It’s common for entrepreneurs to begin their journey with no credit or bad credit. Many new entrepreneurs have personal debts they’ve incurred to maintain a lifestyle their 9-5 job couldn’t fully support. Some successful entrepreneurs have reached a plateau because they can’t obtain higher amounts of funding necessary to get to the next level.
Seeking out traditional financing with bad credit or no credit is difficult. Lenders want to know they’ll get their money back plus interest. Your credit score is the only way to tell lenders you’re trustworthy. No credit and bad credit tell lenders you’re a risk.
Building credit isn’t as complicated as it seems
It’s frustrating when you can’t get the loan you need to grow your business and boost your credit. If you can’t get a traditional loan, don’t worry. There are several factors that go into generating your credit score. While the exact formula is a well-guarded secret, there’s a basic credit score recipe:
- 35% payment history. Paying bills on time increases your credit score. Late payments diminish your score.
- 30% credit utilization. Using too much of your available credit will negatively impact your credit score.
- 15% length of credit history. Having open accounts that are regularly used will increase your credit score. Open accounts that never get used won’t contribute to a higher score.
- 10% types of credit used. The type of open accounts you have are weighted differently; for example, credit cards and loans won’t necessarily affect your credit score in the same way.
- 10% new credit. Too many new accounts can be a sign that you’re living on credit. Opening multiple new accounts not only reduces your credit score, but tells lenders you’re a risk.
As you can see, building credit is not just about getting large loans and making payments on time. It’s also about managing the accounts you open, and taking actions that creditors view as profitable. Keeping the components mentioned above in mind, try these creative ways to finance your entrepreneurship goals:
1. Get a bad credit loan
Bad credit loans come with a higher interest rate, but have one advantage: making on-time payments will contribute to improving your credit score. Even if you can’t get a bad credit loan for the purposes of financing your business, you should consider taking out a small loan for the purpose of rebuilding your credit. Every small effort counts.
If you don’t know your credit score, get your annual free credit report and find out what your score is. Entrepreneur.com outlines credit score ranges, placing poor credit in the range of 501-600, and challenged credit anything below 500.
2. Revenue-based financing
A revenue-based loan is paid back as a set percentage of a business’ monthly revenue until the total loan is paid. This usually takes five years. This type of loan helps a business manage their cash flow because payments are lower when business is slow.
Revenue-based financing is one of the lesser known types of loans, perhaps because it requires a business to have a minimum amount of revenue per month plus gross margins of around 50%. However, when you don’t have collateral, this type of loan can be a dream come true.
For example, revenue-based financing companies don’t just give a business money and then step away. Many of these companies take an active role in helping businesses succeed. They introduce the business to potential customers, other funding sources, and advise them on how to grow. All this is done without requiring the business to relinquish any level of control to the loan company.
It’s like having a genuine partnership with your loan company. They’re in business to make money, and they’re more likely to see their ROI by actively helping you succeed.
Everyone has dreams of being the next most popular Kickstarter campaign, but many crowdfunding campaigns don’t make it through production. To get funded with crowdfunding, you need to have a solid business and marketing plan. You also need to know what reward style will work with your campaign.
When you have a vision for your business, never stop knocking at all the doors you see. You may be told “no” 100 times before you receive one “yes,” but that one “yes” could be worth millions.