This is Part III of a four-part series on how to get loans to start or expand a small business despite bad credit. Fortunately, there are more sources for loans today than in the past.
This blog is about how you can get a loan from a nontraditional lender. Part I was about lenders’ criteria when they decide whether to give a small business a loan. Part II was about how to improve your credit rating. Part IV will be about the risk of accepting a loan from a nontraditional lender.
Getting A Loan From Alternative Lenders
“If you’re planning to start a business or expand an existing business, you might need financing help. SBA participates in a number of loan programs designed for business owners who may have trouble qualifying for a traditional bank loan.” “SBA Loans” SBA.com
Do you know what percentage of the funding needed by entrepreneurs who are trying to launch a business comes from bank loans and credit cards?
The answer is about 25 percent, according to an Entrepreneur magazine article entitled “Funding Options for Bad Credit Risks.” This statistic probably means that plenty of entrepreneurs are obtaining financing from sources who aren’t as interested in borrowers’ credit ratings although some of the 75 percent non-credit rating related financing is surely coming from the entrepreneurs’ own pockets.
One of the most popular alternatives is microloans — loans of small amounts of money to people who have financial problems, including a bad credit history. About 74 million people have received microloans, according to a 2009 report by MicroBanking Bulletin. The number is likely to be much higher today. Roughly 95 to 98 percent of the borrowers repaid their loans.
The Small Business Administration (SBA) has a microloan program that enables small business startups as well as new and growing small businesses to borrow up to $50,000 from nonprofit organizations. The SBA funds the nonprofits, which are in communities all over the United States and lend money to small businesses in their local communities.
The Entrepreneur article reports that you can also obtain microloans from websites that can help experienced small business executives improve a bad credit rating and help inexperienced small business executives begin to establish a good credit history because they report payments to the credit bureaus. The article cites the following websites as viable sources of microloans — www.accion.com, www.americaonefunding.com, www.count-me-in.org, www.prosper.com, and www.zopa.com.
“Microloans are a great option for businesses with bad credit or no credit histories because their credit requirements are typically more lenient,” reports the Fox article “How to Get a Business Loan With Bad Credit.”
Venture capitalists are also a possibility although they are generally not focused on helping small businesses with bad credit histories or no credit histories. Investopedia defines venture capitalists as people who are willing to invest in startup companies or small businesses that want to expand "because they can earn a massive return on their investments if these companies are a success” and are often willing to risk a loss because they are very wealthy.
Generally, venture capitalists are looking for unique products and services and market research that will show that a huge investment can pay off.
“The right venture capital firm can supply your company advice and mentorship in addition to funding,” according to “Search Listings of Venture Capital Firms,” an Entrepreneur magazine article that provides information on 900 venture capitalists.
Community Development Financial Institutions (CDFIs) are another excellent alternative lending possibility. “CDFIs--An Alternative Loan Source for Small Businesses,” an article in the Small Business Legal Blog, reports that CDFIs that have been designated by governments to promote community development. The financial institutions are credit unions, nonprofit organizations, and small banks that receive government financing.
“As reported in a Wall Street Journal article by Emily Maltby, most of their loans have gone to start-ups and struggling businesses that wouldn't qualify for a traditional bank loan because they are considered too risky,” according to the Small Business Legal Blog. “In fact many CDFIs only work with businesses and individuals that cannot get a traditional loan. In making loans, CDFIs don't focus on a borrower's credit history.”
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