If you have a high credit score, you will have a pretty easy time getting credit offers from a wide variety of funding sources to expand your business. If your score is low or nonexistent, however, you won’t.
By: Hitesh Khan/
But a low score isn’t something you can run away from, and even if you avoid it, it won’t go away. The trick is to fund your business in ways that actually get your score back on track so when you’re ready to move your business to the next stage, your score will start opening doors rather than getting them slammed in your face.
Here are some ideas for entrepreneurs who want to achieve high credit score:
1. Look beyond credit cards and bank loans for financing. Studies show that credit card and bank financing account for just 25 percent of the total funding needs of early-stage entrepreneurs. This statistic should provide you some comfort, because it implies that 75 per cent of the money you need can come from other sources that rely less high credit score.
While there are credit cards and lending programs designed for individuals with poor credit, these options will typically charge a higher interest rate to compensate for the credit risk posed by a sub-prime borrower. One bank option for those with poor credit scores is a home equity line of credit, though you should be wary of putting your home on the line to finance a risky early-stage venture.
2. Seek personal loans from your relatives and friends. Everyone likes the idea of entrepreneurship, which may be why, at some point, more than 50 per cent of all business owners get financing help from friends and relatives. Chances are, your relatives and friends want to see you succeed and may be able to help make your business dream a reality.
They also may not dwell on your poor credit score because they trust you, or they believe your business concept to be sound. (Banks used to evaluate your character and business conditions the way family and friends still do, but credit scoring models have made lending decisions more automated, resulting in the critical power your credit score holds over you.)
Also, you can now use private personal loans from relatives, friends and business associates to rebuild your high credit score.
3. Investigate licensed moneylenders. There are several nonbank lenders that offer loans to entrepreneurs. These personal loans are typically in the $1,000 to $35,000 range. Some of these sites are excellent sources of capital for those with poor credit and will also report your payments to credit bureaus which can help correct your credit score if you make timely payments. Be sure to shop around and compare rates since each lender offers a twist on how they price personal loans and spread risk to their lenders/investors.
For a borrower who don’t have high credit score, the interest rates on loans from these sources will tend to be high. But if you’re accustomed to credit-card-level interest rates, these rates may seem affordable, but remember this: You can make partial payments on credit card debt whereas installment loan agreements may restrict you from making partial payments.
There may be some licensed moneylenders who may be able to offer more flexible terms; since they’re small, they may not have a website or web-based loan application form, however, and may be hard to find. For some business owners, flexibility of repayment is more important than getting a slightly lower rate.
4. Don’t overlook gifts and grants. If you need to avoid making debt payments, focus on getting “free” money in the form of gifts and grants. Your search will be long and hard–despite what you read on the internet, there is no silver bullet here. Be wary of services that promise to locate government or private grant programs for you. If you want to avoid scams, you will need to do your homework to locate programs that are available for your type of business.
Health-care businesses, technology companies, and retail businesses in low-income areas tend to qualify for the bulk of grant money. Other forms of “free” money include gifts from relatives, free office space from former employers, and free services from friends or business associates. If you’re creative, you can reduce your startup costs by brainstorming a list of people who would be willing to provide you with gifts and subsidised personal loans.
How to Secure a Personal Loans Quickly
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