Financing is always high on the list of concerns for new companies.
Especially if, like most new businesses, they’re worried about inadequate cash flow. Solving this issue may seem as simple as getting a business loan — but this isn’t always an easy process for new businesses.
Since your business’s credit history is short, you may have trouble securing attractive rates and terms from traditional lenders. This process can be frustrating, but don’t give up hope.
Below, we’ll examine five alternative lending solutions for new businesses to consider, despite poor, little, or no credit.
1. Equipment financing
Regardless of your industry, chances are you need equipment to run your business. If you’re opening a pizzeria, you need an oven. If you’re running a web development company, you certainly need computers.
Enter equipment financing, a popular way to purchase tools and supplies for your business. With this type of loan, the equipment itself serves as collateral, and you pay back the money (plus interest and fees) over time — hopefully, as the equipment generates revenue for your company. According to US Bank, more than 80% of businesses finance their purchases of equipment.
Since the equipment itself serves as collateral (i.e. secures the loan), requirements aren’t as strict as other loan products. That makes them attractive for new businesses without a long credit history.
2. Business credit cards
A business credit card gives you access to revolving credit, which means your credit limit is renewed as you pay back the money you use. Beyond the ability to access funds whenever you need and a cushion when cash flow gets tight, a business credit card has unique advantages that makes it a good financing option for young companies.
Business credit cards help you to separate personal and business spending, while giving you the chance to earn massive rewards. Not only do some sign-up bonuses easily exceed $1,000 when calculated as a dollar amount, you can earn ongoing rewards in the form of cash back, miles, points, etc.
Don't waste money on unused software when building your credit history.
Furthermore, there are business credit cards for every credit level. That means new businesses with no credit can still get approved — although, they may have to settle for a secured or prepaid card.
There are also cards that come with a 0% intro APR period. Look into those if you qualify, as you’ll be able to use the money for 12-to-15 months without incurring interest. After the promotional period is up, your APR will set in at a rate that will vary with the market Prime Rate, so be sure to see the issuer's terms and conditions for the latest APR information.
Keep in mind that interest rates can be high with business credit cards. Spend wisely and keep your balance as low as possible.
3. Credit line builder
The credit line builder is a little different than many other funding options for new businesses. But it’s an effective way to gain access to a large amount of available capital.
With a credit line builder, you apply for multiple business credit cards simultaneously through a financing company. Your credit limit is the combined amount of all those cards.
To get approved, you’ll typically need a good personal credit score, but your business doesn’t have to have a long credit history. Just remember: You’re using this to increase your business credit score. Make payments on time and keep balances low.
Another benefit of the credit line builder is that it can help you graduate to better loans. It’s a good tool to take your business further.
4. Personal loan for business
Though you’ve probably been told to not mingle personal and business expenses, a personal loan for business might actually makes sense if you have decent or good personal credit but no real business credit history. Just be sure to treat the loan like a business loan.
A personal loan for business is made to you — not your company. The advantages of using a personal loan for business are that the funds can be used any way you see fit, APRs are competitive (even with small business loans from traditional banks), and payments are usually made monthly.
5. Family and friends
Family and friends are the second most common source of startup funding, according to data from Fundable. If you think about it, this makes sense.
Friends and family are most likely to believe in your vision and provide monetary support for you to chase your dreams. After all, they know you — and what you’re capable of — best.
Before you ask for money from those in your network, draw up a business plan and prepare a pitch to show why your business is a good investment. To ensure there are no misunderstandings later, do the following:
- Ask the right people. Choose those with business experience and/or knowledge in your industry. Discuss whether those individuals want a passive or active role in the company as well.
- Clearly define what the money is. Will it be a loan or stake in your business? How is the money to be repaid if they’re a lender or distributed if they’re a shareholder?
- Put it into a formal agreement. If you need to hire an attorney to draw up a contract, do so. This will ensure all sides know their expectations and responsibilities.
Making sure your startup has the funding it needs
As you can see, you have numerous options to fund your startup. Explore them all and do the necessary calculations to see what’s most feasible. It could even be a mix of these five options.
What it comes down to is this: You can get the funding your company needs to succeed. It’s just about being resourceful and taking time to find the right type of funding.