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Alternative Lending Options To Those With Good & Bad Credit Alike

Since the economic downturn, small business owners seeking funding for operation and growth are finding it increasingly difficult to secure financing from banks and commercial lending institutions.

As Project Director and Business Consultant for a non-profit organization and providing Technical Assistant to small businesses seeking funding through the SBA Community Express Loan program, several of the SBA lenders that I work with admitted being reluctant to lend but feel a little ease since SBA guarantees 80 percent of the loan programs.

What does this mean to small businesses?  When traditional bank financing is unavailable, small businesses need alternative business financing sources to start or stay in business!  To help, here are 7 alternative financing options for small businesses.

Option 1: Accounts Receivable Factoring 

The selling of accounts receivables is known as factoring.  Lenders known as ‘factors,’ will purchase outstanding business invoices as collateral for funding.  It allows businesses to convert slow paying receivables into cash, by financing them through an invoice.

When you use this type of financing, there are two options.  A small business can finance its own outstanding receivables from a rate of 65% to 85% of the invoice’s face value or sell the invoices at 70% to 90% of the total value and in turn, the lender will collect the outstanding debt from the customers.

When I started my first business in 2000, I was awarded several lucrative government and corporate contracts.  After hiring staff to manage these contracts, I found that clients paid invoices from thirty to forty five days out.  Since I had to meet payroll, I used a factoring company to meet some of my obligations.

Need a Loan but Have Bad Credit?

Having no credit or poor credit is a major stumbling block to getting a loan because you’re viewed as a high risk customer who might default and leave the lender holding a bag of worms. It’s just a fact that until you raise your credit score, you won’t fit the standard lending guidelines that traditional, big banks have to follow.

Bad credit, OK!

When you apply for a small business loan through a traditional lender, like a bank or credit union, the first thing that is checked is the owner’s personal credit score and the business’ credit profile. Most banks and credit unions require strong credit scores, limited debt utilization, no late payments, and no public record filings.

The business and the owner need to look pretty flawless on paper – yet this is rarely the case among the majority of small business owners. Many alternative lenders don’t necessarily care about a credit score component.

These lenders are generally much more concerned with the overall revenue stream of the business and the company’s ability to repay the debt. If you have poor or bad credit, an alternative lender will give you a much better chance at obtaining a loan approval.

Get a Peer to Peer Loan

Peer to peer or P2P lending has been around since 2005. It’s an online platform that allows you to borrow directly from an individual instead of from an institution. Peer to peer lending is growing in popularity because it’s a streamlined process that’s a win-win for borrowers who pay low interest rates and investors who earn high interest rates. Right now, you can borrow for as little as 6.5% and earn an average return of 10.5%—that’s pretty impressive.

Borrowers post a loan listing that includes the amount they want and why they want it. Investors review loan listings and choose the ones that meet their criteria. Peer to peer lenders screen all applicants and check your credit, which becomes part of your loan listing. So while your credit score is still a factor, an individual investor may be more empathetic to your situation than a traditional bank.