Quick answer: You can start a home-based business with bad credit, but you will usually rely more on savings, small loans that weigh your income or sales more than your credit score, and money borrowed against your own assets. In the early years, lenders judge the business mostly on your personal credit, so improving your score alongside the business matters. Borrowing against your home or retirement savings puts those assets at risk if the business fails, so keep borrowing small and planned.
Life does not always go to plan. A financial setback, a job loss or a divorce can damage your credit score, and that can make funding a new home-based business harder and more expensive. It is not impossible, though. The key is to be resourceful about funding while you rebuild your credit. This guide is written for readers in the United States, where the original article was aimed; the principles apply elsewhere, but products and rules differ. It is general information, not financial advice.
Your personal credit score and your business
Until your business builds a credit history of its own, your personal credit is effectively the business’s credit. Even if you form a limited liability company (LLC), lenders, card issuers and suppliers will often ask for a personal guarantee, which makes you personally liable if the business cannot pay. The better your personal score, the more funding you can usually get, at lower rates.
Separate business credit reports are kept by business credit bureaus such as Dun & Bradstreet, Experian and Equifax. They build up as the business pays suppliers and lenders on time. Your aim is to improve both: your own score now, and the business’s record over time. Our guide on how a poor credit score can affect your business explains what lenders and suppliers look at.
Start by checking your credit reports. You can get free reports from Equifax, Experian and TransUnion every week at AnnualCreditReport.com, the official site named by the Federal Trade Commission (FTC). Dispute any errors you find; correcting mistakes is one of the quickest legitimate ways to improve a score.
1. Build a savings plan
Funding the business from savings is the safest route, and it does not depend on your credit score. It is a great idea that is seldom followed. Usually, people either keep their savings and borrow instead, or run through their savings faster than expected.
A useful rule of thumb: a new business may not turn a profit for six months or longer. To start without going into debt, you would need six months of personal living costs plus six months of business expenses.
That adds up quickly. Say you need $5,000 a month to live on and expect the business to cost $2,000 to $3,000 a month to run. Six months of both comes to $42,000 to $48,000, and even that might not be enough. (An earlier version of this article rounded this to $40,000 to $50,000.)
Even if you plan to borrow, a solid cash cushion carries you through the early months until the business becomes profitable, and it makes lenders more comfortable.
2. Consider a personal loan, carefully
Many new owners use a personal loan to get started. With bad credit, it will cost more in interest, but there are personal loan options out there for borrowers with low scores. Before you sign:
- compare the annual percentage rate (APR) and total repayment amount, not just the monthly payment;
- check that the lender is licensed in your state;
- walk away from any lender that asks for a fee before approving or paying out the loan.
The risk is that your personal finances and credit score are on the line. Treat a personal loan as a short-term way to get the business running, not a way to fund it month after month. Repeated personal borrowing for the business can leave you in serious debt, and an LLC does not protect you from debts you took out personally or guaranteed. Our guide to secured and unsecured business loans explains the alternatives.
3. Look at small-business and community lenders
Some lenders focus on small or new businesses that banks turn down. Through its Microloan programme, the US Small Business Administration (SBA) funds nonprofit, community-based lenders that offer loans of up to $50,000. According to the SBA, the average microloan is about $13,000 and the maximum term is seven years. The money can be used for working capital, inventory, supplies, furniture and equipment, but not to pay off existing debts or buy property. The intermediary lenders make their own credit decisions, and many also offer business training.
4. Leverage your assets
You can borrow against business assets or personal assets. Using business assets is better where possible, because a secured business loan repaid on time also helps build the business’s own credit history. A home-based business may not have many assets at the start, especially if it sells services or small products.
You can also borrow against personal assets such as your home or retirement savings:
- Home equity loans or lines of credit use your house as security. If you cannot repay, you could lose your home.
- 401(k) loans, where your plan allows them, let you borrow from your own retirement savings. Under IRS rules, the maximum is generally the lesser of $50,000 or half your vested balance (with a $10,000 floor where the plan permits), repaid within five years. A loan in default is generally treated as a taxable distribution, which can also trigger an early-withdrawal tax.
Like a personal loan, this puts your personal assets at risk if the business fails. Have a clear repayment plan and never borrow more than you can afford to lose.
5. Look into working capital financing
Some payment platforms offer working capital loans based on your sales history rather than your credit score. PayPal Working Capital is one example in the US. According to PayPal’s published criteria, it is open to businesses that have had a PayPal Business or Premier account for at least 90 days and processed at least $15,000 in PayPal sales in the past 12 months ($20,000 for Premier accounts), and it does not require a personal credit check. Instead of interest, you pay a single fixed fee, and repayments are taken as a percentage of each sale, with a minimum payment due every 90 days.
This kind of funding suits growth spending such as marketing, inventory, equipment or extra help, once the business has steady sales. Because the cost is a fee rather than an interest rate, compare it with other options by working out the total you will repay and how long it will take. Missing the minimum payment can make the whole balance due.
Keep improving your credit as you grow
There are funding options for nearly everyone, even with bad credit. At the same time, work on your credit score and the business’s credit history:
- pay every bill on time, personal and business;
- keep credit card balances low compared with your limits;
- open a separate business bank account and keep business and personal spending apart;
- ask suppliers who give you payment terms whether they report to business credit bureaus;
- be wary of “credit repair” companies promising fast results. The FTC warns that no one can legally remove accurate, up-to-date negative information from your credit report.
Once you are up and running, see our tips on marketing a small business online and insuring a home business.
Frequently asked questions
Can I get a business loan with bad credit?
Often, yes, but expect higher costs and smaller amounts. Microlenders, sales-based financing and secured loans are usually easier to get than unsecured bank loans.
Does an LLC protect my personal credit?
Not fully. Lenders often require a personal guarantee from the owner of a new business, and if you guarantee a debt, you are personally responsible for it.
Should I use my 401(k) to start a business?
It is possible but risky. A loan reduces your retirement savings, and if you cannot repay it, the balance is generally taxed as a distribution. Speak to a qualified financial adviser before using retirement money.
How long does it take to build business credit?
It depends on how many suppliers and lenders report your payments. Paying on time from the start, and keeping business finances separate, is the foundation.
Where can I check my credit report for free?
In the US, at AnnualCreditReport.com, where Equifax, Experian and TransUnion each provide free weekly reports.
Checked in October 2026 against the SBA’s Microloan programme page, IRS guidance on retirement plan loans, PayPal’s published Working Capital criteria and the FTC’s guidance on free credit reports. This is general information, not financial advice.
