6 Ways to Get Funds When You Have Bad Credit

hard money loans
Bad credit is a crutch for many aspiring entrepreneurs and existing startups. It creates an unfavorable situation for your business, especially during its early stages. Without good credit history to back up your loan applications, banks and private lenders will either reject your application outright or attach high interests on your loan, which over time can eat up a significant chunk of your revenues. Fortunately, traditional financing options are not the only path to securing funds that your business needs. Here are six other sources of funding:

Fix Your Credit Score

Alternative financing options are a temporary solution for funding your business. In the long run, you’ll benefit more from improving your credit scores. Gradually work your way up to the 700 range to get lower APR and higher amounts on your loan. Request a free copy of your credit report from one of the three bureaus, namely Equifax, TransUnion, and Experian. You’ll narrow down your specific score and be able to verify if there are any mistakes or unscrupulous activity that is weighing down your scores. If there is, file a dispute to resolve the issue.

Home Equity 

Bad credit loans secured through home equity is a good way to avoid the traditionally high-interest rates that credit cards and financing programs are designed with. In fact, according to studies, these traditional methods of financing only account for less than 30 percent of the overall financing needs of early-stage startups, indicating that more than 70 percent of the seed funding and cash infusion made towards startups are obtained from other sources. Bad credit loans sourced through a home equity line of credit or HELOC come with a variable interest rate, which means you can renegotiate lower terms throughout the loan’s life cycle.

Alternative Lending

According to a report by the Small Business Credit Survey, early-stage startups and small businesses that produce $1 million or less in annual profits are often more successful at getting the funding they need from smaller institutions and web-based lenders as opposed to large banks. There are two primary groups of alternative lenders – direct and peer-to-peer lenders. The former is typically designed for smaller to mid-sized companies and cuts the middleman including private equity institutions and investment firms. Peer-to-peer lenders, on the other hand, directly bridges borrowing businesses with angel investors who often finance small amounts of a diversified loan portfolio.

Consider Gifts and Grants

If you want to avoid making monthly payments, you can set your eyes on getting gifts and grants. These are basically free cash, but programs that grant them have a very meticulous process of selecting recipients. Be cautious of services that promise to look for government-sponsored grants for you. You’ll want to do the research and homework yourself to find a grant program that best suits your business model. For the most part, healthcare companies, tech startups, and retail brands operating within low-income communities are the most common recipients of grant money. You should also consider cashing in favors from your previous employers, coworkers, and friends. Doing so could yield free office space and equipment for the early stages of your business at least.

Look at Merchant Cash Advances

For small businesses and startups who need cash to continue operating, merchant cash advances or MCA is another good alternative to bank financing. Through a merchant cash advance, lenders offer you with a lump sum amount for a pre-agreed upon the percentage of your expected account receivables. You repay the initial sum loaned to you plus any fees specified by the lender. The debt is paid with deposits transferred from your linked business account on a fixed schedule, either on a daily or weekly basis. MCAs are ideal for businesses that have solid sales and revenues but need help dealing with delayed account receivables and overdue account payables.

Don’t Count Out Hard Money Loans 

Hard money loans are simply loans secured by real estate used as collateral. They are backed by private institutions or individuals instead of traditional sources, like banks and credit unions. The repayment conditions for hard money loans usually range between as short as 12 months to as long as 5 years. Of course, the longer you wait to repay the debt, the more interest you pay. Typically, this type of loan requires monthly interest payments or interest plus principal amount.

Final Thoughts

Although most financing options seem cut from the same cloth, every option has its own pros and cons that you’ll want to review first before signing anything. Keep in mind that many of these contracts are binding, and signing up for higher than normal interest rates can bring more financial suffering to your business rather than relief. It pays to consult with a financial adviser to get a clear sense of what your business really needs.

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