It is no surprise that banks and credit unions have tightened their requirement for loans the past few years, especially when it comes to businesses regarded as high risk. Every business owner needs working capital in order to start-up, expand or maintain their company until it generates a positive cash flow. Banks traditionally use credit histories and credit scores to determine the level of risk associated with a business. So if you have a high credit score acquiring a loan is fairly easy, but if you are a business owner with poor individual credit, it is inevitable that you go through a great deal of trouble trying to get approved for a traditional business bank loan. In the unlikely case that you do get approved, it is highly possible that it will end up bankrupting you with the exorbitant interest rates that the bank charges in order to offset the risk involved. So how do you manage to not get crippled by your credit score and pursue your entrepreneurial goals?
Many venture capitalist firms are now looking at working with small businesses in addition to their usual norm of working with larger businesses with potential for huge returns, so venture or angel funding is a viable option for a start-up or an expansion. Invoice factoring, through which a small business sells their invoices at about 60 – 80% of their actual worth, is another way to maintain an immediate cash flow. However, among the various types of alternative financing solutions available for small businesses, merchant cash advances are a popular option to obtain the working capital needed, because they are totally unsecured and do not require any collateral or personal guarantee. They are provided in exchange for a share of the business’s future card transactions and the remittances are deducted from the daily credit card and debit card sales. In addition, their approval rate is quick and there is no set repayment period, so it is ideal for business owners for whom flexibility of repayment is more important than a slightly lower rate.
In order to make the best use of these alternate forms of funding, choose a merchant account provider who best suits your business, and understands that credit scores are always based on past records and don’t take the future potential of your business or your ability to run a successful business, into account. Having a low credit score does not automatically exclude you from opening a merchant account and once you have the right credit card processor, the trick is to look beyond credit card and bank loans for funding. You can set up a seasonal merchant account so that the account will be active when the business is operational and will be dormant when the business is closed so that your business will not incur any fees related to the account during the months in which the account is closed. Seasonal merchant accounts work especially well with a merchant cash advance because cash advance loans subtract a percentage of each credit card transaction rather than the business having to repay the loan amount in monthly payments. Some processors also allow for businesses to turn the account on and off numerous times each year.
It’s easier to get a merchant account if you can minimize the risk against your bad credit so seek loans from your relatives and friends who already trust you before turning to professional lending services. Reduce your startup or expansion costs by accepting help from people who would be willing to provide subsidized loans and services in terms of free office space from former employers or free services from friends or business associates etc.