When seeking business funding, there is a list of criteria you’ll have to meet for approval. Depending on the type of funding you want, the requirements will differ. But, what do you do if you have bad credit? The good news is that you can find funding, even with bad credit. We’re going to share some alternative business funding methods with you. Additionally, we’ll get to the bottom of what credit means, why it matters and what makes it good or bad.
Small business funding is the process and act of borrowing capital. Capital is provided through business loans or lines of credit from lenders so that small businesses have money to cover their needs.
Depending on the type of business funding you select, there will be a unique process for approval. The amount of capital you can receive also varies by funding method.
Every small business owner has their own set of needs at any given time. When cash flow is running low, access to quick capital can be the answer to many problems a business is likely to face. Some reasons why a small business may seek outside funding include:
•To hire staff
•Expand opportunities to grow the business or relocate
•Purchase or refinance real estate
•Add more inventory or buy materials
•Prepare for market or seasonal changes
•Buy new equipment or repair broken parts
•Reduce gaps in working capital
To receive small business funding, the process usually includes these steps:
1. Business owner calculates the amount of capital they want to borrow and lets the lender know
2. Business owner shares their desired financing option
3. Business owner has a plan for how they will spend the capital to grow their business
4. Business owner provides potential lender with financial documents like their gross sales and the amount of time they’ve been in business
The lender will assess if a borrower qualifies to receive funding. Even if a lender does not approve a borrower, they may still make suggestions for other sources of funding. Approval rates vary by the type of product a borrower applies to receive. The likelihood of being approved along with the amount of time the funding process takes can depend on:
•The approval requirements (as dictated by the lender)
•How the lender processes funds (expedited or not)
•The specific product the borrower applied for (i.e. line of credit vs. merchant cash advance vs. business loan)
When small business owners don’t qualify for business loans for any list of reasons, then they can look to alternative business funding options. These provide borrowers with quality and accessible financing methods.
Alternate funding began in the 2000s because traditional lenders were facing a challenge to finance all small businesses. The economy and small businesses continue to rely on alternative business funding methods because they offer variety, convenience and better terms in specific cases.
Here’s a list of some types of alternative business funding options available to small business owners:
•Lines of credit
•Business credit cards
Alternative business funding is a good solution for any business owner who may have:
•Low annual sales
•Limited history in business
One of the most common reasons why small business owners get declined for loans is due to bad credit. Credit is the ability to borrow money and pay it back later. Creditors are banks, lenders, merchants and service providers who give money upfront (grant credit) because they trust you’ll be able to pay it back.
Creditworthiness or your credit refers to a rating that allows creditors to judge your likelihood of paying back the money. In the United States, creditworthiness is based on credit history, or your record of borrowing and paying back money. Independent credit bureaus store these records and share the reports with lenders.
Your credit report includes information like:
•How many credit card accounts you have (along with their credit limits and outstanding balances)
•If you make your monthly payments on time
•How many loans you have taken out and the amount you owe
•If you’ve had any financial setbacks like filing for bankruptcy or having a mortgage foreclosure
Credit matters in small business funding because it is one of the main criteria by which you are judged for approval. It also matters for when you sign a lease for an apartment or home (can affect the amount of your security deposit), take out insurance (helps determine your rate), open an account for a utility company or even to judge your character when you apply for a job.
If you’re worried that your credit won’t be good enough for a loan, or you’ve already been denied, it’s okay. There are still ways to get business funding with bad credit.
To be the best prepared for alternate funding, you should:
•Plan: Have a business plan ready to share with potential lenders. When your business looks organized and there’s a clear plan to grow it, lenders will be more likely to give you money.
•Review: Take the time to request your own credit report and look it over. See if there’s anything that is inaccurate. Even if not, take a look at what could be causing it to be so low and try to resolve those issues (i.e. late payments).
•Partner: Perhaps it is worth it to bring on a business partner with better credit. That way, they can be the one to fill out applications for traditional lending options. Or, your partner can be a cosigner.
•Crowdfunding: Consider using crowdsourcing financing methods like Kickstarter or GoFundMe. These platforms are best for businesses that want to make a product or provide something that the public can rally around. In most cases, people give money upfront to help fund the cost of getting the product made, and in exchange, they receive the product once it’s made.
•Merchant Cash Advance: A merchant cash advance is a great option for business owners who need cash fast and won’t make it past a strict approval process. At Uplyft Capital, we can provide borrowers with a lump sum of money very quickly. All you have to do is fill out an application to get started. Instead of credit dictating your creditworthiness, merchant cash advance lenders will look at your business credit card sales monthly. If you have frequent credit card transactions, it could be the best funding method because you’ll pay back the advance by promising a portion of your business’ future credit card sales.
When it’s time to apply for business funding options, outline the criteria by which you’ll be judged. If you clearly don’t qualify according to lenders’ criteria, don’t waste your time trying.
Instead, re-evaluate where you stand financially and look to alternate sources of business funding. There is definitely a way to get the cash you need at any phase in your business cycle.