Your startup business idea may seem out оf reach without sufficient funds. While poor personal оr business credit could seem insurmountable, getting financing doesn’t automatically disqualify you.
There are financing solutions that don’t require personal credit checks and provide faster turnaround times than traditional bank financing. Get the funding even with bad credit!
This article explores various funding options for new founders, even those with a less-than-perfect credit history.
Collateral-Based Loans
Unfortunately, getting funding for a startup with bad credit isn’t impossible, though you will likely require collateral like real estate or inventory as security for any loans granted to you. Furthermore, you must submit an organized business plan that contains company details as well as leadership profiles and financial projections in order to secure any loans given out.
Collateral loans typically offer better interest rates as lenders assume less risk; additionally, you may even be eligible to borrow more with them than with an unsecured loan. Unfortunately, if your business fails, the lender could seize any assets held as collateral to cover debt obligations.
Collateral-based financing includes asset-backed loans, cash credit accounts and receivable client invoices as examples of collateral-based lending vehicles. While these types of loans don’t always require collateral and often include personal guarantees as required collateral protection measures; they provide an effective alternative to working capital loans and lines of credit by helping keep personal and business credit separate.
Personal Loans
There are various personal loans and lines of credit available to startups to help fund startup operations, especially after several months in business. Over time, as you pay back debts, your credit score and revenue should improve, which opens up additional financing options and lowers interest rates.
Investors, such as angel investors or venture capital firms, may offer to finance your startup in exchange for a portion of equity ownership. A well-researched business plan with financial projections increases your odds of securing this type of funding.
Be mindful that lenders often require personal guarantees from you or co-founders with good credit as a condition for loan approval, making you personally liable if the business defaults, increasing personal risk. Before making decisions on financing options for your startup, carefully evaluate all available solutions; best to consult a financial advisor first to help narrow down what might work.
Small Business Grants
Canadian provincial and territorial governments provide numerous business grants. Some focus on specific industries while others cater to minority entrepreneurs or companies involved with scientific research or experimental development projects. It’s important to research these grants thoroughly before applying; normally their funds need to be matched 2:1 by your business in order to receive one of them.
Grants tend to prioritize cash flow over credit scores, making them an attractive option for entrepreneurs with poor credit. There are alternative lending solutions available which may also offer loans with poor credit but it’s wiser to secure funding sources well in advance of an imminent funding need.
Crowdfunding, peer-to-peer networks or invoice financing firms such as FundThrough can all be effective ways of financing a startup; however, each comes with its own risks that must be evaluated carefully prior to their use as sources of funding for your venture.
Venture Capital
Venture capital is an industry that helps nurture emerging businesses with potential for expansion, providing funding through equity or debt financing to start-ups and small businesses that do not meet traditional banking loan or public market investment criteria.
Venture capitalists typically invest in companies that demonstrate early product/market fit through Series A financing or later rounds. In exchange for their risk, VCs typically gain substantial equity positions and control of company decisions as part of their return for their investment.
Many venture capital funds are organized as pools, with investors contributing simultaneously to various start-ups in a portfolio and sharing fund risk across their holdings. This reduces the chance that one startup might fail and force an entire fund to liquidate all their holdings simultaneously.
Today’s venture capitalists don’t represent reckless risk-takers like in days gone by – instead, modern VCs act more like traditional bankers who specialize in helping new companies launch. Their services meet both institutional investors looking for high returns as well as entrepreneurs seeking funding by connecting capital markets with private companies. Pension funds, large financial institutions and wealthy high-net-worth individuals often invest in venture capital funds.