Whilst lending for small businesses has steadily improved over the past year, there are still many challenges that remain, particularly for companies who have a less than perfect credit score, as many banks aren’t willing to provide them with capital. Having a low credit score isn’t something you can escape from immediately and, even if you ignore it, it won’t go away. Rather than giving up on financing your business, you should seek alternative funding, which could also help to improve your credit score.
There are many credit cards and lending programmes designed specifically for those with poor credit, but typically these options tend to charge a higher interest rate to compensate for the credit risk of the borrower.
Here are five different ways through which you can still grow your business despite having a bad credit score.
- Look into local grants
Grants can provide much-needed finance, and sometimes expertise, to help a business or project develop. A grant is financial assistance that is given to a business by a funding body. Grants can provide finance to allow a business to undertake in a specific project that, without financial assistance, it would not be able to undertake. Grants are typically one-off payments that provide funding which covers a percentage of the costs of the project – normally the business, or the business owner, will have to meet some of the costs too.
Grants can often be specific to certain geographic locations, sector or type of organisation, often with restrictions around what they can and can’t be used to fund. Typically grant providers include government departments, local councils, enterprise agencies and sector specific organisations. Although individual schemes may vary, there are some common themes across most grants:for example, there are some counties that have their own grants or schemes that target firms of a certain size, perhaps measured by turnover and/or the number of employees.
- Consider a loan from your relatives and friends
One way that small businesses are securing finance is through their family and friends. Everyone likes the idea of becoming an entrepreneur and helping out small businesses, which could be why more than 50% of all business owners get financing help from their family and friends. It’s likely that your family and friends want to see you succeed and may even be willing to invest in your enterprise to help your business dreams turn into a reality. Unlike taking a loan from a bank, it’s very unlikely that your family will be checking up on your credit score because they know and trust you.
You can also use private loans from relatives, friends and business associates to rebuild your credit score if you use a loan management company to service the loan and report your payments. The advantage of borrowing from people that you know is that you can usually access a low interest or even an interest free loan. However, it’s worth keeping in mind that your personal relationships with the lender may suffer if the loan cannot be repaid or if the lending or repayment plan is not set out clearly at the start.
- Try a business loan for bad credit
If you’ve got a bad credit score, securing a business loan for your business probably feels like an impossible task. Sure, you can spend the time working on your credit score, but according to previous research, it takes the average business around 12-18 months to improve its credit score. Banks usually deem a business with a bad credit history too much of a risk and, even if you somehow manage to convince them of the viability and growth potential of your business, it’s still highly unlikely that you will be able to acquire funds through traditional means. It might feel as if you have no other option to secure funding, but these days many small business funders are lending money to business owners with a business loan for bad credit. For example, merchant cash advance lenders have been known to provide finance to businesses that might not have met traditional bank lending criteria, but have other business strengths and assets. So it’s certainly worth checking out alternative finance lending for businesses with a bad credit score.
- Give crowdfunding a go
Over recent years crowdfunding has become a popular method of raising funds to start a small business thanks to such sites as Kickstarter and Indiegogo, they let you launch online campaigns to solicit funds. Instead of paying back the money, like you would a typical loan, you can give gifts to those who donate to your cause, which is why this system is also called ‘rewards crowdfunding’.
Crowdfunding is a great tool that can help entrepreneurs attract ‘crowds’ of people – who contribute towards an online funding target. It’s believed that this model is more successful than attempting to source the full investment required from a single person or organisation. Additionally, whilst some investors may be hesitant to invest large sums in an unproven idea, crowdfunding provides an alternative way to source seed capital from a number of backers. It’s also worth keeping in mind that the majority of crowdfunding platforms won’t charge you for publishing a pitch, however they typically take around 5% commission once you’ve reached your target.
- Use asset-based lending
Asset-based loans work in a similar way that a mortgage would, borrowing money against an existing possession. Just like a mortgage, if you can’t meet your obligations, the asset is repossessed. Assets that can be used as collateral include property, inventory and equipment, although you should be wary of putting your home on the line to finance a risky early-stage venture.
Although interest rates are often punitive, asset-based finance can be extremely useful for a company desperate for cash, or a business backed by valuable property which has yet to make major profits. Although they typically cost more than traditional loans, interest rates can vary greatly and occasionally banks will want to include an additional audit in addition to the overall cost of an asset-based loan. Larger banks might also require your personal guarantee, as well as the assumption of your other banking relationships, again, be careful about putting your property at risk.