Many people jokingly say that you cannot get credit unless you have credit. This is often true for businesses as well as individuals, but getting financing is even more challenging for small businesses and business owners with bad credit. Here are a few tips on how to get business financing with bad credit.
Selling Product on Credit
Businesses often sell their products to customers on a line of credit. For example, a manufacturer may sell its customer a piece of equipment while the customer pays for it in installments that equal the purchase price plus interest.
When someone sends a distributor some items to sell, they may have a loan secured by the inventory itself. If they miss payments, you’re able to repossess the property, and they have the right to return the property if they cannot make payments. The downsides of this strategy include drafting the legal contracts to sell items this way and the need to monitor payments by your customers.
Invoice factoring is the practice of selling unpaid invoices to a third party while they pay you a percentage of the amount that is due. The benefit of this type of business financing is that it depends on the creditworthiness of your customers who owe you money, not your credit.
For some businesses, this isn’t an option because you don’t have any outstanding invoices or they’re all so old that no factoring firm will buy them. Then there’s the fact that if you sell the invoice at a 20% to 50% discount to a third party, you’re raising capital now at what can be considered a high-interest rate.
If you are trying to build up your business on the side while still working a day job, you could use a payday loan to raise needed capital for your business. In this case, you are receiving a cash advance now that is secured by your paycheck. The upside of this is that you can raise money immediately and the lender cares more about your employment history than your credit.
Contentinjection.com recently discussed the pros and cons of payday loans, such as ease and speed of access, for instance. The only issue for borrowers utilizing payday loans is the fees and interest; if you renew the loan, you’re guaranteeing it will cost you more than if you’d just charged it on a credit card.
Merchant Cash Advances
A merchant cash advance allows merchants to get an advance based on the business’s cash flow. One benefit of this strategy is that the loan repayments may be made as a percentage taken from every new customer payment. Another benefit is that you can secure it based on your revenue figures instead of your credit.
There are a number of ways to get business financing if you have bad credit, without even touching credit cards. Do your research so that you don’t choose a business finance method that worsens a cash crunch or comes with compounding interest you cannot afford.