How To Finance Your Business With Bad Credit
As a business owner, you’ll experience several points throughout the course of your business where funds are needed to sustain operations or expand. Many entrepreneurs need a cash infusion to get started, while others need financing to scale up production and increase revenue potential.
If you have bad credit, securing additional financing can seem impossible. Fortunately, there are plenty of options for financing your business despite having a low credit score. Here are a few ideas to explore and keep in mind.
Explore Bad Credit Loans
While banks heavily rely on credit scores when approving loans for business owners, they aren’t the only lender option. You can find several loan options targeted at individuals with bad credit. The advantage of these loans is that you’ll get approved regardless of your credit score. The disadvantage is they typically have higher interest rates or collateral requirements to offset their risk.
If you look at bad credit borrowing and car title loans online, you’ll find options that work for you. Take your time reading the fine print and understanding the total costs when applying for your loan. It’s essential to make your payments on time, even with higher interest rates.
Learn How To Bootstrap
Bootstrapping is a startup culture that promotes frugality and minimalism when starting or expanding a business. The idea is to slow down and take more time to reach your goals by creatively scaling your efforts and saving money along the way. It’s a common practice among Latin American entrepreneurs with less access to financing and business loans. The mindset is that it’s better to take your time growing a successful business than to chase the dream of overnight success.
Take some time to look at your business plans and determine how you can break your overarching goals down into smaller, sustainable objectives. Many entrepreneurs use small infusions of personal cash while reinvesting money from their continuous efforts. This mindset works with other fundraising principles on this list and works well for entrepreneurs building a business while working full-time.
Crowdfunding has become a popular option over the past decade, with platforms like Kickstarter guiding the process. This type of business financing offers several benefits.
First, it encourages one-time investors to contribute without sharing ownership of the business. These investors are typically supporters and potential customers who will use your business products or services.
Crowdfunding is also a powerful way to validate your business idea. If customers want to use your business, they’ll contribute to a crowdfunding campaign. If you struggle to find people to contribute, it indicates that your product offering may not be market-ready.
This type of fundraising also requires almost no money to get started, though you will have to invest time and resources in sharing, telling a compelling story, and marketing your campaign. You’ll also have to offer something in return, such as access to your services or product. Suppose your business is a sushi food truck, and you need funds to purchase a proper refrigerator. In that case, you could offer low-level investors a sushi combo and high-level investors a party platter or catering.
Crowdfunding requires time, creativity, and follow-through, but it’s a great option if you have something to offer in return.
Host a Pre-Sale
Pre-sales and crowdfunding are similar, with a few overarching differences. With a pre-sale, customers are pre-ordering a product at your market price point to finance production, whereas crowdfunding is somewhat conceptual. You may hold pre-sales many times throughout your product-based business.
The idea behind a pre-sale is that you lack the funds to do a production run or can’t manage the risk of having a product sitting on shelves unsold. So, you put in a group order that covers production costs and ensures that customers who say they’re interested in your product are willing to pay for it before ordering.
The challenge with a pre-sale is that you must already have a clear understanding of your production costs and strong marketing in place. Understanding your production threshold and how many orders are required to cover costs and turn a profit is also essential.
Appeal to Investors
Reaching out to investors is a common fundraising strategy in the fundraising world. Bootstrapping, crowdsourcing, and pre-sales are entirely separate from credit scores; there may be overlaps with investors. Some investors will want to know your credit score and financial history, while others are more interested in your vision and ability to generate a return on investment.
There are two primary types of investors: angel investors and venture capitalists. Angel investors tend to be wealthy individuals who see potential and are sold on a vision and passion. These investors may also stay on in a coaching or mentor capacity.
Venture capitalists tend to focus purely on numbers and potential returns. While they infuse more money into a business, they have higher demands, such as partial ownership, decision control, clear payback terms, etc.
Choosing the right type of investor to pitch depends on your business status and goals.
Explore Government Grants
Governments want to see local businesses and entrepreneurs succeed whenever possible, because it’s good for the economy. As such, you can likely find municipal, state, and federal grant programs to help finance your business. Take some time to check with your local Chamber of Commerce or business development center for guidance.
Your local programmers might also direct you to an accelerator or incubator program to help get your business off the ground. While these programs don’t always offer financial support, they offer mentorship, resources, and connections with lenders.
Get creative when exploring what services you’re currently paying for and how you could reallocate that money through bartering. For example, if accounting services are one of your key expenses, could you offer your services as a trade and redirect those funds elsewhere? If you’re opening a tattoo shop and need some plumbing work done, could you trade services with a local plumber?
Bartering doesn’t work in all scenarios, but it’s an option to help mitigate expenses and improve cash flow.
Fix Your Financial Health
As you navigate these fundraising options, focus on improving your financial health. Work with an advisor to start repairing your credit, taking micro-loans, and paying them back to rebuild your score. Pay down your existing debt and start building savings so that you don’t have to get creative with borrowing in the future— though you might still want to with these options!