Even with great credit, it’s harder than ever for small business owners to get traditional bank business loans. With bad or no credit, it may be impossible. Fortunately, if you’re an entrepreneur or an aspiring entrepreneur with bad or no credit, you have options.
In fact, start-ups get most of their funding from non-traditional sources. A mere 25 percent of new business funding comes from traditional bank loans and credit cards, meaning that a full three-quarters of the cash behind new businesses comes from non-traditional sources — sources that don’t care so much about your credit score. You can get much of the money your small business needs from alternative lenders. If you play your cards right, you can build or rebuild your credit score and bring traditional small business loans within your reach.
Bank Loans Aren’t the Only Source of Funding
If you’re a small business owner with poor or no credit, you’ve probably been discouraged at how difficult it is to get a traditional small business loan from a bank. Even entrepreneurs with perfect credit find it hard to get bank loans these days. However, many alternative lenders are still willing to work with small business owners.
Merchant cash advance loans from lenders like Advance Funds Network are among the most popular options for small business financing. Such a loan gives you fast access to a lump sum of cash without the need for great credit or significant collateral. When you take a merchant cash advance loan, you’re borrowing against your future credit card sales. Many entrepreneurs can get a cash advance in a matter of days.
Microloans are another great alternative to traditional small business loans. Microloan organizations are non-profit entities that grant small loans from $5,000 to $50,000 to women, minorities and business owners in rural or economically depressed areas. You might also apply for a business credit card, which would allow you to access a line of credit for your small business while also building or rebuilding your credit rating.
Private loans from friends and relatives help to fund at least half of new businesses. Your friends and relatives know you, and they’ll consider what they know of your character when deciding whether to loan you money. They may be willing to fund your business dreams because they want to see you succeed, they trust you to pay back the money or they think you have a solid business idea.
Rebuild Your Credit
Even if you have poor or no credit, you can improve your credit scores and qualify for more loans and better interest rates in the future. The first step in rebuilding your credit as a small business owner is to incorporate your business. Once your business is an established legal entity, with an address and utility bills, lenders will take you more seriously.
Once you’ve incorporated your business, make sure you pay all of your utility and other bills on time. Don’t mix your personal and business accounts — open new utility and bank accounts in your business’s name. That way, if you have poor personal credit, you can still build good business credit. Bills that go into collections will appear on your credit report and harm your score. Late payments also negatively impact your credit score. Paying your bills on time — or even pre-paying bills whenever possible — establishes a recent record of payments that will raise your credit score and give lenders confidence in your ability to repay.
When you do get a line of credit, such as a credit card, be careful with it. Don’t overwhelm yourself with debt. Make payments consistently and always pay off the full balance whenever you can. Don’t open too may credit cards at once, either; opening too many credit accounts at once can also bring down your credit score.
Always manage your business resources wisely. Cut costs whenever you can, and keep your inventory reasonable. When business is slow, manage employee schedules accordingly. When you manage your resources well, you’ll find it easier to pay your bills on time, build good credit and turn a profit.
Just because you have bad credit or no credit doesn’t mean you can’t get the funding you need to start or expand your small business. If you can’t get a traditional bank loan for your small business, consider an alternative source of funding. Work on building or rebuilding your credit, and you’ll soon have many more options when it comes to small business funding.