Funding a business when you have less than perfect credit can seem difficult if not impossible. The truth is, there is a way to obtain business funding if you have a less than perfect credit history. If you’re seeking debt financing for a small business, there are several options that you may be able to take advantage of whether you own a startup or established business. These options include:
- Merchant Cash Advances
- Accounts Receivables Financing (or Factoring)
- Purchase Order Financing
- Using a Personal Guarantor
Let’s Talk About Microloans
Based on my professional experience, microloans are a hidden gem in the small business financing world. This is due to the fact that most entrepreneurs and small business owners often have no idea that microloans are available to them even if they have less than perfect credit. Most entrepreneurs feel that all is lost in regards to qualifying for a small business loan when they have less than perfect credit. However, that’s simply not the case. According to a recent study conducted by four college professors, “Business Microloans for U.S. Subprime Borrowers”, microloans have a very positive impact on the success of small businesses where the owners have a less than perfect credit history. The study also found that small business owners with the worst credit benefited the most of microloans because they were unlikely to be able to obtain financing elsewhere to grow their busineses. Therefore if you have less than perfect credit, a microloan could be an option for you. Most microloan lenders have low minimum credit score requirements (in the 500’s) or no minimum credit score requirements at all. You can check with your Local SBA District Office to find SBA approved microloan lenders in your area or start by getting help from a direct microloan lender such as Accion USA. The SBA also has as a list of approved SBA microloan lenders (by state) on their website here. It’s important to keep in mind that microloans typically only go up to $50,000 with the average business owner getting between $13,000 and $20,000.
Educate Yourself on the Alternatives
If you have a more established business that is consistently generating revenue you may be able to qualify for alternative financing. With many types of alternative financing, approval is largely based on how much money the business is making instead of your personal credit history and score. This is the case for alternatives such as merchant cash advances, accounts receivables financing (or factoring), and purchase order financing. With merchant cash advances, you can get a loan based on the amount of daily credit card sales or bank deposits your business has made. With accounts receivables financing (or factoring) you can sale your receivables to a lender at a discounted rate and get up to 90% of the total amount of your receivables (depending on the lender)! With purchase order financing, you’ll need to have a purchase order from a client to qualify for financing. The total amount that the purchase order needs to be to get approved varies from lender to lender. The point here is that all of these types of financing can be obtained if you have a business that has significant and consistent cash flow coming in and you’re credit doesn’t have to perfect.
If All Else Fails, Seek Help
If you can’t qualify for a microloan or any of the other alternatives your only other option is to seek help from a business partner, friend, or family member who can act as a personal guarantor or co-signor for your small business loan. Finding someone who does have a good personal credit history and believes in you and your business could very well be the way you obtain funding for your business with less than perfect credit. The best way to get someone with a good personal credit history to act as a personal guarantor or co-signor for your business to get funding is to offer them something in return. This could be a small percentage of ownership in the company or a percentage of the sales made as a result of them helping you obtain funds to grow the business. Whatever you decide to offer them, make sure it’s a win-win situation for all parties involved.