A bad credit score (business or personal) is a red alert for financial institutions that trade in the small business loans. It’s the one major reason considered by Banks and other lender agencies on your eligibility for a loan. This is because your personal credit score is solely a function of your financial reliability, whiles your business management skill, is reflected in your business credit score.
Thankfully, it’s not the end of the road for candidates with a poor credit score. There are viable alternatives to credit score dependent funds.
Let’s clear things up a little. Shall we?
What’s a Bad Credit Score?
As defined by the experts; a bad credit score is a one that is between 300 to 629 units. It simply is the reason small businesses get rejected by lenders, as they are considered highly risky.
How Do I Get A Loan Despite A Bad Credit Score?
Thankfully, the financial system has evolved into a dynamic structure. However, there are four major approaches.
1. Try Alternative Funding.
One such approach is a merchant cash advance. This technique is useful for businesses that take credit card payments. The effect is that you sell a portion of your future credit card profits for immediate funding. Another option is the lines of credit. LOC depends on credit score; however, it has additional considerations for people with low credit score which ultimately means they would face higher interest rates and the maximum withdrawal amount would be lower.
Here’s a list of popular lenders especially recommended for lines of credit and the factors that make them so special.
Kabbage don’t require a minimum credit score, but instead, good cash flow and a minimum yearly income of $50,000 with a year in operations are requested.
No minimum credit score requirements, they are rather interested in the invoices you offer, and how valuable they are.
Here you need a personal credit score of at least 500 (term loan) and (600) ( line of credit) and you should have a clear reason to chose either of these loan classes.
Here your lack of credit score or collateral is waived, however, you have to offer valuable unpaid invoices which shows your debtors as financially fit and as well a dependable cash flow is important.
2. Seek SBA Loans.
SBA loans come in handy when other options fail. The SBA loan is a government-backed system that shares the risks of defaulting borrowers with the Lender. However, SBA loans only work when other options have been exhausted. At the same time, it requires some credit score of up to 625 units.
3. Try Crowdfunding
With this technique, you seek investors online, displaying the prospects of your business and the importance of your product or service. In exchange for their donations, you offer them free products or Premium spots for service you render. The only drawback to this idea is that; crowdfunding sites are already filled with desperate entrepreneurs. So, you know; for your business to stand out, your profile has to stand out as well. Thus, the higher creativity expressed here, the higher your chances.
4. Seek Family and Friends.
This technique is known to cause a little bit of friction; however, it is one of the most reliable alternative ways to traditional loans. If you have a low credit score, seek friends and family to come make donations big enough to jumpstart your business. Of course, as safe and predictable as this is, it’s advisable to have it documented. Documents, to the interest of both lender and borrower, prevent future confusion.
This alternative however only goes so far if a large amount is required. Other channels should be considered, and family & friends should be put into the ‘extras’ category.
The major alternatives have been stated above. But you can try the big names in the society that offer capital to start your business in exchange for equity or shares. These guys are known as Angel investors. They are often found in crowdfunding groups or Angel networks. And of course, your creativity also comes into play here, if your job proposal is to be convincing enough to an Angel investor.
If all the methods above are exhausted and yet to give what you want, why not just put in efforts to improve your credit score? The good thing about this is that; with a better credit score, a lender may consider you for future loans request, even if your credit score is not at its best yet. The simple observable efforts you make here is enough to convince responsible lenders of your dependability.
Make further research about what available preferences exist for your business type as some alternative lenders have biases for certain business classes like taxi driving or eCommerce for instance.