Trying to get business financing can be very frustrating for business owners that have bad personal credit. Entrepreneurs face constant rejection by lending institutions that are weary of working with business owners that have bad credit. It can be a bleak situation.
While getting business financing is very hard for entrepreneurs that have bad credit – it is possible. However, you have to be realistic about it. You may not be able to get all the financing you want, at least initially. The terms may not be the most favorable and you will need to go through some hurdles. If all goes well, this will be only temporary.
With the right strategy and approach, you should be able to get financing. Use that financing carefully to grow your business. Once you have developed a track record, getting additional financing will become easier.
Getting funded is a matter of setting realistic goals, understanding where lenders are coming from, and what they are looking for in an applicant.
Do you really need financing?
Before looking for financing, examine your situation carefully and determine if you really need financing. This will save you a lot of time and frustration. Remember that many cash flow problems can be solved by adapting how you work and without using financing.
However, if your financial problems are due to growth or if you really need funding, focus on financing alternatives that have the highest chances of getting approved. We will discuss three options in this article.
Why does your credit matter?
If you own a large business with professional managers, substantial assets, and a lot of employees, your personal credit won’t matter much. Large businesses can get financing using their own assets and growth potential.
However, the situation is different for small business owners. If you are just starting a business or own a small company, your personal credit is very important. It does not matter if you have incorporated – or not. As a matter of fact, incorporating (or using an LLC) will not separate the company from any personal credit issues.
Your personal credit is very important to the lender. It is a reflection of how the entrepreneur handles their personal financial affairs. Lenders believe that you will handle your business affairs the same way you handle your personal affairs.
If a business owner is constantly paying their personal bills late, lenders will fear that the entrepreneur will handle their business creditors in the same way. This makes them a credit risk. And unfortunately, they have a point. That’s how things work. Businesses don’t run themselves. Instead, they are run by their owners.
That is why your personal credit is so important – it’s seen as a reflection of your character. It’s your job to help them see beyond that.
You made mistakes. Is business financing not an option then?
Yes, financing is an option. However, you must set realistic expectations. This means you may not be able to get the exact type of financing that you want. You may also not be able to negotiate the best terms. But in many cases, you may be able to get some financing.
a) Avoid this critical mistake
Many business borrowers with bad credit make the mistake of not disclosing bad credit information in their application. Instead, they leave the section blank – or worse – they willfully put inaccurate information.
Lenders do extensive due diligence before financing an application. They crosscheck everything against private and public data sources. You can be 99% certain that they will find any “application discrepancies” and omissions.
However, finding a serious discrepancy or an omission in an application creates a serious problem for lenders. They will ask themselves if there is other information that is not being disclosed or that is being misrepresented. Before long, they lose confidence and reject the opportunity.
b) Honesty works best
The better approach is to be completely honest and upfront. Fill out the personal section of the application completely and thoroughly. If possible, discuss this in person with the underwriter or lending officer ahead of time. Give them the chance to hear your side of the story before they look at other sources.
If a direct conversation is not possible, consider writing an executive summary. Explain, in detail, how previous mistakes will not be repeated and won’t harm your chances of success.
Keep in mind that this approach helps increase your chances of success — but there are no guarantees. Most lenders are very careful with their funds and some will reject the application.
However, being straightforward and honest shows character. Character is one of the qualities that lenders look for in an entrepreneur. This will gain you the respect of a business lenders and will improve your chances of finding one that will work with you.
Here are three options that can provide financing to entrepreneurs that have bad credit.
a) SBA Microloans
The SBA has a Microloan program that provides up to $50,000 of financing to small business owners. This program is geared specifically toward small business owners. As such, it’s easier to get than conventional financing. In many instances, these loans are provided to entrepreneurs that have limited or no credit.
Furthermore, Microloans are offered by intermediaries who also provide business and financial training. This training is very useful, increases your chances of success, and complements the financial package. This program is highly recommended.
b) Small business factoring
Many companies get into financial problems because their clients pay invoices in 30 to 60 days. This is a common problem for companies that sell to commercial or government clients. They can’t afford to wait up to 60 days for payment and need the money sooner.
You can solve this problem and improve your cash flow using small business factoring. Factoring companies provide you with financing by using your invoices, payable from creditworthy commercial clients, as collateral. This type of financing is available to business owners who have less than perfect credit, as long as the business is well operated.
c) Purchase order funding
If your company re-sells products at a markup to commercial or government clients consider using purchase order funding. This tool can be used to finance growth.
Purchase order financing helps you cover supplier expenses associated with a large order. It enables you to fulfill the order and book the revenues. This solution is also available to entrepreneurs that have less-than-perfect credit as long as the problems are not too serious.
One last point – build on what you have
The key to succeed with this strategy is to build on what you already have. Consider it a success if you get any financing that will help your situation. Use the financing carefully to grow your business and improve your track record. Then, build on that success and negotiate better financing terms. Eventually, your business will gain enough momentum that your personal credit issues will become secondary.
Do you need financing?
We provide factoring and purchase order financing to small business owners. For information, please get an online quote or call (877) 300 3258.
Disclaimer: This article is provided for information purposes only and does not provide legal or financial advice. If you need advice, please seek a competent expert.