Often times small business owners communicate either they are unable to obtain capital for their business based on their personal credit score or they believe, based on what they have heard from others, their personal credit score will impede them from getting capital for their small business. While it is true that financial lenders typically take credit scores into consideration when evaluating a small business loan application, this article is meant to shed light on avenues to pursue for obtaining capital for your small business when your personal credit score is not ideal.
We are going to take it a step further than to suggest that you reach out to friends and family for money or a loan, because likely if you had friends and family to reach out to then you would not be reading this article. Don’t get me wrong, if available always start with sources of money that come with the least stringent obligations. But if you are borrowing money from friends or family it’s important to know where the business relationship starts and the personal relationship ends, otherwise the personal relationship may be soured by business concerns. Addison H. Hallock may have said it best, “Before borrowing money from a friend, decide which you need more.”
Grants are likely another suggestion you may have heard when looking for small business capital, but unless you are working on providing perpetual energy or curing cancer it may be difficult to obtain a grant. Small Business grants, contrary to popular belief, are extremely limited and are usually administered to those working in technology oriented industries or the health field. Typically grants may come from the federal, state, or local government agencies, private organizations or universities. To find grants for a small business you will have to conduct broad research to find organizations with grant programs that may be applicable to you.
A great avenue to add to your search is to apply for a small business loan with a micro-lender. It is important to note that each bank or financial institution has its own lending standards, but typically, traditional lenders impose the most stringent standards. The Small Business Administration (SBA) has programs in place that mitigate risk for financial institutions and may allow them to provide loans where a person may not meet traditional lending requirements. SBA programs, such as the 7(a) loan guaranty program, help traditional banks make loans to small business owners as the SBA will guarantee or back a percentage of the loan. But micro-lenders are usually the institutions that may be able to touch the “untouchables.” Micro-lenders are typically nonprofit, community based lenders and may go beyond the numbers on a piece of paper when evaluating a loan application. Although micro-lenders can incorporate more “personal” factors into making a small business loan decision, such as, the business acumen of the owner or the owner’s experience in the industry, micro-lenders, just like anyone else lending out money, want to ensure that they will get the loan paid back on time.
Another avenue to pursue for seeking capital for your small business is to use crowdfunding. Crowdfunding has gained in increasing popularity. Online, crowdfunding platforms, such as Kickstarter, Kiva, Indiegogo, and Prosper have been emerging and becoming more familiar as a source of funding. Crowdfunding allows a small business owner to pitch their business or concept to the public and people can make relatively small investments in the business in exchange for a small reward, equity stake, or a debt position. The Securities and Exchange Commission recently proposed rules firming up the use of Crowdfunding (see http://www.sec.gov/rules/proposed/2013/33-9470.pdf). Though some critics believe the rule proposal to be too burdensome on small businesses, by requiring audited financials in certain circumstances (see http://www.forbes.com/sites/deborahljacobs/2013/10/23/sec-proposes-crowdfunding-rules/), others view the proposed rule as a positive first step in that it opens the door for small businesses to tap investment from unaccredited investors (see http://www.reuters.com/article/2013/10/23/us-sec-crowdfunding-idUSBRE99M03O20131023)
With these different avenues to pursue for capital, a small business owner should not be discouraged to seek money for their business when their personal credit score is an issue. The key is to (1) make sure you have a well, vetted, investable business model and (2) focus on effectively communicating your business plan. If you can implement these two key actions then you will significantly increase your chances of obtaining capital and moving along your path to success.
Content contributed by Jermaine A. Hunt of SourceLink Dallas. SourceLink Dallas is a proud affiliate of U.S.SourceLink, America’s largest resource network for entrepreneurs.