If you are an entrepreneur or small business owner who does not have good personal credit but you need a small business loan of some kind to start, build, or grow your business then there’s good and bad news for you.
We’re really not here to talk about the bad news because you already know the bad news. It’s tough – some would say impossible – to get financing when your personal credit is “not so great.” After all, it’s been tough enough since The Great Recession for people with “good” credit to get financing.
Just to clarify, we’re talking about debt financing and not equity financing. This post will not cover equity financing options such as venture capital, private equity, angel investors, or the three F’s (friends/family/fools).
Before we get started, let’s review a couple important truths:
- One is that your personal credit is either an asset or a liability. It’s not neutral because, if you’re like most of us, you’ll want or need credit to do things like buy homes, obtain credit cards, get business financing, etc. Your credit is not neutral, it’s either an asset or a liability. If it’s an asset then keep it that way and if it’s a liability then don’t be guilty of the definition of insanity and continue doing the same things you’ve always done and then expect different results. Do something about it.
- Two, you may want to consider an ownership strategy if you are married and your spouse has better credit than you. More about husband & wife “insider” tips here.
Now, let’s dive into the best small business financing options for people with “not so great” credit:
ROB’s (Rollover as Business Startups)
This works for both new and established businesses. If you have an IRA, 401k, or other qualified retirement vehicle then you may be able to roll some or all of those funds into your new business entity. You’ll need a C-corp and this strategy should only be executed by a qualified and experienced company or attorney. There are no monthly payment requirements but be sure you have good people who properly set this up for you so you don’t run into IRS compliance issues.
This works for both new and established businesses. You’re looking for a non-bank equipment finance company here. There are many of them out there who will lend you the funds you need to buy construction equipment, medical equipment, tractor trailers, aircraft, printing equipment, etc. The list goes on. They look for clients with damaged credit and what you’ll need in return is very simple. You either need a larger down payment or collateral or both.
These lenders like to lend based on the “auction value” of the equipment you’re buying and/or the auction value of some equipment you already own. Although it goes without saying, you should expect to pay a higher cost for these loans.
This works for established businesses only. It’s simple here too. If you have an aging report or book of receivables then there are lenders out there who will buy your receivables at a discount (some or all of your receivables).
Qualifying for factoring is all about the company who owes you the money. If the lender believes they will pay, then you’ll probably get your financing. However, if it’s Uncle Louie from Louie, Inc. who owes you $100,000 you probably won’t be able to finance that one. I’m sure you get the idea.
The lender will check things like business credit reports on the company who owes your invoice(s), make verification phone calls, etc. but it’s a quick solution and there are thousands of businesses all over the country who do this very successfully.
Merchant Cash Advances
Also known as MCA’s, works for established businesses only. This is probably one of my least-favorite forms of financing because it’s so expensive but there is a time and a place for it.
We’re talking about the Wild West of financing here though. If you’re working with a trusted small business loan professional then you’re probably okay but these loans are a dangerous combination of two things – they are costly to the business owner and lucrative to the brokers who sell them. They are tough on cash flow no matter how you slice it but if you can absorb the high-cost and the short repayment term and advance your organization then this is an option.
To give you some perspective, our company takes in around 5,000 requests for financing per year and in the last 2 years, you can count the number of MCA’s we’ve done in the single digits. For each of those clients it was a means to an end to achieve a larger goal. They’re an option, but use them wisely.
Purchase Order Financing
Also known as PO Financing, works for established businesses only. Of these five lending solutions this one is done with the least frequency. However, it’s a great option when you have a large order you need to fulfill from a large customer.
For example, if Target gives you an order for 500,000 of your widgets to go in all their stores on the east coast, then you’ll need to manufacture and ship those widgets to them before they ever pay you. You will also need to pay all your people or the manufacturer for the production. That can get expensive and many business owners have had their growth halted simply because they couldn’t afford to fulfill a big order.
With PO Financing, as long as you have a credit-worthy buyer, you can finance that entire order and ensure that your business grows and that you can develop the relationship with the buyer for future orders.
And there you have it. These are not the “only” ways to obtain financing if you are a small business owner with damaged personal credit, but these are likely your best options – or they are at least the most commonly used financing vehicles for people with “not so great” credit. The list could certainly be longer.
So how have you creatively financed your business growth?
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