).
How to get an SBA Micro-Loan
The Microloan works like this. The SBA lends money to nonprofit lenders, who can in turn use this money to lend up to $50,000 to small for-profit businesses. Microloans can have terms up to 6 years and we believe the average loan amount is around $14,000.
They won’t allow you to use the money for buying real estate or refinancing debt. But you can in theory get loans for pretty much anything else…
- Materials and supplies
- Furniture and Fixtures
- Marketing and Advertising
The people giving out the loans will want to see a well worked out business plan. They will have to approve what you spend the money on. They will set their own conditions so it will vary, but to get one of these loans you usually need…
- A credit rating over 640
- Some collateral
- A personal guarantee
So, they’re not just handing out loans to anyone. These lenders tend to be small and have more flexibility than the big institutions when it comes to lending. But they still want to be sure you’re going to be able to pay the money back.
It has become more and more popular to raise money using ‘crowd-funding’. Just like peer-to-peer lending the investors are not interested in your past. They will base their decision to invest on how much they like your project.
There are two basic approaches to crowd-funding. The first is rewards based and the second is equity based.
Sites like kickstarter.com and Indiegogo.com are great if you have a new product you’re developing.
People who like the product pay a set amount for the product up front and in return they’ll get the product when it’s ready. You set the amount of money you’re hoping to raise and you only get to keep the money if you manage to raise it all (sometimes you can get more than you asked for). Kickstarter will charge you 5% of the money you raise, plus a fee for payment processing. Indiegogo charge 3% plus a fee for processing.
You can also use crowd-funding to raise investment. With ‘equity crowd-funding’ you sell a stake in your business. The biggest equity crowdfunding sites are CrowdFunder.com and CircleUp.com (Indiegogo.com also started their own equity funding scheme in 2016).
CircleUp.com takes a percentage of your funds raised in fees. This could be as high as 7-10% of the money you raise. Crowdfunder.com has a simple flat fee and charge a few hundred dollars a month.
So, neither of these options are cheap. And you’ll need to put together a great business plan to attract investors.
CREDIT CARDS/PAYDAY/PAWN SHOPS
These are all expensive ways to borrow money. They are not really small business loans for felons but just very short term fixes if you need money quickly.
Most credit card companies don’t usually care about your record – they just want to know what your credit score is. (If you have a bad credit score then there are ways you can improve it – but it takes time)
Credit cards are a very expensive way to finance a business and we’d recommend you try other ways to raise the money first. (The best option is probably peer-to-peer.) But if all you need is a quick injection of cash and you’ll be able to pay it off over a few months then it can be a good option.
We all know what pawn shops are but we’ve included it here just so the list of options is complete. You take something of value as collateral and they give you a loan against it. The interest rates are high and if you don’t make the payments you lose whatever it was you used to get the loan. It’s risky.
The interest rates are very high on payday loans. It might be an option if you need money to be able to do a job quickly and you know you’ll be able to pay it off within 2-3 weeks.
Final thoughts on small business loans for felons
A business loan can be the boost you need to start your business and build a better future. But think through all the implications carefully. You don’t want the loan to become a millstone around your neck.
If you’ve ever received or applied for any of the loans we’ve discussed in this article we’d love to hear from you. Please share your experience with our readers by adding a comment below.
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N.B. This article is for information purposes only and we accept no liability arising from it. All opinions are subjective and this article must not be used as the basis of any investment or loan. You should check details with the loan provider yourself and if necessary get the advice of an independent financial expert before entering into a loan agreement.