Starting a business is difficult for any entrepreneur, but it’s even more challenging for people with a criminal record. A felony or criminal history of any kind can put you at a big disadvantage, particularly when it comes to getting small business loans.
Despite the obstacles, people have turned their lives around after serving time in prison and gone on to have lucrative careers as entrepreneurs. Popular examples include rapper-turned-entrepreneur Curtis “50 Cent” Jackson and Dave Dahl, co-founder of the nationally distributed bakery line Dave’s Killer Bread.
In some cases, having a criminal history might automatically land your loan application in the rejection pile. However, if you diversify your search enough, you should eventually be able to qualify for a business loan. Find out which are the best types of business loans for felons and how to convince a lender to approve your application.
When you’re searching for business financing, business loans shouldn’t be the only eggs in your basket. It’s likely that you’re not in a good place financially if you recently served time in prison for a criminal conviction. Your credit score might be a mess, you could have a lot of unpaid debt, and you don’t have a steady income stream. Given these realities, qualifying for a business loan is a big hurdle.
As a first step, we recommend applying for business grants that are open to people with a criminal record. There’s a big difference between a grant and a loan. A grant is a reward of money that you don’t have to pay back, whereas you have to pay a loan back with interest. If you’re able to qualify for a business grant, then you can use that money to grow your company debt-free.
Another option is to apply to incubators that specifically help ex-cons, such as Defy Ventures and Inmates to Entrepreneurs. These incubators provide leadership training, executive coaching, networking opportunities, and even some financing to help former inmates start businesses.
Crowdfunding platforms like Kickstarter and Indiegogo are also good platforms to tell people about your business. They’re open to anyone over 18, even if you have a criminal record. If your business concept resonates with the audience, they can contribute monetarily. In exchange, you give your supporters product samples or a small discount.
Take the company Lazlo as an example, which has brought in over $30,000 on Kickstarter. Lazlo employs former inmates to produce and sell sustainable clothing.
If you have a felony or other crime on your record, you’ll need to get a little creative in your business loan search. You’ll likely need to try out a few different options before something clicks and you’re able to get the money you need to launch.
Here are the best business loans for felons and entrepreneurs with a criminal record:
Loans from family members or friends are among the best business loans for felons. This is how the nationally distributed bakery brand Dave’s Killer Bread came to be. More than anyone else, your family and friends intimately understand the circumstances that led to your conviction, and they will be supportive of your efforts to become a business owner. Although one family member or friend might not be able to help much, small loans added up might be enough to seed your business’s growth.
The important thing to remember with friend and family loans is to get the details in writing. Overlooking this step can lead to disagreements down the line. Put the essential terms of the loan in writing—the amount, the interest rate, the payment schedule, and any late payment penalties.
Remember to have an interest rate attached to the loan. Without adequate interest, the IRS might determine the loan to be a gift and assess tax penalties on the lender.
SBA loans are loans that are guaranteed by the U.S. Small Business Administration. The government guarantee is designed to encourage banks and lending institutions to loan money to small business owners who might otherwise find it difficult to qualify for affordable financing. The SBA wants to help all small business owners, but they have a special focus on minorities, women, those with criminal records, and other underrepresented groups. You can use SBA loans to pay for almost any type of business expense.
The SBA assesses a borrower’s criminal background on a case-by-case basis. Felonies and other crimes of “moral turpitude” are grounds for rejection. This typically encompasses violent crimes and crimes of financial dishonesty (e.g. burglary, embezzlement). But other past convictions might not be a bar to qualification. As part of the SBA loan process, you’ll have to provide a detailed criminal history on SBA Form 912. The SBA and the lender will use your responses to assess whether you’re eligible for the loan.
Just keep in mind that qualifying for an SBA loan isn’t easy. These loans are reserved for the most creditworthy borrowers. Even with a criminal record, the SBA and the lender will expect you to have a good business plan and good credit to qualify.
Commercial real estate loans and equipment financing are additional types of business loans for felons. These are self-secured loans, which means that the asset underlying the loan—the equipment or the real estate—serves as collateral. If you default on the loan, the lender will seize and sell off the collateral.
Having collateral that covers the full amount of the loan gives the lender more peace of mind and some “guarantee” that they will be paid back. As a result, criminal history becomes less important. Many lenders that specialize in equipment financing or real estate will overlook a borrower’s criminal history as long as the underlying asset is in good condition.
Online lenders are another good way to find business loans for felons. OnDeck, Kabbage, and other online lenders are more flexible than banks in terms of qualification requirements. You don’t need perfect credit to qualify, and most of these lenders won’t disqualify an otherwise-eligible borrower due to criminal history.
That said, online short-term loans are really only an option if you already have a viable business that you’ve been running for one year or longer. Short-term lenders place emphasis on the revenue that your business is generating. If you can show strong business financials, then your criminal history shouldn’t matter too much.
If your business has been up and running for a few months already, invoice financing is another type of financing that you should check out. Invoice financing is open to B2B businesses that invoice customers for goods or services. While waiting for customers to pay you, you can use invoice financing to tide you over and cover business expenses.
An invoice represents your customer’s promise to pay, so qualifying for invoice financing is dependent less on your own history and more on your customer’s. Lenders will check your customers’ credit history and reputation, and if that checks out, you should be able to qualify.
As a last resort, you can consider merchant cash advances in your business loan search. With merchant cash advances, you receive an advance of money that you pay back over time with a cut of your credit card sales. Startups that are expected to process an above-average volume of credit card payments can qualify for merchant advances.
Criminal history generally isn’t a bar to getting approved, but be cautious if you opt for a merchant cash advance. This is one of the most expensive types of business loans for felons. The annual interest rates on merchant cash advances can run to 100% or higher, and the daily cuts from your credit card payments can eat into a business’s cash flow.
When you apply for business loans with a criminal history, the truth is that you’re at a disadvantage. You need to strengthen your business loan application as much as possible to overcome that and get approved.
These are three ways to strengthen your business loan application:
When starting a business, it’s crucial to have a well-thought-out business plan in place. You might not always stick to the business plan, but it provides a blueprint for growth and success. Lenders (especially banks), the SBA, and investors will expect to see a solid business plan before they agree to loan you money or invest in your company.
A good business plan doesn’t need to be a hundred pages long, but you do have to do some market research and analysis to complete one.
Here are the components of a complete business plan:
Lenders will look closely at your financial projections and the rest of the information in your business plan. If the thought of writing a business plan from scratch is too intimidating, there are tools—LivePlan is a good one—that can get you started with industry templates and examples.
Even more impactful than a criminal record, your credit score is the biggest factor in determining whether you qualify for a business loan. Although the money is going toward your business, your personal credit score has the biggest impact on whether you’ll be approved.
After serving time in prison, it’s normal to have a low credit score. Payment history is the number one factor that affects credit scores, so accounts that become overdue when you’re behind bars can have a big impact on your credit.
The best business loans are typically reserved for individuals with credit scores of 700 or higher. But you should be able to qualify for business loans with a credit score lower than that. Aim to improve your credit score to at least 600. You can accomplish this by paying back any debt that has accumulated and staying on top of all your bills. Some nonprofits provide free debt counseling to help former inmates deal with the transition back to normal life and the financial responsibilities that it brings.
The last piece of advice for securing a business loan with a criminal record is to build as many connections as you can. Successful business owners are those with a large professional and personal network.
Individuals who you’ve formed connections with can serve as mentors as you’re getting your business off the ground. This can be especially invaluable if the mentor is in the same industry. Connections can also help if a lender asks for a reference letter or a cosigner. A cosigner is someone who agrees to be responsible for paying back all or a portion of the loan if you’re unable to do so. If a lender has doubts about your credentials, they might require a cosigner.
Apart from these tips, strive for accuracy and completeness in your loan application. The fewer mistakes you have in your application, the more reason you give a lender to approve you in spite of your criminal record.
A criminal record makes the road to a business loan longer and more challenging, but it’s definitely still possible. First, learn what options are open to you so you don’t waste time on dead-end loan applications. SBA loans, online loans, and fully collateralized loans are among the best business loans for felons.
After narrowing down your options, take the time to improve your credit score, draft a solid business plan, and build your personal and professional network. With enough effort and patience, you’ll soon be able to obtain sufficient business financing to lead your business to success.
Priyanka Prakash is a senior contributing writer at Fundera.
Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.