Business owners or startups seeking loans to fund their ventures can become frustrated when banks and traditional lenders turn them down. If you have poor credit, it can be very difficult to obtain traditional loans.
Don’t panic. Studies show that only about 25 percent of a business’ credit comes from credit cards or loans. The remaining funds come from time-honored sources of funding such as your own personal collateral, loans from family and friends, and other sources. All’s not lost if you have a poor credit history.[Editor’s note – Before you get your loan, do seek help from a financial expert, such as an accountant or controller or very experienced business owner who can help guide you into wise financial spending, budgets and money allotment. While many businesses need outside funding to grow, you might not need added funding.]
Bad Credit Funding Options:
Alternative sources of funding must be pursued if you have bad credit. The following five funding options provide an alternative so that you can continue to fund your business.
- Friends and family: One of the simplest ways of obtaining funds for your business is to ask for loans from friends or family. The people in your immediate friends and family circles know and trust you. More than anyone else, they probably know the circumstances surrounding your previous bout of bad credit and understand that floating you a loan now for your business isn’t much of a risk at all. It’s a smart idea to put any repayment agreements in writing so that everyone is clear on the terms of the loan. You can draw up a simple letter of agreement that indicates the date, amount lent to you, who lent it to you and for what purpose, and the date by which you intend to repay it. Having such a document may seem like an extra formality, but in the event there’s a disagreement about the loan later on it can come in handy to remind all parties of the conditions under which the money was shared.
- Business line of credit: A business line of credit provides capital on a more flexible basis than a traditional loan. Lines of credit are approved up to a specific amount, and you can draw upon your line of credit, repaying it as you go along and using the credit only when you need it. Interest is charged on the amount borrowed, not on the total line of credit. You may be approved for a line of credit up to $100,000, yet only borrow $5,000; interest is charged on the $5,000, not the $100,000.
- Alternative lenders: Although a traditional bank may be your first thought, specialty lenders offer business owners loans based on business revenue, not personal credit history. Such lenders care more about your business’ recent revenues and financial history than your personal past credit history. Companies such as Accion, OnDeck and others may provide you with the capital you need.
- Microlenders: Perhaps you’ve heard the term microlending used in regards to small loans given to entrepreneurs in remote parts of the world to finance new businesses. Microlending has spread beyond this initial concept to encompass all areas and businesses. Microlenders typically loan small amounts of capital to entrepreneurs for specific reasons, such as to buy new equipment, upgrade vehicles, etc. If you need to borrow less than $50,000, a microloan may be a good fit for your business needs.
- Crowdfunding: Crowdfunding is a popular funding method to help raise money for a specific purpose or event. Many artists, musicians and others use crowdfunding to help them finance recording releases, gallery openings, and other activities. A plea goes out through the Internet, typically via social media, and large numbers of people donate a little bit of money each. You can find 10 crowdfunding sites in this article and learn more about them.
Venture capital is another funding method, but you have to give up a little control over your business to get a loan. Venture capitalists typically look for a high rate of return and profitability from their investment, so they only want to invest in businesses that are likely to generate a strong cash flow and good returns. In exchange for their money, venture capitalists want a say in how the business is run so that it can generate strong profits. If you don’t mind the thought of someone coming in and telling you how to run a portion of your business, consider this route.
An angel investor is similar to venture capital, but with a slight difference. Angel investors lend large sums of cash in exchange for partial ownership in a venture, but they may not be as concerned with a high rate of return or a quick return on their funds. Most angel investors are wealthy individuals who find a business, cause, or organization they like, and they tend to invest based on the trustworthiness of the owners and managers rather than on the rate of return.
Angel investors not only provide money to fledgling businesses. Many angel investors are retired entrepreneurs or business people themselves. They often mentor, coach and advise new business owners as part of their investment. Although angel investors may be difficult to find, finding your angel can make a tremendous difference in the success of your business.
You Can Overcome Bad Credit
As these ideas attest, you can certainly overcome bad credit and poor credit history. There’s money available for almost every business venture, provided you do your homework, present a solid business case, and build a reputation for honesty and integrity in business.