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Updated: March 27th, 2020
As lenders review your application for debt financing, the underlying fundamentals of your business and your personal credit history are among the most important considerations. For this reason, raising financing can be a challenge if you have a spotty personal credit history. Even so, there are options. The key is making sure that whichever channel you choose does not ultimately contribute to further deterioration of your credit history.
As you work on rebuilding your credit profile, financing from friends and family can be a low-risk means to continue investing in the growth of your business. This is particularly the case if you’re unopposed to selling a small percentage of your business. If the investment is made in exchange for equity, much of the risk will be borne by the investors; they will receive a return only if the business is a success. If on the other hand, your friends and family prefer to offer you a loan, make sure that the repayment terms do not place an untenable burden on your cash flow.
Peer to peer lending platforms are largely utilized by individuals who need to borrow money for personal reasons, but taking on a personal loan to support your business is not unusual. You will have to create a listing, stating the amount you seek to borrow and the purpose of the loan. While the lending platform evaluates your credit and posts it as part of your listing, it is ultimately up to the individual investors to determine if your listing matches their ideal risk profile.
If your venture is still in the startup stage, raising capital through crowdfunding may be the answer. Under the 2012 JOBS Act, startups can raise $1 million per year through equity crowdfunding, without having to register securities with the SEC. With equity crowdfunding, you accept money from investors in exchange for a share in your business. If the business is successful, the investor will be able to sell those shares for a profit, down the line. Investors base funding decisions on the projected outlook for the business, not on your credit history. The upside is that you’re not obligated to repay anything to investors if the business fails. Pay attention to the fees associated with this channel. Funding platforms will typically charge a fee to list your campaign, and another to process payments from your investors.
If a large percentage of your revenues is processed via debit or credit cards, a merchant cash advance may be another alternative for financing. MCAs are short-term loans based on a business’s monthly sales volume, not on the business or the owner’s credit history. In exchange for a lump sum advance, the business owner pledges a fixed percentage of daily revenues to repaying the loan. MCAs are expensive. It is not unusual to see APRs above 30 or even 40%. While it may be handy for a business in a bind, this option is usually best if you’re in a position to repay what you borrow relatively quickly to minimize the cost.
As you weigh these financing options, it’s important to focus on the overall cost, as well as the impact on your business, on a day-to-day basis. Ideally, the type of financing you choose should satisfy your funding needs without diminishing your business’s long-term profitability.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.