How to Fund a Business with Bad Credit
Everyone knows the importance of a credit score when it comes to securing a loan for either a home or automobile purchase, but few understand the impact personal credit ratings can have on a business credit score. Small business owners looking to securing financing for their venture may be shocked to find out the impact it has on their business fundability. Although it is best to establish and maintain a high credit rating both personally and with your small business, there are financing options that can fund your business without totally relying on a credit score.
To be fair, your credit score may appear lower to some lenders than it does others, simply due to the industry scoring algorithms and credit rating companies choice of criteria. Your physical location within the US might even affect your score, just as the act of checking your lending opportunity with a bank. It’s wise to take proactive steps to build your credit and protect your score, but again, don’t panic that you are without options.
If your business credit score keeps you from securing a loan or credit card, there are two options generally available for those with bad credit.
Factoring is a process where a third-party will purchase a batch of past due or outstanding invoices from your company, but for less than the actual cash value of the outstanding funds. This fee could be anywhere from 3% to 10% less the owed amount. Although it seem steep, it does provide you access to the cash, and the factoring company is tasked with settling the debt with your client.
Accounts Receivable Financing
If factoring sounds like a risk, you might look into the process of accounts receivable financing. This is a bit more cost effective. A lender will advance your company anywhere from 70% to 90% of an outstanding invoice total, and companies with great credit may be able to secure 100% of the invoiced amount. You receive immediate access to working capital, but you are charged a fee according to the length of time it takes the client to pay on the invoice. The client pays the lender directly, and once the balance is received in full, your company is issued a refund for the remaining balance minus the fee.
It is not impossible for a companies with a poor business credit score to continue to grow an expand operations. It takes some contemplation, but there are options available for funding your business.