Bad Credit Affecting Business Loan Approvals? Worry Not!

06Mar2017-badcredit

Bad credit history bogging your business down? Sounds familiar, doesn’t it? Poor credit, be it personal or company, makes it that much harder for a business looking for a loan or any kind of funding. Banks scrutinise your credit history before approving your loan application. You may have had your reasons as to why you couldn’t pay up on time or messed up your payments. But to any lender, a person with a bad credit is high-risk, because it means either that you’ve not repaid on time or that you’ve seen harsh times. Fret not, all is not lost! There are a variety of alternative financing options which look into your operating history and business strength, and not just your credit history. Here, we introduce you to 5 viable financing options for businesses with bad credit.

Crowdfunding

This is a popular form of alternative financing wherein the funds required for a business or a project is raised from a number of people. Some ventures raise funding through reward-based crowdfunding where, as the name suggests, funds are raised in exchange for some reward such as free software development or some perks. However, most startups and small business generally opt for equity crowdfunding where the people pooling in to fund your venture becomes a shareholder in the business or owns a part of it as a result. You can explore crowdfunding platforms such as Wishberry, Start51 and Crowdera among others or go here to check out the top 10 crowdfunding sites in India.

Peer-to-peer lending

Peer-to-peer lending or P2P lending is where borrowers are put in touch with lenders through an online service to facilitate money lending. P2P lending emerged as a result of the high rates of interest on bank loans that were given to small business because they are considered to be risky. This is a collateral-free means of accessing funds at lower interest rates than what traditional banks offer. 

Invoice Discounting

The ease and reliability of invoice discounting as a means of financing have made it a popular option among SME’s. Borrowers are put directly in touch with potential investors on an online platform like KredX, India’s first invoice discounting marketplace.

Businesses receive an invoice for delivered goods or services from a bluechip company. The business then uploads the invoice on the KredX platform after discounting the total amount in exchange for quick funds rather than after 45-90 days as is customary. Investors explore the available invoices on the platform and purchase the ones, in part or whole, they are interested in and the funds are then transferred to the business. The business foregoes a small amount of the money due to them for a quicker payment so that their cash flow isn’t affected. In essentiality, borrowers receive quick access to funds from investors, in 48-72 hours, using invoices as a pseudo-collateral.

Pre-sell your product

This would only work for businesses that focus on a single product. You could pre-sell the product to your customers to help you tide over cash crunch. This also ensures that you don’t have a warehouse full of unsold products because you would sell only the exact number of products. Though it is a way of making sure that you follow through and give your customer the product, it also puts so much pressure on you that most entrepreneurs prefer to stay away from pre-sales unless they’re sure they can adhere to their timelines.

Small business funding contests

This is an unconventional route to finance your business but a viable one if you think you truly believe in your business. If your business is unique and has potential, there’s nothing stopping you from winning contests such as NASSCOM’s 10000 Startups, Next Big Idea Contest or Microsoft-BizSparks! Not only do you get funds, but it also gives you media coverage and the chance to network with the who’s who of the industry.

No matter which financing option you choose to go with, your decision needs to be well-researched and thought through. Seek advice from other business owners, industry leaders and mentors to make sure that the choice you make is the right one for your business. Above all, don’t forget to work on improving your credit score because it will help you and your business in the long run.

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