This is Part IV 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 five possible ways to fund your business if your credit history is too bad to get a loan from a bank and you don’t want to pay a nontraditional lender’s exorbitant interest rate. 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 III was about how you get a loan from a nontraditional lender.
Five Alternative Ways To Fund Your Business
“OnDeck’s small loans are easier to qualify for than a traditional loan and more quickly processed, but interest rates aren't low — usually 18% to 20% — and you still must have sufficient cash flow to repay them.” “Avoid Funding Your Business With Credit Cards” Small Business Legal Blog
Part III of this series related how people with bad credit histories can still receive funding for their businesses via microloans, venture capitalists, and community development financial institutions.
In recent years, many small businesses have also chosen to seek funding from companies like OnDeck that say openly that they’re able to loan money to entrepreneurs who have been rejected by banks because they save a lot of money via a loan application process that can take minutes and deliver cash to a borrower within one business day.
Unfortunately, there are risks to accepting a loan from these companies. Besides the high interest rates, these companies also often require significant pledges of collateral and make sure that their borrowers don’t procrastinate in repaying their loans by automatically taking a small amount of money out of borrowers’ bank accounts daily.
You might not want to risk losing a significant amount of your assets to take out a loan with such a high interest rate and you might need time to make money before repaying the loan. If that’s the case, here are five other possible sources for financial assistance.
1. A HOME EQUITY LINE OF CREDIT: Unmarried entrepreneurs who live by themselves without family members might be the only people who should be willing to put up their house as collateral for a loan, but the option is there.
2. INEXPENSIVE “GIFTS”: Many communities and universities try to help small businesses and entrepreneurs by offering them office space at a very cheap price as well as the business expertise of staffers who are willing to help them. These incubators might diminish your need for a loan.
3. A CASH ADVANCE: Some cash advance companies are willing to lend money to small businesses with a bad credit history in exchange for part of the companies’ future credit card sales and an interest rate that is higher than what a traditional bank will charge the same borrower.
4. SBA PROGRAMS: The Small Business Administration (SBA) has a wide variety of specialized programs for veterans, exporters, small businesses that want to improve the environment, victims of disasters and more. The SBA also has a basic loan program for entrepreneurs who want to start and/or expand a small business and a program called the Certified Development Company 504 Loan Program for small businesses that need to buy buildings and/or land.
5. FRIENDS AND RELATIVES: Friends and relatives generally aren’t going to check your credit rating, but if you have trouble repaying them you might be risking their friendship.
Believe it or not, there are statistics on interest rates on business loans from friends and relatives. The stats prove that borrowing money from friends and relatives is a better deal than borrowing money from microlenders who cater to people with bad credit histories.
“For borrowers who don't have strong credit scores, the interest rates on (microloans) will tend to be high,” according to an article in Entrepreneur magazine entitled “Funding Options for Bad Credit Risks” article. “For a comparison, the average rate on business loans from relatives and friends is currently at 7.6 percent, according to CircleLending's Business Private Loan Index, whereas the rate was more than 12 percent at (microlender) Accion and more than 20 percent at (microlender) Prosper for individuals with poor credit.”
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