Look Beyond Traditional Means of Financing
Reports indicate that credit card and bank financing only make up for a quarter of the overall funding requirements of early-stage startups. This comforting statistic shows that more than half the capital that startups need come from other cash cows that do not rely on stringent risk assessment. Although there isn’t a shortage of lending programs that specifically cater to bad credit scores, these programs often charge you with high interest rates to offset the risk that they are taking on. A viable option for startup founders with bad credit history is a line of credit against your home equity. This option brings with it its own set of risks, primarily the fact that you put your property on the line to fund a startup that is yet to take off.
Get Your Assets in Order
Although credit scores are the highlight of a risk assessment done by lenders and banks, it’s not the only factor taken into consideration. Your business’ assets will help compensate your credit score or lack thereof. If you have solid cash flow, strong and attainable projections, and a lot of physical and intellectual assets, lenders can see this enough value to take a leap of faith on your startup. Before approaching lenders, get your cash flow and assets in order. You’ll also want to show your own investments in the startup. If you haven’t spent a dime of your own money into your business, why should lenders put their money into it?
Consider Family and Friends
People who are starting out with their business always turn to family and friends for some financial support. What’s great about approaching your family and friends for some help first is that credit history doesn’t really matter. Unlike banks and private lenders, they won’t put you through the wringer with two dozen questions about your personal and business finances. Of course, this doesn’t mean you should take advantage of their generosity. Try to repay the debt as soon as possible once your business becomes profitable.
Launch a Crowdfunding Campaign
Platforms, like Kickstarter and IndieGoGo, have helped tons of entrepreneurs launch their startups. How these platforms work is, you can launch a crowdfunding campaign for your tech startup with a specified goal. If the goal is met, Kickstarter will deliver the payments. IndieGoGo, however, allows entrepreneurs to keep the funding they’ve raised even if they don’t reach their financial target. Crowdfunding campaigns are not free money, though. You’ll need to deliver the product/service that you promised your backers through the campaign materials.
Consider a Hard Money Loan
Hard money loans are a certain kind of asset-based financing option in which you receive cash with real property used as collateral. Hard money loans are often provided by private lenders and organizations. Interest rates usually start around 7 percent, which is similar to the rate attached to a bridge loan. The loan amount will be decided by the value of the property, which is a calculation referred to as LTV or loan to value ratio.
Don’t Quit Your Day Job Just Yet
If you work full-time and is doing your startup as a side project, don’t quit your main source of income at least until you break even and start making money for yourself. You won’t need to apply for bad credit loans if you have money coming in every week or so. It’s tempting to hand in your two weeks notice and finally breathe in the freedom and independence that entrepreneurship affords, but you have to time the transition right otherwise you could just fall back to step one.
Consider Microlenders
Microlenders refer to non-bank institutions online that are offering small loan amounts to entrepreneurs. The loan amounts often range between $5,000 to $30,000. They are similar to bad credit loans in that they cater to borrowers with low credit scores. Another advantage of microlenders is that they report payments to credit agencies, which can help you build or repair your credit score.
Final Thoughts
Money is always going to be an issue during the early stages of your startup. When you know your options, you can easily move around your personal and business finances to secure the loan amount and terms that reflect your startup’s value and needs.