In the days following the Great Recession, it’s become almost commonplace for entrepreneurs and business owners to struggle with obtaining funding from traditional loan sources. That’s because traditional lenders have become more reluctant to loan money. But it’s also because many business owners, entrepreneurs, and aspiring entrepreneurs suffered huge dings to their credit as they struggled to stay afloat financially in a difficult economic environment.
But, while a low, bad, or nonexistent credit score isn’t something you can escape, it’s not something that has to hold you back from investing in your business, either. Whether you want to start a new business or expand an existing one, there are other ways to generate investment capital besides traditional bank loans. These options can help you face your funding challenges and boost your credit score at the same time.
1) SBA Loans
The Small Business Administration, or SBA, offers loans to small businesses that have already been turned down for a loan from a financial institution or bank. The qualifying criteria depend on the type of loan you want, as the SBA guarantees a number of different kinds of loans, including microloans, 7(a) loans, disaster loans, and 504 loans. But the SBA itself doesn’t grant the loans; it merely guarantees them. You’ll need to apply for the loan itself through a financial institution that processes them.
2) Invoice Financing
Invoice financing, also known as invoice factoring, is a type of business loan that allows you to borrow against your unpaid invoices. Technically, this isn’t a loan, because it involves selling your invoices to a factoring company for 85 percent of their value up front. The company then collects payment from your customers when due, and forwards you the rest of the money, minus a small factoring fee of two to three percent. That factoring fee is how these companies make their money.
3) Short Term Loans
Non-traditional lenders offering bad credit business loans have proliferated in recent years, with many of them offering short term loans or business lines of credit. Short-term loans often have a repayment schedule of just a few months, with payments made daily or weekly. They’re a good way to generate some quick cash to invest in new equipment, roll out a new product line, rent a bigger space, or do some much- needed remodeling. Interest rates are comparable to those for credit cards, so it’s a good idea to shop around for the best rates. These lenders do report to credit scoring bureaus, so short-term loans can help you improve your credit score as long as you repay them faithfully.
4) Equipment Loans
Equipment financing is a specific type of loan that allows you to borrow money to invest in equipment for your small business. It’s similar to a car or home loan, in that the equipment itself serves as collateral for the loan. Because of this, equipment financing lenders aren’t as worried about your credit score or business history as traditional lenders might be. Equipment lending is a good option if you need to buy expensive, essential business equipment that won’t need frequent updating. If you think that you’ll need to update your equipment more often, however, you might consider leasing it instead.
Crowdfunding has gained popularity in recent years as a way to raise money for relatively low-cost projects. Using sites like Kickstarter or GoFundMe, you can solicit donations from family, friends, and total strangers to help you raise the money to fund a business expansion, launch a start-up, or develop a new product.
Even if you’re not comfortable with using a website to ask for donations to invest in your business, you can still get funding help from friends and relatives, as more than half of all business owners do. Friends and relatives will make the decision to lend to you based on what they know of your character or how they feel about your business model, not your credit score. If you want to borrow from a friend, relative, or business partner while rebuilding your credit, use a loan management company to handle the loan repayments and report your repayment history to credit bureaus.
Bad credit doesn’t have to keep you from accessing the funds you need to invest in your business. With today’s range of financing options, anyone can get the money they need to start or grow a business, regardless of credit score or business history.