If you are running a small business, then you know how hard it is to get a loan from a big bank. For entrepreneurs with bad credit, trying to get a bank loan is close to impossible. This means that you are usually left with very few options to get money for your business – or so you thought. In fact, banks shying away from small business owners with bad credit may be a blessing in disguise.
How, you might ask? Well, not only does it force you to focus on cash flow to stay alive, but it opens up three other opportunities to get money for your business when you have bad credit.
How Your Personal Credit Score Impacts Your Business
Most small business advisers will extoll the virtues of incorporating your business and while this is important, they often forget to mention the impact your personal credit has on your business.
You might be thinking that your business was set up to help it get credit on its own. But, herein lies the rub, if your business does not have a commercial credit history, then it will need to rely on the credit history of the owners to get approved.
It gets even trickier as using your personal credit cards for business expenses can also have a negative impact on your credit score. This is because businesses tend to be heavier users of credit – using it to pay for everything from office supplies to corporate travel expenses.
What can you do? For starters set up trade accounts as soon as you set up your business; such as those with UPS or FedEx. Just make sure that you pay on time and that these companies report your payment history to the commercial credit reporting agencies. In this way, you start to build your company’s credit profile.
Funding Ideas for Those with Bad Credit
Here are three ideas on how to get money for your small business that work, regardless of your credit rating.
1. Get a Working Capital Loan
As you know, having enough cash on hand to keep the lights on and to pay for materials is critical. This money is your businesses’ working capital and without these funds, you’ll be hard-pressed to stay open.
Often times working capital loans are small, ranging from a $1,000 to up to $50,000. If you are seeking a working capital loan with bad credit, then you will want to seek out lenders who specialize in this form of credit.
Just remember to be prepared before you apply by getting together the supporting documents for your loan and any information on your company such as registration details and tax ID number as this will help to speed up the application process.
Another thing you want to mindful of is that many working capital loans are short-term loans, and this means you will probably need to repay the amount you’ve borrowed within one year or less.
As such, you will want to remember that short-term loans are for short-term purposes. Keeping this rule in mind will make sure you won’t run into issues when you need to repay your loan.
2. Peer-to-Peer Loans
The second way to get money for your business when you have bad credit is to seek out a peer-to-peer loan. These loans came into being when entrepreneurs noticed they could use the internet to bring borrowers and investors together.
For the owners of small businesses, the attraction of these loans is that investors are usually less concerned with the lack of physical assets than traditional banks. However, applying for peer-to-peer loans means that you are competing against thousands of borrowers for investor attention and as this form of finance matures it means that more and more loan applications go unfunded.
3. Customer Financing
Customer financing sounds simple enough; more sales equals more money flowing into your business. But there is a catch; getting your customers to pay faster. In the world of e-commerce this could include rescuing abandoned sales, or if you are a b2b business, then getting customers to sign up for 12-month contracts.
The concept of customer financing is this – if your customers pay faster, then you will have more funds available to grow your business. As such, you will want to focus on creative ways to make this happen. Options include discounting, offering bundles, or even coupons which can be applied to future sales.
Remember, the goal is to get the money you need for your business and this requires thinking out of the box. Especially as banks prefer not to lend money to small businesses owners with bad credit. As such, you can seek out a working capital loan, peer-to-peer loans, or customer financing to help get you the money you need.