Business Loans for People Who Were Convicted of Felonies
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
While funding a business is difficult for any entrepreneur, it can be more challenging for people who have past felony convictions, particularly when it comes to getting small-business loans.
However, some lenders may follow the lead of the SBA, which has recently proposed updating regulations to make accessing capital easier for entrepreneurs with certain criminal histories. And there are factors, within an applicant’s control, that may be helpful in influencing a lender’s decision to loan them money.
How much do you need?
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
Financing options for people convicted of felonies
Here are some funding options that may be available to entrepreneurs with criminal histories:
SBA loans
SBA loans may be one of the best options if you have a criminal history. SBA loans are guaranteed by the U.S. Small Business Administration. This guarantee encourages banks and other lenders to loan money to small-business owners who don’t qualify for other affordable financing.
The SBA doesn’t prohibit loans to borrowers who were previously incarcerated. However, entrepreneurs who are currently incarcerated, on probation, on parole or under indictment for a felony or any crime involving financial misconduct or a false statement are not eligible for SBA loans. The SBA lender assesses a borrower’s criminal background on a case-by-case basis, but crimes of “moral turpitude,” which generally mean violent felonies or crimes involving dishonesty, are grounds for rejection.
SBA lenders often require good credit and multiple years in business to qualify for a loan. SBA microloans may offer more flexibility because the program is administered by nonprofit community organizations that set their own lending and credit requirements. Loan amounts can go up to $50,000, and funds can be used for working capital, inventory, supplies, furniture, machinery and equipment.
Additionally, the SBA recently proposed updated regulations that would expand access to loans for entrepreneurs with certain criminal records. Some of the proposed changes are:
Standardize eligibility rules for programs such as SBA 7(a) loans, 504 loans and microloans.
Ask about current incarceration status only and eliminate other questions about involvement with the criminal justice system.
Clarify what is considered a “crime of moral turpitude.”
SBA lenders would be allowed to continue to follow their own policies on criminal background checks.
Online loans
Online lenders are another good way to find business loans. Online lenders are more flexible than the SBA in terms of qualification requirements. You may be able to qualify for an online loan with fair or bad credit. For example, Fora Financial’s minimum credit score requirement is 570 for its business term loan.
In addition to more flexible qualifications, online lenders typically offer a streamlined process and can fund loans quickly, within a day or two in some cases. Some will work with startup businesses that have been in operation for as little as six months. However, these loans will often have higher interest rates and shorter terms than traditional business loans.
Invoice factoring
If your business has been up and running for a few months and you have significant business-to-business (B2B) transactions, invoice factoring may be an option. Invoice factoring isn’t technically a loan; instead, you sell your outstanding invoices to a factoring company that advances you a percentage of the invoice amount and takes a fee for its services.
An invoice represents your customer’s promise to pay, so qualifying for invoice factoring is less dependent on your business history and more on your customers’ histories. Lenders will check your customers’ credit and reputations to assess eligibility.
Family and friend loans
Turning to friends or family for a business loan may be a good option for those who were formerly incarcerated. Family and friends who are supportive of your efforts can be the source of both small loans and larger investments. Like any other financial arrangement, putting the essential terms of the loan in writing — amount, interest rate, payment amounts and schedule — can help you avoid misunderstandings down the line. Also, you may want to consult a tax professional to review tax considerations for the lender, especially if the loan amount is over $10,000.
Business grants
Business grants are a popular way to raise funds for a business. There are grants specifically designed for people previously convicted of felonies. Unlike other forms of financing, a grant award doesn’t need to be paid back and typically doesn’t require giving up equity in your business. While the competition for this “free money” is strong, getting an award can be worth your time and effort.
Business incubators
Business incubators are organizations that help startup businesses. Services that may be available at a business incubator include training, mentorships, networking opportunities, office space and, in some cases, financing of some type.
Defy Ventures — with locations in California, Connecticut, Illinois, New Jersey, New York, Pennsylvania, Washington, and Wisconsin — offers entrepreneurship training and business accelerator programs to people who were previously in prison.
Inmates to Entrepreneurs is another organization that assists people with criminal histories who are interested in starting their own businesses. Online resources are offered that include free courses, correctional facility workshops and city-based events.
Crowdfunding
Another source of startup funding could be crowdfunding platforms such as Kickstarter and Indiegogo. These platforms are generally open to anyone over 18. If your business concept resonates with the audience, they can contribute monetarily in exchange for rewards, product samples or small discounts. Equity crowdfunding is another option where instead of rewards, you offer investors a share of ownership in your business.
How previously incarcerated people can strengthen their loan application
Any entrepreneur who has something negative in their borrower profile will want to strengthen the other factors used to assess their eligibility for a loan. Here are some areas to focus on.
Work on your credit score
Your credit score can be one of the biggest factors in determining whether you qualify for a business loan. Late payments, closed accounts and debts in collection during or after your incarceration can have a significant impact on your credit score.
Here are some things you can do to improve and maintain a strong credit score:
Pull your credit reports. You can get free credit reports from Equifax, Experian and TransUnion to see where you stand. If you find any errors on your credit report, you can dispute them directly with the credit bureaus.
Bring overdue accounts current. Late payments can stay on your credit report for up to seven years, but paying them off or bringing them current could help. (Negotiating with the lender to “settle” the debt by paying less than the entire balance could have a negative impact on your credit score.)
Think carefully about closing accounts. Closing a paid-off account could negatively impact your credit score. Having different types of credit and available credit that you’re not using can have a positive impact on your credit score.
Consider establishing new credit. Opening a new account that is reported to the credit bureaus will only benefit you if you make regular, timely payments. There are credit cards for bad credit that require a cash security deposit that can help you rebuild your credit.
Limit the number of applications for credit. A new account can improve your credit, but too many applications that pull your credit report (hard inquiry) can hurt your credit score.
Find a co-signer
If a lender has doubts about your application, it may ask if you have someone who will co-sign the loan. A co-signer is someone who agrees to be responsible for paying back all or a portion of the loan if you’re unable to do so. Family members and trusted friends often act as co-signers. However, to be of benefit, co-signers will typically need strong credit scores.
It’s also important to remember that if you default on the loan, the co-signer’s finances and credit score will also be adversely affected.
Create a comprehensive business plan
When starting a business, it’s crucial to have a well-thought-out business plan in place. It provides a blueprint for growth and success and can be helpful in convincing both lenders and investors that your business is positioned for success.
Organizations like SCORE and your local Small Business Development Center can assist you in creating your business plan. These SBA resource partners offer free mentoring and other low-cost services to entrepreneurs and small-business owners.
A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.
On a similar note...
New elevated offer
100,000
