When it comes to business financing, a stellar credit can help you easily secure additional capital while poor credit can be a challenging roadblock. However, just because you have a low credit score does not mean that getting small business funding is completely impossible. Some options won’t be available to you but rest assured that there are still a lot of avenues that are open. Let’s go through some of them.
Private funding from family and friends
Big banks and other traditional lenders are choosy when it comes to approving loan applications. As far as they are concerned, you are a complete stranger so if you have a checkered credit history, these lenders see you as nothing but a risky borrower and are therefore unlikely to do business with you.
However, friends and family know you better. They know that your bad credit or lack of credit is not the only thing that defines you. They know your history, your capabilities, your values, and your strengths. They are also emotionally invested in seeing you succeed.
Of course, if you’re borrowing money from people in your social circle, it is important for you to have a solid plan in paying them back. Otherwise, you risk straining your personal relationships and blemishing your reputation with the people you care about.
P2P lending and crowdfunding
Peer-to-peer (P2P) lending is another excellent way a business owner with bad credit can get funding. Here, multiple individuals pool together their money to provide loans to borrowers. A similar and also popular option is crowdfunding, where you can get business capital in exchange for a physical or digital product or service later on.
There are also many alternative lenders that offer loans and microloans to entrepreneurs through the Internet. Some of them also report to the main credit agencies, which can help you in strengthening your credit score.
These lenders have lower credit score requirements — or even no credit score requirements at all — and most have quick and convenient application processes. The downside is that their interest rates are higher than traditional lenders — reaching up to 20% or even more.
Some examples of online lenders include Kabbage, BlueVine, OnDeck, and Fundbox. Terms and requirements vary, so shop around before choosing which one to go with.
Small business grants
Grants are not easy to find and are usually very specific in terms of location, industry, and demographics, but if your business qualifies, they are essentially “free money,” because you don’t have to pay them back as long as you follow the guidelines.
Another funding option is to get a cash advance through invoice factoring or invoice financing. With this option, bad credit is not an issue because you are leveraging the unpaid goods and services that you have provided to your customers. There is lower risk for the lender because you have already made the sales and are just waiting for the payments to arrive in a few weeks or few months.
You can also get a merchant cash advance. With this kind of financing, you get a certain amount upfront then the lender deducts a certain percentage of your credit card sales each day until the advance and the interest are fully paid.
If you really want a bank loan…
If you still prefer to get your funding from a bank, one thing you can do is to get a partner who has great credit. That partner will then be the one to apply for the business loan.
Needless to say, getting a business partner involves additional complexities and risks. You will have to be clear on the terms of the shared ownership and the division of responsibilities, especially when it comes to paying back the loan. For the business to succeed, you and your partner also have to get along, so choose your partner well.
As you can see, even with bad credit, there are still many ways for you to get funding for your business. The best approach is to work on improving your credit score even after you’ve secured funding so that you would have more financing options and better terms in the future.