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How to Finance a Business with Bad Credit – Effortlessly!

Published By Janet Gershen-Siegel at December 29th, 2017

You Can Finance a Business with Bad Credit – Splendid!

Bad credit is an issue. There’s no refuting that. But it is not an overwhelming one. You can get credit for your small business even though your credit score is a stinker. Yes, you can finance a business with bad credit. Here’s how.

Finance a Business with Bad Credit: Personal Guarantees

One means of getting business credit with bad consumer credit is by granting a personal guarantee. This personal guarantee can originate from you, but it can also come from an investor.

If a family member (your semi-rich uncle, for instance) would like to have a chunk of your new business, why not offer a chunk for them granting a personal guarantee to a lending institution or credit issuer?

Personal guarantees do come along with a degree of risk. If your business does not succeed, then your investor could be left holding the bag if you default on loans etc.

Subsequently, asking somebody to provide a personal guarantee for you is not something which either of you should take lightly.

Finance a Business with Bad Credit: UCC Blanket Liens

Without having a personal guarantee, some loan providers will obtain a UCC blanket lien on your firm. A UCC blanket lien works as a notification which will go on your credit report.

It says that the creditor has an economic interest in all of your business’s assets. And that is up until you pay off the loan in full. As a result, there may be dire results if you need to default.

Likewise, for truly bad credit risks, your creditor might demand both a UCC blanket lien and a personal guarantee.

Finance a Business with Bad Credit Credit Suite

Demolish your funding problems with our rock-solid guide about 27 killer ways to get cash for your business.

Finance a Business with Bad Credit: Unsecured Credit

A better alternative is unsecured credit. Unsecured just means you are getting credit without putting down any cash. There is no collateral, so rates can often be high.

In contrast, with secured credit, you put down a certain sum and can only borrow up to that sum.

You can get five to eight times the amount of your highest credit limit. This is with 0% rates. And it is for up to $50,000.

Finance a Business with Bad Credit: Personal Assets

You might have a retirement fund, like a 401 (k). Or your semi-rich uncle might give you (or will to you) stocks or bonds. You may own your own dwelling.

Each of these assets may be used as collateral for a secured business loan or any other form of secured credit. As with personal guarantees, consider this option carefully as a default could cost you, big time.

Finance a Business with Bad Credit: Anticipated Company Assets

You may also use your anticipated profits as collateral. Let’s say your business has owed invoices out to your clients. You may have given generous payment terms in order to sweeten a deal and get the sale. Or maybe your customer is just plain late paying you back.

With accounts receivable factoring, you can get up to 80% of your uncollected receivables.

Even so, you must be in business for at the very least a year. And the receivables need to be with some other business. Hence that means they can’t be with an individual.

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Demolish your funding problems with our rock-solid guide about 27 killer ways to get cash for your business.

Finance a Business with Bad Credit: Current Company Assets

Your organization may also have properties which you could use as collateral.

Real Estate

Company assets can include landholdings– does your business own land, or a building, or part of a building? You can use this real estate as collateral.

Equipment

It can also mean equipment, if you own it free and clear, although this has to be major equipment. You won’t be able to put together a bunch of smaller equipment.

This is called an equipment sale leaseback. As a result, you are essentially selling your equipment to the lender. And then you are renting it back from them for the cost of your loan payments.

Stock

How about business stock? You can use inventory valued at $500,000 or more and use it for a line of credit worth 50% of your inventory’s value for what’s called inventory financing. In other words, the loan to value, also known as the cost, is 50%.

Finance a Business with Bad Credit: Angel Investors

Let’s get back to your semi-rich uncle. You may have heard the term ‘angel investor’, in particular if you have ever wanted to finance a play or you just go to the theater a lot. The term originally comes from the performing arts. The first angels were investors in shows.

These days, angel investors are investors in any kind of an enterprise. Yes, your mom can be an angel investor! The idea is that you are selling a piece of your business to them, in exchange for a quick, immediate infusion of cash.

There are two types of angel investors: affiliated and unaffiliated.

Affiliated Angel Investors

An affiliated angel investor is just someone who you knew before you asked them for money. They can be your family or your friends. They can also be people you have worked with – a person on the verge of retirement may be looking for a business to invest in. Why not yours?

A Few Caveats

Owning a business with a family member or a friend has the potential to be problematic, so draw up a bill of sale and ownership documents just like you would with anyone else buying a piece of the business.

Plus only you will know how your family or friends will react if the business fails. Decide if the relationship can handle the strain.

And keep in mind that angel investors tend to not buy very big parts of a business. You will most likely retain a controlling interest. In that way, the company’s direction is going to be your choice.

Unaffiliated Angel Investors

Then there are the unaffiliated angel investors. They might be the wealthier people in your town or (as with affiliated angels) maybe someone the cusp of retiring. They can even be people who you connect with online.

How do you connect with unaffiliated angel investors? It’s the same way you meet any new person in the business world. One way is to get an introduction. And another is to network. Yet another method is to go online.

Because you do not know the person well, the relationship is a lot less fraught. Hence if the business tanks, it won’t matter quite so much if the relationship comes to a screeching halt.

However, you should always be aware of where your money and your ownership are going. So when you sell a bit of your business to someone you don’t know, get a cashier’s check or the like and get it before or during the transaction where you hand over a piece of the business. Don’t take personal checks!

Finance a Business with Bad Credit: Venture Capitalists

Do you have a business which is right on the cusp of becoming something truly groundbreaking? This can be a service such as Uber. Or this can be a product like the GoPro camera. Or it could be an app like WhatsApp.

For all of these, venture capital firms saw what they felt was an excellent investment – and they were right! Hence keep in mind that venture capital firms will not invest in just any company. So unless your laundromat or trucking company is a massive game-changing industry disruptor, venture capital firms are likely not going to throw money at you.

But if your good or service or app really is groundbreaking and game-changing, and you think venture capital could happen, you will need to network to get an introduction to venture capitalists.  And you will have to be proactive as you are asking them for a pretty big thing.

The Details

Finance a Business with Bad Credit Credit SuiteVenture Capitalists will provide funding in order to help establish new startups, if the VCs think a company has both high-growth and high-risk potential. These usually be fast-growth small businesses with an exit strategy currently in place.

Venture capitalists will commonly plan to recover their investment inside a 3-5 year interval. They will also, often, want to acquire a large portion of a company if not a controlling percent.

Venture capitalists look for a strong management team; a sizeable potential market; and a distinctive service or product with a strong competitive advantage.

They also search for opportunities in industries they have familiarity with, and where they will have the opportunity to own a sizeable percent of the business, so they can influence its direction.

Risks and Rewards

This is due to the fact that the drawbacks for venture capitalists could be pretty ruinous. Venture capitalists can experience considerable losses if their picks flop.

Nevertheless, these investors are ordinarily wealthy. They are frequently so well-off that they can afford to take the risks associated with funding new and unproven businesses, as long as they seem to have a good idea and a skilled management team.

As with angel investors, you are selling a piece of your business. However, in this case, it’s a more substantial transfer of ownership and control. Only you can decide if you are comfortable with this.

Finance a Business with Bad Credit Credit Suite

Demolish your funding problems with our rock-solid guide about 27 killer ways to get cash for your business.

Finance a Business with Bad Credit: Crowdfunding

Another option can be asking for money from a lot more people: crowdfunding.

Crowdfunding has become popular and it’s not surprising. It’s (normally) free money which you do not need to pay back. And you can get these funds without needing to give up any ownership or control over your startup company.

Plus it can help you to assess the popularity of an idea or a prototype or invention. Because there is no sense in proceeding if there is no interest in your design.

You will have to make a lot of choices before you even launch a startup crowdfunding campaign.

How Much?

Your very first decision should be: just how much do I need to crowdfund? If you need $1 million, you are going to have to crowdfund more than that.

How come? Because that is how crowdfunding platforms make their money. They take a percentage of whatever money you can raise. For that reason, you will have to take that into consideration. Crowdfunding percentage charges vary from 4% to 10%.

Will I Meet My Goal?

Another decision has to do with how successful you think your campaign will be. If you are super confident that you will be 100% funded by the end of your campaign, then traditional funding is for you.

If you are not sure, then try GoFundMe’s flexible funding. With flexible funding, you, the campaign runner, can keep your donations even if your campaign falls short. Having said that, for this benefit, you will need to pay a higher fee to GoFundMe. Other crowdfunding platforms like Kickstarter don’t provide this option.

What Should I Offer for Perks?

Yes, you will have to provide perks to your donors. Perks can take many forms — buttons, tee shirts, bookmarks — all of those are possible physical perks. Contemplate a perk format which can sync with your business. It’s even better if it’s something you sell or are thinking of selling.

Pro tip: physical perks are a pain! A lot of people love them, and they will attract attention. However, tangible perks also must be delivered. International shipping is incredibly expensive, even for smaller items. So if you offer tangible perks, stipulate if you will permit international donor addresses.

Because of this, if you can do it, try for virtual perks. These can take the form of access to videos or downloads, or an offer of electronic coupons.

Your Campaign

Your campaign’s success is far from assured. However, you can benefit from a few known strategies. To start with consider these four feelings that you want to instill in donors. Use one or more of them as the centerpiece of your campaign as a starting point.

Urgency

The very first two and last two days of a crowdfunding campaign are almost all the time the days with the largest payoffs. Often, lengthening the campaign doesn’t make you a lot more money. So why not open a campaign for merely a week? Don’t let donors think they can chip in any old time they feel like it.

Scarcity

If you have thousands of something or other to supply as a perk, it won’t be as desirable. If you only have one or two of a certain perk, that will develop a sensation in some people that they simply have to have it. Do this with your larger donation levels only.

Novelty

If you are providing the same thing as a thousand other places, nobody will want to make a donation. Your gadget needs to be lighter, hotter, less expensive, or more durable. Your food should be lower in calories or higher in nutritional value or better-tasting.

Or your services will need to be provided better or quicker, by friendlier and more well-informed employees, and with a cash back guarantee your competition does not provide.

Cool factor

Is your product a form of art? Is it a brand-new, gadget-like innovation? Then it may possibly have a coolness factor which you can build your campaign around. But do not be discouraged if it isn’t! These days, some of the most memorable marketing campaigns are based around a product most people found uninspiring not a decade ago — insurance.

Strategy

A few words on strategy:

  • Your pitch video should be good. Use a professional to film it and write the script.
  • If you have tangible evidence of your project, then make sure to present it in your campaign video and on your campaign page.
  • Manners matter. Say please, thank you, and you’re welcome to everyone. You do not have to grovel, but you definitely must be courteous.
  • Don’t be greedy! If you need $250,000 for your campaign, but you call for $1,000,000, that’s no good. You’ll just seem like you want to mooch off others’ generosity. Instead, account for your expenses as clearly and transparently as you can. And incidentally, if you abuse your funds, you might end up in an unpleasant meeting with your state’s attorney general. So be truthful!
  • Your stretch goals should be a combination of readily achievable and pie in the sky. Let your donors know what you are pursuing, so they can dream with you.
  • Be gracious if your campaign fails. Even if you use GoFundMe’s flexible funding option, you still may not receive enough to make a significant dent in your funding needs. For non-flexible funding, even being a penny off means a shortfall – and you have to give that money back, in full.
  • Line up the most significant and most dependable donors you can before you get started. And ask them (nicely!) to pledge their money on the first or very last day of the campaign. Take advantage of the novelty factor of the initial day of the campaign, or the urgency factor of the very last
  • Share your campaign on social media and ask your friends and family to do so, too.

Finance a Business with Bad Credit: Takeaways

So take into consideration what you and your company possess, or are expecting to own in the near future. You just might be able to get an unsecured business line of credit. And you may be able to despite the fact that your personal credit is bad. And there are other options – you can finance a business with bad credit. Just be creative!

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