It’s typical for businesses to experience a shortage of funds at a particular time. Though such predicaments are mostly temporary, it can be challenging for some businesses to survive. One reason is that they couldn’t find resources for funding.
If you find yourself in the same situation, you might wonder how you can survive this financial challenge. There are several ways to manage a shortage of funds, and one of the quick solutions that business owners employ is to get financing.
But having poor credit can sometimes affect your chances to secure financing. Read on to find out how you can finance your business even on bad credit.
Understand Your Credit Score
Credit scores are crucial to get financing for your business. If your credit score is high, you’re more likely to secure funds quickly. On the other hand, a low credit score can lead to frustration and make it more difficult for you to find a reliable funding source. The last thing lenders want is to finance a business that may be unable to pay the fund back.
Thus, it’s essential to take an honest look at your credit and understand what it means. By doing this, you can set realistic expectations for your prospective lenders. Keep in mind that your goal is to get the funding you need, and you would not want to waste your time applying to a lender where your chances are least.
Your credit score might not be good, but some lenders would still be willing to finance your business even on bad credit. The key is to find the one that will lend you the fund with rates, terms, and conditions that work best for your needs and resources.
Identify Funding Sources
Banks and other traditional lenders are always looking to reduce credit risk. Since credit scores have become integral in evaluating the potential risk of a borrower, they rely heavily on them. It’s safe to assume that you’re less likely to get approval from these lenders. If you do, the terms might be less favorable.
Fortunately, some alternative lenders can be more flexible and friendlier to your situation. Aside from credit scores, they will look at other financial indicators to guarantee you the loan.
Here are some of the potential funding sources that might be worth considering for your business:
Microloans
Microlenders weigh their decision much less on your credit history. Thus, you’re more likely to get approved even if you have bad credit. It should be noted, though, that you might have to prove that your business has potential. You can do this by designing a well-thought-out business plan.
A microloan can be an excellent choice only if your business needs a small amount of funds to thrive. Specifically, the ideal amount can be between $500 to $10,000. You can also expect a higher interest rate for a microloan, and defaulting on it can hurt your credit even more. Besides that, they often have a longer application process than traditional lenders.
Line of Credit
One of the most flexible tools for financing your business is a line of credit. It’s a type of financing wherein you can withdraw funds up to a predetermined amount, which is considered your credit limit. Your credit available may increase or decrease as you make payments and withdrawals.
However, some lines of credit, like those in banks, can be challenging to get approved. To qualify for a business line of credit, your company should have assets, good financials, and sufficient cash flow to repay the line. Fortunately, it’s much more accessible through online lenders. You have to be mindful, though, of high-interest rates and fees.
Invoice Financing
Invoice financing is an immediate option if your business urgently needs funding to manage cash flow. You’re seeking a loan based on your customer revenue expected from sales before payment.
But since the invoices become an asset of the finance company or lender, you can no longer use it as collateral for other forms of funding. Note that the lender will only lend you a percentage of the total invoice amount while the remaining balance serves as your fee.
Guarantor Loan
An alternative way to secure business finance is to seek a business loan with a guarantor. Some lenders will be willing to offer you a loan even on bad credit if you have a guarantor who is willing to take responsibility if you fail to make a payment.
The guarantor should have a good credit rating and must be able to prove that they can afford to make the repayments if you default on the loan. However, it doesn’t mean that you will not be accountable for the loan.
Determine The Best Loan For Your Business
You’ll be surprised that you have a lot of loan options to choose from, even if you have bad credit. However, you won’t be able to find the perfect lender. Each carries some benefits and drawbacks you need to think about.
But to determine the best loan for your business depends on several factors, such as loan limits, terms, rates, and fees. Choose the one that your business needs but can comfortably afford to repay. To help you decide, you can read different articles online and learn more about financing your business with bad credit.
Takeaway
Loans can be a helpful tool to help your business cope with a shortage of funds. However, it can only be a temporary solution. If the root of the problem is not determined and resolved, you might find your business in the same situation again.
