working capital bad credit

Cash flow may be king, but what happens when a one-off emergency throws a wrench in your plans? That’s when you need quick and easy access to working capital to deal with a crisis, like a broken piece of equipment or a sudden need for more supplies, or to take on an unexpected opportunity.

But when you don’t have strong personal or business credit, quickly securing a line of credit or short-term loan can be difficult and expensive.

If you’re running into cash flow problems month after month, you’ll likely need to take a serious look at your business and figure out a way to right your ship. But when you’re in need of a one-time cash injection, consider the following options and advice:

1. Ask for terms from your vendors.

Rather than focusing on how to raise money right away, look for a way to minimize your expenses.

Gerri Detweiler, head of market education at Nav.com, suggests that business owners ask for terms from their vendors: “If you have good relationships, they may be willing to let you pay net-30, net-60 or even longer terms.”

Having an extra month or two to pay your bills could free up cash to cover an immediate need. However, try not to make a habit of making last-minute payments. Paying vendors early can help build your business’s credit score.

If your vendors don’t agree to terms, perhaps they’ll accept installment payments on your current balances. Again, this isn’t a long-term solution, but it could help you free up money for a one-time expense.

2. Consider a variety of options that don’t require high credit scores.

Some lending options don’t necessarily require a high personal or business credit score, Detweiler says. Carefully review the terms, fees, and requirements, as they vary drastically for different types of funding and from one lender to the next.

Line of Credit

A line of credit is one of the most popular forms of working capital financing. These include a business credit line from a bank or an alternative lender, a business credit card, or a personal credit card or line of credit. Credit cards are a popular way of dealing with everyday funding needs. But these typically have high-interest rates, so you should definitely consider alternatives.

Factoring

Invoice financing lets you receive cash now for outstanding invoices. The fees for factoring can vary, and you should read the terms of the agreement carefully before signing on with a factoring company. Some factoring companies offer more flexible terms, including letting you choose which invoices you want to factor.

Online business loans

Some online lenders may offer loans based on a business’s performance, rather than your credit history. The interest rate will usually be higher than what you’d receive from a traditional bank loan, but the low credit requirement and easy process make online lenders a worthwhile alternative to traditional bank loans. You also might be able to get the funds within a few days. Depending on the lender, you may be able to take out an installment loan or quickly open a line of credit and draw from it when needed.

Micro-lending services

Kelliane Parker, a SCORE business counselor in the San Francisco Bay Area, recommends looking into micro-lending services, such as Kiva Zip. Although raising the money partially depends on your ability to promote your fundraising campaign, there’s no credit-score requirement and loans through Kiva Zip have a 0-percent interest rate. Parker also recommends looking for local Community Development Financial Institutions Funds (CDFI Funds) that provide micro-loans based on the business’s accomplishments and owner’s experience rather than credit scores.

Merchant cash advances

Even with poor credit, business owners may be able to quickly receive a merchant cash advance, a loan that you repay with a portion of your business’s credit and debit card sales or automatic deductions from a bank account. However, high-interest rates and daily or weekly repayment requirements could drastically eat into your company’s cash flow, hindering your ability to run or grow the business. Generally, a merchant cash advance should be one of your last resorts.

Apply for a BlueVine Line of Credit account

3. Borrow money from friends or family, but be cautious.

Asking for a loan from friends and family could seem like an easy solution, after all, they won’t likely require a credit check, but such arrangements can also lead to trouble.

Blair Koch is the CEO of a The Alternative Board (TAB) franchise in Denver, Colorado, an organization that offers small-business owners one-on-one mentoring and a group of peers who serve as an advisory board. Koch warns, “If your venture fails, now you have hurt your immediate family, plus extended family and friends. It can be very difficult to repair those relationships.”

That’s not to say it’s always a bad idea, but Kelliane Parker notes that it’s especially important to have a written agreement and a plan for paying the money back if you’re going to ask a friend or family member for a loan.

“Think about how much you really need,” says Parker, “you can usually only ask for money once or twice.” If you want to borrow money to take advantage of a growth opportunity or cover a one-off expense it might make sense if you’re kicking the debt can down the road don’t risk your personal relationships.

4. Plan ahead to avoid trouble in the future.

Waiting until the last minute to look for funding can turn a small problem into a major disaster. By planning ahead, you can help ensure you’ll have access to working capital when you have to deal with an emergency or take advantage of a great opportunity.

Build your business’s credit score

Regardless of your personal credit history, you may be able to establish and build your business’s credit. A business’s credit history and score are separate from the owner’s credit, and a strong business credit score could open up opportunities for vendor terms, lines of credit, and business credit cards without a personal guarantee.

Open business credit lines

It could be easier to get approved for a business line of credit when you don’t need it. Plus, applying when there isn’t an immediate need lets you take your time with an application and paint a rosy and accurate picture of your business.

Establish strong relationships

According to John Meetz, President of a TAB franchise in South Central Kansas, “every small- and medium-sized business owner should establish a relationship with an accountant, attorney, and banker.” Meetz sees the importance of keeping in contact with them throughout the year, not just when you need something. “Building a relationship is key. A banker who knows you will be more flexible during financial emergencies,” Meetz adds.

Create an emergency fund

Just as many households keep a rainy-day fund and view it as an important part of their personal finances, business owners can establish an emergency business fund. Make a practice of putting a portion of your business’s profits into a separate account that you can dip into during a crisis, or when the right opportunity presents itself.
Know your business and cut expenses. Sometimes you should be working on your business rather than in it. Take an occasional step back and look for ways to improve your business’s operations, identify problems, and brainstorm solutions. “Many business owners don’t know their numbers, and that’s a critical error,” says Parker.

Bottom Line

Even with a poor personal credit history, there are several ways to raise money for your business quickly. However, it’s important to compare your options and find the one that best fits your needs. Whether you decide to move forward with a loan, factoring, or figure out a way to put off paying bills, be sure to learn from the experience and create a plan for how you’ll deal with a cash crunch in the future.

This article was originally published on Feb. 6, 2017. It was updated on August 22, 2018.

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