Small businesses can have a tough time getting off the ground, especially if the business owner has a bad credit record associated with his identity. This can severely hinder your prospects of procuring the funds you need to run your venture. Does that mean that all your business hopes and goals should be laid to rest? Fortunately, the answer is: not so soon!
Whether you need wholesale factoring or want to take out a personal loan or avail it for business reasons, it is common knowledge that lenders shy away from funding borrowers with an unhealthy credit score. Even if they do lend, the terms and conditions that accompany the loan can push a newly-started business into further debt. This, typically, holds in true in the case of traditional lenders, who are open to extending business loans even for bad credit.
From the economic point of view, budding entrepreneurs looking to kick-start their projects can have a tough time. However, most determined ones do not allow the state of the economy to dictate the fate of their business plans and go on to run their small businesses successfully. You can do so too.
Getting funding with a low score shouldn’t be much of a problem. You need to decide to look beyond the obvious choices for getting funds. By “obvious choices,” I’m referring to banks and business credit cards. With a poor credit score, chances are that neither of these options will be helpful. While some of the credit cards and lending programs are meant for people with bad credit, these options tend to charge a higher rate of interest to make up for the credit risk posed by the borrower.
According to entrepreneur.com, “Studies show that credit card and bank financing account for just 25 percent of the total funding needs of early-stage entrepreneurs. This statistic should provide you some comfort, because it implies that 75 percent of the money you need can come from other sources that rely less on your credit rating.”
Mentioned ahead are a few funding options for small business entrepreneurs to consider.
1. Consider Getting Merchant Cash Advance
This option is also known as business cash advance. It comes with its limitations, though. It is applicable only to those experiencing cash flow problems for the amount of ten thousand dollars or less. Cash advances typically come with extremely high interest rates. This implies that you need to be ready to pay a lot more than you borrow, and even more if you miss a payment. It is, therefore, best to ascertain whether or not you are in a position to repay the amount on time before taking this road.
2. Use Home Equity Line of Credit
Home equity line of credit is another option to consider. It can be used by those who are owners of a house because you will be required to put up your house as collateral to secure a bank loan. If you do not repay the amount on time, you stand to lose the house. This is why this option is also referred to as ‘betting the farm.’ It makes for a high-risk alternative, unless you’re absolutely sure that you will be able to repay the loan in a timely manner.
3. Try Revenue-based Loans
A revenue-based loan comes with its own conditions, which are as under:
- You should have a credit score of over 550
- Your company should be making more than a hundred thousand a year in sales
- The loan amount should not exceed ten percent of your revenue
Typically, such a loan isn’t accessible by all. But, if you do satisfy all the above terms, you can receive this type of loan in a week’s time.
4. Microlenders and Web-based Lenders Can Help
Did you know you can take your search for a lender online? You can find several non-banking, non-profit lenders on the Internet that offer microloans to entrepreneurs. Typically within the $300 and $35,000 range, these loans make for remarkable sources of capital for those with bad credit. You stand to benefit greatly if you make timely repayments as they report this to credit bureaus. This can go a long way in resurrecting your credit score.
However, do not apply to microlenders in a hurry. Go online and compare the rates of interests, prices and the risks involved. Borrowers with low credit scores tend to receive loans with high interest rates.
Look around and weigh your options. There may be subsidized microlenders in your state that offer more flexible terms. For a lot of startup entrepreneurs, flexibility of repayment takes precedence over somewhat lower interest rates. Most states now have at least one microlender.
5. Crowdfunding Can Work
Are you planning to launch a venture that you’re confident will generate tremendous mass appeal, enough to earn you a band of loyal followers? If yes, you may want to give crowdfunding a shot. A relatively modern concept, crowdfunding allows you to talk about your venture to the public, convince them of its success, gain their trust and support, and subsequently earn funding from them.
Several crowdfunding platforms such as Kickstarter and Indiegogo have gained popularity among budding entrepreneurs. Devising and implementing a crowdfunding campaign is worth the enormous effort because it beats paying exorbitant interest on a loan or credit card, particularly if your credit is poor.
6. Use Grants and Gifts
If your big concern is to avoid making debt payments, then you may want to get your hands on “free” money in the form of gifts and grants. However, you’ll need to put in significant effort to find programs that suit your business’s requirements. Businesses related to healthcare, technology and retail operating in low-income areas often qualify for grants. But, be cautious of services that promise to locate government grant programs for you.
“Free” money can also refer to gifts from family and relatives, free office space from former employers, and free services from friends or business associates. In best case scenario, you can further reduce your startup costs by making a list of people who would be willing to provide you with such gifts and subsidized loans.
The above options can come as a blessing for small business entrepreneurs looking for sufficient funding to get their business off the ground. While banks may be the first and the most obvious option that comes to mind when taking out a loan, having a bad credit will most likely mar your chances of receiving money from them. It is best to focus on alternate options like the ones mentioned above and give your entrepreneurial dreams wings that enable them to take off.