From Rags to Ritches

How To Creatively Finance Your Business Despite Your Bad Credit Score


If you’re a small business owner with a poor or middling credit score, you are probably worried about how to obtain financing for your business. The good news is there is such a thing as bad credit business financing. The bad news is, of course, that these alternative business financing options can come with some pretty hefty fees, down payments and interest rates. This is the temporary trade-off you will make in lieu of having better credit. As your company grows and prospers, you will be able to improve your credit score along the way. In the mean time, here are some business financing options to consider for near term working capital when your credit is damaged:

One form of bad credit business financing is factoring your receivables. A factoring company will examine your aging schedule of receivables to determine which customers owe you money and how likely these customers are to pay you. The factoring company will buy all or some of your receivables, giving you access to cash now. The factor will only buy receivables that you are expecting from reputable and stable customers with good credit histories.

Another form of bad credit business financing is ROBS, Rollovers as Business Startups. If you have a personal retirement fund like an IRA or 401K, you might be able to extract cash to help fund the startup of your corporation without penalty. There are some caveats, however; you can only execute an ROBS strategy if you have a C Corporation, not an S Corporation or any other business structure, and you should only execute an ROBS under the guidance of a certified public accountant (CPA). If you opt to borrow money from your 401K, you will have to pay it back in full on deadline or else you will face some major penalties.

If you need major equipment for your company, one option is to work with a company that specializes in equipment financing. These are not banks or traditional lending institutions; they are companies that focus on equipment financing only, and the interest rates offered will likely be higher than interest rates offered by conventional lenders. But the trade-off here is you will have quick access to the equipment you need to keep your business operational. This type of bad credit business financing is appropriate for construction, landscaping and manufacturing companies, among others.

Merchant cash advances (MCAs) are short term loans, usually 24 months in duration or less, which are repaid when the lender takes multiple small but regularly scheduled payments from your credit card sales or straight out of your business bank account. MCAs can have high interest rates but if you select a trustworthy lender, the advantage is fast access to working capital. Be sure to pay your MCA back on time and in conformance with the agreed upon terms and conditions set forth by your lender to avoid penalty fees and further credit score problems.

These are just a handful of the bad credit business financing options available to small business owners with less than perfect credit. Consult with your existing banker and your CPA to determine if you have other options available based on your own unique business situation.



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