Can felons get business loans?
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UPDATED: May 8, 2013
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It is unlikely that an ex-felon will gain approval for a standard business loan.
Typical bank financing is usually out of the question. The Small Business Administration (SBA), the main loan guarantor for business loans in the United States, is particular about the recipients of their funding. The SBA will not lend to borrowers who have committed crimes of “moral turpitude.”
Gaining funding is a major hurdle for almost all entrepreneurs, and ex-felons are no exception. In fact, they face ever more struggles at overcoming hurdles in order to start a new business.
Rohit Arora, CEO of Biz2Credit.com, told loans.org that it is difficult for felons to get business loans due to the fact that SBA loans or any other federally-guaranteed loans are not granted.
He said if a lender is reluctant to lend money to an ex-felon, it is likely because of the borrower’s financial behavior and a cautious attitude about their ability to continue running a business.
“The only loans they are eligible to receive are private money loans, which often come at higher interest rates than SBA loans,” Arora said. “Violent crimes would definitely create a problem for the lenders and unless a customer has served probation and completed it, private money might be the only option.”
Besides applying for a business loan from an accredited lender, ex-felon borrowers can use a private money lender and get a business loan for their business through use of their own personal credit.
Private money loans, also called hard money loans, are loans made to an individual by a private individual or organization.
Private money loans differ from traditional business loans and have added risks. Since the funding is private instead of public, there is less banking regulation associated with hard money loans.
But there is an upside. Private money lenders can be more lenient on non-traditional qualifying factors, such as approving borrowers with low credit scores or be willing to loan to other less appealing borrowers, such as ex-felons. In order to make up for the added risk to the private lender, a higher interest rate is likely, which will cost the borrower more over the course of the loan’s term.
Despite the option for private money loans, turning away a part of the population for business loans does affect ex-felons greatly. For some ex-felons, improving themselves after incarceration involves starting over and beginning a new way of life that does not involve a life of crime or disorder. Starting a new business is one way this can be achieved.
Due to the long period of incarceration, most ex-felons lack the necessary funds to open and sustain a new business. This is why approval on business loans is so important.
Although traditional funding is likely not an option for most ex-cons, raising funds other ways, such as via private money lenders, is one way to begin a new business after prison.