Q: Is bad credit a deal-breaker when it comes to securing funding for my business? How can I secure business funding with bad credit?
A: Bad credit is a detriment when you’re trying to secure funding for your company, but it isn’t a deal-breaker. You can secure business funding with bad credit by seeking alternate financing sources, using online platforms that offer no-credit-check funding, or using a crowdfunding platform.
Many entrepreneurs are under the impression that securing funding with bad business credit is an impossible task.
They feel that convincing lenders to let their businesses borrow money is undoable unless they’re ready to show an excellent credit history to bolster their chances.
It may be true that securing business funding with bad credit is more difficult than securing funding with good credit, but that doesn’t mean you’re completely out of luck if your credit history isn’t up to snuff.
If bad credit prevented entrepreneurs from securing funding, we’d see fewer small businesses being launched. Considering there were more than 32 million small businesses in the US as of 2022, this isn’t the case.
The US Chamber of Commerce claims that 78% of small business owners use their funds to launch new companies, but most small businesses will eventually need funding.
Thankfully, there are several ways to secure business funding with bad credit.
In this article, we’ll explain why bad credit doesn’t necessarily mean you can’t get funded, explain secure loans, determine whether investors are the answer to getting businesses funded with bad credit, and finally, we’ll see how using a Virtual Office may help you find business funding with bad credit.
So, if you’re looking for business loans with a bad credit score or trying to apply for business grants with bad credit, you are in the right place.
Keep reading to understand why business funding with bad credit isn’t the end of the world!
- Does bad credit mean no funding?
- What are secured loans?
- How to win investors
- Using a Virtual Office to find business funding with bad credit
Does bad credit mean no funding?
You might think that bad credit will prevent your business from receiving funding or that having no credit will make it infinitely difficult to secure funding, but neither of these statements is the whole truth.
Realistically, bad credit will make it more difficult to secure funding. No credit will present similar problems, but with multiple platforms and lenders operating exclusively online, you have more options than you realize.
Business loans with a bad credit score may require you to deal with nontraditional lenders, but that is all right, so long as you ensure you are not taking a predatory loan or line of credit.
A small business loan is an amount of money you receive in a single lump sum that you must begin paying interest on as soon as you receive the capital.
A small business line of credit is access to capital that you can withdraw from as needed. With a line of credit, you pay for the money you use as you use it.
Both options are useful in their own right and can be attained with poor funding.
Below, we have compiled a list of methods to find business funding with bad credit. With each of these methods, you need to be aware that predatory lenders hope to take advantage of businesses with poor credit.
To avoid these bad actors, carefully read the fine print before signing any legally binding documents, ask as many questions as possible, and when in doubt, consult with an attorney to ensure that you are not receiving a raw deal.
- Alternative funding options
- Focus on business performance
- Collateral and asset-based financing
- Co-signers and guarantors
- Credit repair and improvement
Alternative funding options
While traditional lenders may be hesitant to provide funding to businesses with bad credit, numerous alternative funding options are available.
These options include online lenders, crowdfunding platforms, peer-to-peer lending, and microloans, which often have more flexible criteria and consider factors beyond just credit scores.
Keep in mind, not all alternate lenders are created equally. Anyone trying to rush you into funding or who makes you feel like you will miss out if you do not borrow their money as quickly as possible most likely does not have your best interests in mind.
Take your time, speak to as many alternative lenders as possible, and do as much research as possible before taking a loan or line of credit like this.
Focus on business performance
Instead of solely relying on credit scores, some lenders and investors prioritize the actual performance of your business.
They may consider factors like revenue, profitability, business assets, and growth potential.
By demonstrating a strong business plan and providing evidence of your business’s success, you can overcome the limitations of bad credit.
Essentially, lenders just want to ensure they’ll see a return on their investment.
If your business is bringing in impressive revenue and has several regular customers, lenders will be far more likely to loan you money, helping you secure US business funding, no credit check required.
In addition to helping you secure alternative funding, creating an in-depth business plan is also good for your brand’s operational duties.
The more you plan for, the more you’re prepared to overcome. The more detailed a plan you create, the better off you are.
In a perfect world, your business plan is loaded with scenarios and situations you’ve deftly avoided. A detailed plan that walks you through as many scenarios and situations as possible helps you prevent finding yourself in positions that you’d prefer to avoid.
Collateral and asset-based financing
Many lenders are willing to provide funding based on collateral or specific business assets. This type of financing, known as asset-based lending, allows you to secure a loan using valuable assets, such as equipment, inventory, or accounts receivable.
By leveraging your business assets, you can secure funding even with bad credit.
Granted, not every business has access to assets and collateral, so this option may be null and void for some. But, if you have equipment or other assets on your balance sheet, this is a great way to avoid credit checks or personal guarantees.
Co-signers and guarantors
Your business credit is separate from your personal credit, but unfortunately, especially when your business doesn’t have an extensive credit history yet, your personal credit may be called into question sometimes.
If your personal credit is holding you back, you can explore options that involve a co–signer or a guarantor.
These individuals, who have better credit scores and are willing to take on the responsibility, can strengthen your loan application.
Lenders are more likely to be willing to approve the funding if they see a reliable co-signer or guarantor involved.
Keep in mind, some lenders will ask you for a personal guarantee if your credit history isn’t stellar enough. While there are situations in which this may be unavoidable, it’s typically not a great idea to combine your personal credit with your business credit unless necessary.
Credit repair and improvement
Although bad credit may limit your immediate funding options, it doesn’t mean it’s a permanent roadblock.
Taking steps to repair and improve your credit can significantly enhance your chances of obtaining funding in the future.
Implementing strategies like paying bills on time, reducing debt, and resolving any credit issues can help rebuild your creditworthiness over time.
As your credit improves, you can access more traditional funding sources as well.
Remember, the best way to build business credit is by never missing payments, staying on top of any outstanding debts, and utilizing services that use standard payments like utilities and other operational expenses to help bolster your company’s credit.
These are just a few of your options when seeking business funding with bad credit. If you’re unable to find an option above that works with your specific business, you may simply have to take the time to build your business credit yourself before seeking additional funding.
Nevertheless, building business credit, although slow-going at times, pays dividends over time. As your credit increases, so does the amount of capital you have access to.
What are secured loans?
Before we dive into secured loans, let’s take a moment to explain the differences between secured loans and unsecured loans.
Essentially, unsecured loans do not require collateral and rely solely on the borrower’s creditworthiness.
For companies with good credit, unsecured loans are the norm.
Secured loans, on the other hand, are a type of borrowing that require the borrower to pledge collateral as security for the lender.
The collateral acts as a safety net for the lender in case the borrower defaults on the loan. Common examples of collateral are real estate, vehicles, inventory, or equipment.
Secured loans are more accessible to individuals with bad credit because the collateral mitigates the risk for the lender, making approval more likely.
Let’s explore more about secured loans.
- Benefits of secured loans
- Collateral evaluation and loan amount
- Application process and documentation
- Finding secured loan providers
- Choosing the right lender
Benefits of secured loans
Secured loans offer several advantages for businesses.
First, they generally have lower interest rates compared to unsecured loans, thanks to reduced risk for the lender.
Additionally, secured loans often have longer repayment terms, allowing businesses to spread their payments over a more extended period.
Lastly, they provide an opportunity for businesses with limited credit or a less-than-perfect credit history to access funding.
A secured loan is easier to get than an unsecured loan, and paying back a secured loan in a timely matter will positively affect your business’s credit history.
Collateral evaluation and loan amount
When applying for a secured loan, the lender will assess the collateral’s value.
The loan amount will typically be a percentage of the collateral’s appraised value, known as the loan-to-value ratio.
Lenders may also consider factors such as the business’s financials, cash flow, and creditworthiness in determining the loan amount.
This may present problems if you don’t have assets or collateral worth the amount of capital you’re looking for, but you can often make up for it with high-quality financials, cash flow, and incoming revenue.
Application process and documentation
To apply for a secured loan, businesses typically need to provide documentation such as a loan application, business financial statements, tax returns, bank statements, and a description of the collateral being offered.
The lender will evaluate these documents to assess the business’s creditworthiness and the value of the collateral.
Finding secured loan providers
Secured loans for businesses can be obtained from various sources, including traditional banks, credit unions, online lenders, and specialized lenders.
It is advisable to research and compare different lenders to find the most favorable terms and interest rates.
Working with a reputable lender who understands your industry and has experience with secured loans can greatly streamline the process and increase your chances of approval.
Choosing the right lender
Once you’ve found a few secured loan providers, you need to make sure you’re choosing the right lender.
Be wary of predatory lenders and be wary of lenders who aren’t good, but only “less predatory” than their peers.
Entrepreneurs seeking business funding with bad credit who aren’t aware that they have other options are often desperate to access funding to help their businesses continue to grow.
Unfortunately, this presents opportunities for bad actors to take advantage of individuals who may be blinded by their desire to improve their companies.
Disadvantages of secured loans
Although there are plenty of ways a secured loan can help your business, there are some disadvantages associated with these collateral-backed loans too.
The biggest risk is losing the pledged collateral should your loan default.
In addition, the lengthy application process requires extensive documentation that many entrepreneurs don’t have on hand.
And finally, depending on the lender or whether or not you used a personal guarantee, a secured loan may potentially impact your personal credit should you default.
Now that you understand what a secured loan is, let’s explore how you can win over investors.
How to win investors
There are several ways you can secure business loans with a bad credit score, and although these methods may require some work, you have endless options at your fingertips.
That said, winning investors is a better feeling than seeking your next loan.
There are countless options for small business loans provided by online lenders and other companies, but finding high-quality investors for your business gives you something a loan simply can’t provide: guidance.
Business funding with bad credit can only take you so far, and if you use the business funding you receive with poor credit to build a robust credit history, you can continue borrowing money forever while retaining as much of your company’s equity as possible. That said, not everyone finds themselves in this position.
We’ve created another list of methods you can use to win investors and forego expensive loans or lines of credit.
- Networking and industry connections
- Utilize online platforms and crowdfunding
- Prepare a compelling business plan and pitch
- Seek assistance from business incubators and accelerators
- Establish credibility with a Virtual Office
Networking and industry connections
Tap into your existing network and industry connections to find potential investors for your small business.
Attend industry events, join professional organizations, and participate in networking activities to meet individuals who may be interested in investing in your business.
Personal referrals from trusted contacts can significantly increase your chances of finding suitable investors.
Remember, each connection you make may eventually be leveraged into an opportunity you never expected. This is why it’s important to network whenever the opportunity presents itself.
Utilize online platforms and crowdfunding
Take advantage of online platforms that connect entrepreneurs with potential investors.
Websites such as AngelList, Gust, and Fundable provide a platform to highlight your business and connect with angel investors, venture capitalists, and crowdfunding communities.
These platforms often have a wide reach and allow you to present your business idea to a large pool of potential investors.
AngelList has more than 20,000 investors searching for innovative companies. Considering that at the time of writing, 3,017 startups are using the website, this is a great option for innovative businesses looking for capital.
Gust is a one-stop shop for new entrepreneurs hoping to get their businesses off the ground. Gust allows you to register for an LLC, issue stock, and manage company ownership from one webpage.
Fundable is more similar to AngelList than it is to Gust. To date, Fundable has existed for over a decade, with more than 20,000 accredited investors using the platform and more than a half billion dollars raised in funding.
Prepare a compelling business plan and pitch
Develop a comprehensive business plan highlighting your unique value proposition, market potential, competitive advantage, and financial projections.
Craft an engaging pitch that communicates the investment opportunity and the potential returns for investors.
A well-prepared business plan and pitch are crucial in attracting investors and convincing them of the viability of your small business.
Seek aid from business incubators and accelerators
Business incubators and accelerators supply support and resources to early-stage startups, including access to a network of investors.
These programs often offer mentorship, guidance, and educational opportunities, enhancing your business’s appeal to potential investors.
Participating in an incubator or accelerator program can supply valuable introductions to investors interested in supporting businesses within your industry or niche.
Establish credibility with a Virtual Office
A Virtual Office from Alliance can help build trust and credibility with potential investors.
Read more: Get a Virtual Address for LLC Registration
A Virtual Office offers a professional business address, mail handling services, and includes access to meeting rooms or coworking spaces on an as-needed basis.
By having a physical address associated with your business, you convey a sense of professionalism and stability, which can instill confidence in investors.
Additionally, a Virtual Office can create a positive impression by ensuring your business communications are handled efficiently and professionally, further bolstering investor trust.
Using a Virtual Office to find business funding with bad credit
Finding funding for a small business is possible even with bad credit through alternative options, focusing on business performance, asset-based financing, involving co-signers or guarantors, and working on credit repair.
Secured loans for businesses are a type of financing where certain collateral, typically real estate, vehicles, equipment, or inventory, is pledged to obtain more favorable terms and lower interest rates.
To find investors, leverage networking and online platforms, prepare a compelling business plan and pitch, seek support from incubators and accelerators, and establish credibility with a Virtual Office to earn trust.
Remember, your Virtual Office can immediately boost your business’s legitimacy and professionality solely by providing you with a physical address you can use to host meetings, enjoy coworking spaces, and even network with other like-minded entrepreneurs when the opportunity arises.
- Small Business Loan vs. Line of Credit: A Guide
- Small Business Loan Secured or Unsecured: What’s the Difference?
- Strategic Debt: How to Leverage Small Business Microloans
- Get a Virtual Address for LLC Registration
Alliance Virtual Offices offers Virtual Office services and more tools designed for established entrepreneurs, new business owners, and everyone in between.
If you’re seeking business funding with bad credit, Virtual Office can help show investors that you’re serious about your operations.
Contact us to see how Alliance can help you access funding regardless of your credit, and be sure to take a look at our Virtual Office Blog for more information.