Loans from traditional lenders are appealing; with low APRs and the security of a large financial institution behind them, they are a wonderful financing option—if you qualify.
But what if you have less-than-stellar credit? While traditional lenders may be hesitant to work with you, there are alternative lenders offering safe products worth exploring. We’ll take a look at some of the best options below.
1. SBA Loans
Small Business Administration (SBA) loans are still issued by traditional banks, but—because they’re backed by the SBA—lenders are willing to take on slightly riskier borrowers. However, those able to secure an SBA loan typically have credit scores over 650. While a score of 650 is not considered excellent credit, it’s still out of reach for some borrowers. SBA loans are a good option if you’ve been in business for over a year or two and have financial statements that demonstrate healthy and consistent revenue and growth.
2. Invoice Financing
If your credit doesn’t quite clear the hurdle for an SBA loan, a collateralized or secured loan might be your next best option. Lenders are more likely to consider working with riskier borrowers when the borrower is willing and able to offer collateral to back the loan.
If your business generates revenue through invoices, invoice financing is an option for you. There are a number of alternative lenders who focus specifically on this type of financing, providing a cash advance on outstanding invoices. Once payment is received on those invoices, you receive the full amount minus a fee paid to the lender.
3. Equipment Financing
Also falling under the category of a collateralized loan, equipment financing is something to consider if you need to purchase equipment to support your business’s operations. Just like with a car loan, the equipment you’re purchasing functions as collateral against the loan. You pay off the loan in installments and, once you’ve completed payments, you own the equipment outright.
4. Short-Term Loans
As the name suggests, short-term loans don’t have a very long lifespan—they’re usually three to 18 months in length and are repaid with weekly or daily payments. Because the term for the loan is so short, lenders foresee a diminished risk of default on payment and are therefore willing to consider borrowers with less desirable credit scores. While these loans tend to have higher APRs, the application process is typically quick, and they’re a potential solution for those with credit scores as low as 500.
If your credit score or company’s financial history is not strong enough to qualify you for alternative funding, consider turning to friends and family for financial support. With a plethora of crowdfunding platforms like Kickstarter or GoFundMe aimed at helping startups and small businesses, it’s easy to find the one that best fits your business model, create a fundraising page, and share with family and friends. If starting a business is your dream, there are many people in your life who will be happy to lend a hand (and a couple of dollars) to get your company off the ground.
Even with a credit score that puts a traditional bank loan out of reach, there are safe alternatives to consider. Just keep in mind that the interest-rates and APR will often be higher than with traditional loans.