Starting and growing a business can be a risky proposition. Many owners go all in, using personal loans or credit cards to fund their start-ups. But what if you have bad credit? Can you still get funds to launch or expand your venture? The answer is “yes.” And, in fact, it’s easier than ever to get small business funding without a credit check, if you know where to look. Here are three options:
1. Business Cash Advances
If your business has strong sales, verified by credit card, PayPal sales receipts or steady bank deposits, you may be able to get the equivalent of a credit card cash advance for your business. But instead of borrowing against your credit card’s credit line, you’re borrowing against your future sales.
These companies advance funds to the user based on anticipated future sales. PayPal Working Capital, for example, offers working capital to businesses with at least $20,000 in sales for 12 months (and at least three months of history). The funds you borrow will be repaid from your future sales until the advance is fully paid off.
Square Capital has a similar offering for merchants who use Square, and eligibility is based on processing volume and sales history. There are a number of websites that will make these loans to merchants who process credit card sales through any platform.
This convenience often comes with a price, though. These loans can be expensive, with effective interest rates that rival some payday lenders, and you’re likely to be quoted the cost in terms of fees or percentages of sales, not interest rates. So be cautious, do the math, shop around and make sure you can afford to pay it back without getting caught in an endless cycle of advances.
Nothing has democratized small business lending more than crowdfunding. With the right story and vision, an entrepreneur can raise money for all kinds of projects. Chris Kelly, owner of California Cycleworks is an entrepreneur I profile in my forthcoming book, Finance Your Own Business: Get On The Financing Fast Track.
He’s used crowdfunding before the word was even invented — creating campaigns from loyal customers, which has allowed him to build extra capacity fuel tanks for several different models of motorcycles. “We were successful…because we had a number of exceptionally passionate customers,” he told me.
It’s important to understand that some crowdfunding platforms will review your credit reports or credit scores. If you are getting a loan from investors you don’t know, as is common peer-to-peer lending sites, then you will have to have a good credit score in order to qualify. But if you are trying to raise money for a specific project through one of these platforms, your credit may not be a factor at all.
3. Friends & Family
Loans from friends and family have been funding businesses for decades, and now they even have a fancy name — “social capital.”
“Every year there is about $60 billion in funding raised from friends and family, especially for early stage entrepreneurs,” says Anson Liang, founder and CEO of TrustLeaf. This kind of loan can be especially effective for someone who has started a business on the side, has established a clientele and decides it’s time to go all in working full-time on the business.
If you’ve maxed out your credit cards or mortgaged your house to the hilt to get your business off the ground, the beauty of this approach is that friends and family aren’t likely to care about what’s on your credit reports. Liang says that the entrepreneurs who come to his site for a free promissory note or funding campaign overwhelmingly say that their friends and family are “more interested in supporting them” than they are in their credit scores.
Best of Both Worlds
If you do end up using one of these methods to raise money, don’t neglect your credit. Building strong personal credit and business credit scores will provide you with more options — and negotiating power — as your business continues to grow. (One way to check your personal credit scores for free is through Credit.com.) Then you’ll be able to choose from many options for raising money and not limit yourself to those that require good credit.
More on Credit Reports & Credit Scores:
- The Credit.com Credit Reports Learning Center
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report