When it comes to financing your business, having a healthy credit score is key to unlocking your funding potential. A good credit score could help convince lenders that you are safer to lend to.
If your credit score is less desirable, you may come across obstacles in your funding journey. This could include rejection from lenders or being offered smaller amounts of funding.
However, this doesn’t mean that a bad credit score is the end of the road for raising business finance. There are solutions available to fit every kind of company, including those with a low credit score.
Below, we have listed our top tips for obtaining funding, even with bad credit.
- Be prepared for higher interest rates
- Utilise security
- Consider alternative lenders
- Try peer to peer lending
- Pursue equity
- Have a strong business plan
- Look at turnaround finance
- Improve your credit score over time
Be prepared for higher interest rates
When taking out a business loan, you will need to pay interest at some level. However, where there is a conceived high risk, a lender will increase the interest rate for this additional risk.
If you have a poor credit score, it’s therefore common that any lender who agrees to loan money to you will do so with the condition of higher interest rates. This will vary between lenders, but it’s will be higher than on a loan offered to someone with a high credit score.
Before agreeing to any loan, make sure you are able to keep up with the repayments that these increased interest rates will incur to avoid further damage to your credit score.
Utilise security
Having a bad credit score makes you a higher risk for lenders, so you need to consider ways to reduce the threat. One way to do this is to use your assets as security against a loan.
The aim of using assets as security is to assure a lender that, even if you default on repayments, they will be able to recoup their debt through repossession of your security. This can counteract their concerns about your credit score, improving your chances of being accepted and allowing you to leverage more significant amounts of funding.
Consider alternative lenders
Different lenders are open to varying levels of risk. This means that, when seeking a loan, it’s worth shopping around providers to find one willing to work with you.
Compare the criteria of each loan to see whether your business is compatible, even with a low credit score. In some cases, it may be worth talking to the lender to discuss your unique situations.
Another option is to approach a commercial finance broker who can direct you towards providers who match your business needs.
Try peer to peer lending
While considering alternative lenders, it’s worth thinking about peer to peer (P2P) lending. With a P2P loan, people come together to loan a small amount each to a business, culminating in a larger pool of money. You repay them in the same manner as any other commercial loan.
The benefit of P2P lending is that, because you aren’t working with traditional lenders, they might be more open to businesses with a higher risk. However, you will still need to convince them that you are reliable and worth lending money to.
There will be consequences if you don’t keep up with payments, so you must be confident that you can meet the repayment schedule.
Pursue equity
As we have already mentioned, a credit score is typically associated with how reliable you are to lend money to. However, this tends to be less of a deal-breaker in equity finance. If you are seeking business funding, you might therefore contemplate investment.
With equity funding, you do not need to repay the investor – instead, they will be entitled to a share of your dividends. When pursuing equity, you need to convince investors that you have a valuable business idea that you can run successfully with excellent profit potential. If you can do this, they will want to support you financially – even if you have a history of poor credit.
If this sounds like an option for you, it’s essential to make sure you understand the implications on your business and what an investor can offer.
Have a strong business plan
Another essential factor when applying for funding is your business plan. The role of this plan should be to convince any lender or investor that your business has the potential and, if currently loss making, will generate a profit that will enable you to either repay any money they lend to the business or pay any dividends for those who invested instead.
By having an effective business plan, you should be able to overcome the consequences of a poor credit score and convince even a risk-averse lender that your business is capable of repaying the loan.
Spend time perfecting your business plan, so it is as strong as possible and portrays your venture in the best possible light, so you stand a better chance of persuading lenders or investors.
Look at turnaround finance
If your bad credit stems from issues within your business, such as restricted cash flow or a loss-making business, it might be time to consider turnaround finance.
Turnaround finance refers to funding explicitly used to help restructure a business and move it back towards profitability and might include costs of redundancies, new management teams and so on.
By obtaining turnaround finance, you can focus on getting your business back on track and profitable, increasing the chances of longer-term funding solutions that will open up with increased business stability.
Improve your credit score over time
If you have a poor credit score that sets you back in securing funding, you must work to improve it. While this may not help you in the short term, it will increase your access to financing in the long term.
There are many ways to improve your credit score, including ensuring you keep up with any credit commitments you have, settling court judgements and minimising your debt levels. By gradually increasing your score, you will improve your reliability in the eyes of a lender.
Conclusion
While lenders may typically favour businesses with a good credit score, it doesn’t mean there is no hope for those who do not have one. Instead, you need to consider alternative options that still fulfil your needs while maintaining your eligibility for funding.
By looking at other solutions in the market, including alt lenders, secured loans, peer to peer funding and even equity, you will be able to find the funding route that works for you. This means that bad credit needn’t be the end of your business finance journey.
Get in touch with us today to find out what options may be available for you in the market.