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Obtaining Financing with Less-Than-Perfect Credit

The ability to obtain financing is often the difference between success and failure for many small businesses. Unfortunately, not all business owners have credit strong enough to qualify for conventional loans. While it can create difficulties, less-than-stellar credit is not an insurmountable barrier for business owners if they know where to look for loans. Here are three different types of financing that can help out business owners while they build their companies and their credit:

Small Business Administration Loans

If a business owner has exhausted all of their options to obtain financing, a loan guaranteed by the Small Business Administration (SBA) might be the way to go. The SBA has a variety of programs available for business owners ranging from micro-credit loans all the way up to loans for millions of dollars. The SBA is not a direct lender, but it guarantees a portion of an SBA loan against default. This reduces the risk for lending institutions and provides them with an incentive to loan to borrowers who would not qualify for credit otherwise. The main qualifications to receive an SBA guaranteed loan are:

  • The business must be officially registered and operate legally.
  • The business must be physically located, and operate in, the United States.
  • Over 50% of the property being used as collateral must be occupied by the business.

Additional information on SBA loans can be found on the Small Business Administration’s website: www.sba.gov

Business Equity Financing

Equity financing involves selling an ownership interest in the business to investors, and is often used to generate seed money for a new company startup or to expand an existing business. Credit worthiness is not a main consideration for potential investors, but they will only be attracted to a business that has a solid business plan to provide desirable goods or services to the public. An advantage of equity financing is that it provides the company with needed capital without adding debt to its balance sheet. A disadvantage is that selling equity dilutes a business’ ownership by creating new business owners who will have a say in how the business is managed.

Private Money Real Estate Loans

Businesses that have equity in their company’s real estate can usually obtain private money (also known as “hard money”) loans to raise needed funds. There is a wide variety of private money lenders. Some are truly “hard money” where they are high interest rate, high fees and short-term loans. Others are lower cost, longer-term “soft money”, like American Life Financial’s Not So Hard MoneyTM loans. Private money lenders are concerned primarily with the value of the real estate being offered as collateral and generally don’t concern themselves with a borrower’s credit history. Business owners frequently use private money loans to acquire new assets, fund expansion, or make improvements to existing facilities.

Having less-than-stellar credit is not a permanent obstacle on the road to success, and there are many options for business owners beyond the three listed in this article. Business owners should take the time to carefully research and evaluate all of their options so they can decide on the course of action that best meets their needs. And, as they use alternative financing options to reach their goals, they should focus on building and repairing their credit scores. Eventually the financial tools that are unavailable to them today can become a valuable part of their business’ success in the future.

E. Paul Whetten

About the author: Paul Whetten is a loan underwriter for American Life Financial, a private money lender based in Mesa, Arizona. He has 10 years of experience in enterprise management and small business accounting, and over 14 years of experience in the financial services industry. Paul holds a Master’s degree in Administration from Northern Arizona University and is an adjunct professor of business at Mesa Community College.