How to Get Funding for Your Startup If You Have Bad Credit

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startup funding

Startup owners are faced with numerous challenges when developing their business. One of the major challenges entrepreneurs face is finances. To start and grow your startup, you need a hefty investment many startup owners take out of their own pockets to support their business. However, if you’re not careful with personal funds, you may end up having a bad credit score. A credit score is a statistical number that determines an individual’s creditworthiness. Lenders check your credit score to determine whether or not you’ll be able to repay your debt and whether or not you’re eligible for a loan.

A good credit score means you’re financially trustworthy, while a bad credit score shows that you’re not really good at handling personal finances. Having a bad credit score can hurt you in many ways. Banks can charge you with extremely high-interest rates or may deny you a loan altogether. This can be a very bad situation when in need of funds for your startup. Therefore, here are a few ways to get funding for your startup even if you have a bad credit score.

Angel investors

Securing financial aid from an investor is always a good way to get around your bad credit rating. Angel investors are willing to support startup owners who are passionate about their business. They will provide you with enough funds to fully develop your business, but only if you manage to convince them to help you. In order to achieve that, you must do your homework.

That includes having a developed business idea, social proof that people are interested in your product or service, a minimum viable product (MVP), as well as projections and forecasts that you’ll be able to sustain your business during good times and bad. Most importantly, angel investors don’t tolerate a get-rich-fast attitude and they’ll outright reject you. The downside is that you’ll have to repay angel investors with 25% ROI for their support once your business is fully developed.

Venture capitalists

Venture capitalists (VC) are also investors willing to support rising startups. The difference is that VC only support startups with business ideas that have the potential to become lucrative very fast. In other words, the get-rich-fast mindset is better suited for VC investors. They expect your idea to become profitable in 3 to 5 years tops and you must also show the proof that your business can manage those expectations.

In return for their financial support, VCs will ask for shares of your company once it’s developed, making them part of decision makers in your business. Companies, such as Facebook and Google were financially supported by venture capital. Therefore, if you have a great business idea, it won’t matter to VCs that you have a bad credit score.

Alternative Lenders

When seeking a loan, most startup owners first look for a bank willing to support them. As mentioned before, official lenders, such as banks, don’t look too kindly on business owners with a bad credit score. To avoid loan denials or high-interest rates and unsuitable payoff conditions, you can always look for alternative lenders.

Applying for bad credit business loans can help you get funding for your startup regardless of your credit score or credit history. Alternative lenders aren’t banks and they usually look favourably towards individuals with poor credit rating. They can also provide you with more suitable payoff conditions, payoff periods and monthly payments. You can also leverage these loans to consolidate your debt and work on improving your credit score.

Start a crowdfunding campaign

Getting funding for your startup even with a bad credit can be achieved via a crowdfunding campaign. Modern digital age allows businesses to be in direct contact with their audience. Crowdfunding, as its name suggests, is asking your audience to financially support your business. Platforms such as Kickstarter, GoFundMe and Indiegogo among others host such events.

If your audience likes your business idea they can be encouraged to help fund your startup. The way it works is that you set a time limit, as well as a funding limit, and your audience gives as much as they can to help you achieve funding in a given time period. If it succeeds, you can reward your audience in any way you see fit. However, some platforms won’t let you keep the funds unless you reach both limits. Therefore, choose only the crowdfunding platforms that suit you the best.

Government grants

The government can help fund your startup business regardless of your credit score. However, the government only supports startups with particular ideas with its grants. In other words, businesses that focus on research, science and development are able to get a government grant. What’s more, grants don’t have to be repaid at all or only a small portion of it has to be repaid depending on the idea for your business.

For instance, in the United States, the SBA (Small Business Association) in association with Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) offer grants to businesses in exchange for meeting the federal research and development goals. Funds gained from grants must be allocated to procure equipment, hire employees and set up a location for your business. If you have such a business idea, check what grants your government offers.

A bad credit score can hinder your ability to financially support your startup. However, there are alternatives that help you get around this inconvenient situation. Improving your credit score is always a good thing, but if you don’t have the time to wait, there are always options available for you.

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Anyaogu Ikechukwu

I am the Editor of Passion Entrepreneurs.

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