Starting a business requires drive, insight, hard work, expertise, and — let’s be honest — cash. While the business world is full of people with the attitude it takes to succeed, coming by the money required to get off the ground isn’t always easy.
Historically, less than 1% of U.S. companies have received venture capital funding. The reality is that 80% of startups are self-funded through money from the owner’s savings, credit, family, or friends.
If neither you nor anyone in your immediate network has the money to start a business, you’ll need a line of credit. But what if you have bad credit? Should you forget about entrepreneurship altogether?
Beating Bad Credit
Bad credit doesn’t have to be the death knell of your business idea. Here’s how people with less-than-stellar credit scores can still pursue their dreams:
1. Get to the root of the issue.
Just because your credit score is bad doesn’t mean it has to stay that way. The factors that influence credit scores are numerous and not always easy to manage. Although paying your bills in full and on time is an obvious path to a better score, there are some subtler problems that might be holding your score down from obtaining a secured business line of credit.
Finance guru Jackie Lam lists a number of less common issues that can plague credit reports, like opening a retail credit card. Do a full assessment of your financial situation to make sure there aren’t any “leaks” in your credit. Even padding your score by a few extra points could put you over the threshold to get a loan.
2. Do a grant search.
Loans aren’t the only way to bring cash into your business. Especially if you’re a member of a historically disadvantaged demographic group, you may qualify for a small business grant. And unlike a loan, a grant comes with no pressure to pay it back.
Grants are difficult to come by, unsurprisingly, and competition for them can be fierce. Lydia Roth of Nav has compiled a list of 21 groups that offer grants to small businesses, but the options don’t stop there. Look for grants specific to your sector and geographic area. Although applying for them might be time-consuming, the potential payoff could be huge.
3. Opt for a business line of credit.
If your company has short-term or seasonal cash needs, a business line of credit (LOC) might be a better option than a traditional loan. Business LOCs are set amounts of cash to which your business has continued access, but interest only needs to be paid on the amount you take out.
For example, you might have a $100,000 business LOC but only need $20,000 of it. You’d be required to pay back just that $20,000 at a pre-set rate of interest. And because LOCs have lower default rates than credit cards and some types of loans, interest rates on LOCs tend to be lower.
Another advantage of LOCs is that they’re generally easier to obtain than loans. Through a 10-minute online approval process, online lenders like Kabbage offer LOCs of up to $250,000.
4. Find a microlender.
Microloans are very small loans, often made to startups or newly established businesses. These may be backed by nonprofit, for-profit, or government entities. The U.S. Small Business Administration provides funds to nonprofit community lenders, which then make loans of up to $50,000 to business borrowers.
Many microloans are even smaller. Andrew Mosteller at Lendio found that the average microloan is around $13,000, but microloan options exist all the way up to six figures. Although most microlenders still perform credit checks, the minimum credit score required tends to be lower than for traditional loans.
5. Finance your invoices.
As a budding business, it can be frustrating to see so much of your cash tied up in outstanding invoices. Invoice financing, which involves offering those future invoices up as collateral, is a relatively new option for getting the money you need now. If you work with reputable companies that pay their invoices in full each month, a loan financed with invoices carries very little risk.
Jared Hecht of Fundera reports that 64% of small businesses have unpaid invoices that are at least two months old. By treating those outstanding invoices as IOUs, you can get around the barrier of bad credit. Just be sure your financial projections reflect that you’ve already allocated those invoices to paying back your lender.
Bad credit doesn’t have to spell the end of your dreams of being a business owner. By getting creative with your financial sources, you can overcome your credit score — and maybe even boost it in the process.