In a cash crunch? Every business faces them from time-to-time. In fact, some businesses operate in a perpetual cash crunch. For those businesses and business owners who have solid credit, they can usually make it through a cash crunch by drawing on their line of credit or even taking an advance from a business credit card.
If your credit is less-than-stellar, those options may not be available. Traditional lenders are as picky as ever when it comes to borrower credit quality, essentially eliminating lending options for those businesses that are in the process of repairing their credit.
The good news is that you have other options available. Traditional lenders aren’t the only game in town when you need emergency funding. By opening up your search and being a little creative in your thinking, you can likely find a short-term funding solution that’s right for your business.
Here are four such solutions that can work well for businesses with bad or even no credit. Even if you have bankruptcy on your books, these options may be good choices.
Receivable factoring is an effective solution to one of the most frustrating problems in business. You have a business on the books. You have invoices out to customers. They’re just not paying fast enough for you to meet your obligations. You call them to ask them to pay. You offer them incentives to pay early. You do everything you can, but the money just doesn’t come in fast enough.
A factoring company can help you get cash in the door quickly and can also take your receivables process off your plate. Even better, factoring companies don’t care about your credit. Rather, they care about your customers’ credit.
Here’s how it works. You submit some basic information to the factoring company, including documentation about your outstanding receivables. Once you’re approved, they’ll advance you a portion of each outstanding invoice, usually around 80 – 85 percent. They will then work on collecting payment from the customer. When the customer pays, the factoring company will keep a small fee and will forward you the balance.
Very often, factoring companies can advance cash within a matter of days, helping you resolve even the most urgent of cash flow problems. If you have invoices on the books but just need the cash faster, then factoring maybe your best option.
Bank Deposit Funding
If you have poor credit, you may not be able to get a traditional loan or line of credit. However, that doesn’t mean you should skip the bank completely. Some banks offer alternative solutions called revenue-based loans.
As the name suggests, revenue-based loans are entirely dependent on your ongoing revenue. Your credit doesn’t factor into the decision at all. Rather, the bank looks at the history and consistency of your deposits and then makes you a loan based on the strength of those deposits.
There are a couple of other things that make revenue-based loans different from traditional loans. First, revenue-based loans generally have shorter repayment schedules than traditional loans. A typical loan may have a schedule that lasts for several years or even longer. A revenue-based loan, on the other hand, usually doesn’t last for more than 18 months.
Also, the bank will automatically collect repayment. They’re making the loan based on the revenues into your business account. They’ll collect payment by taking small amounts out of your account on a frequent basis, usually either weekly or daily. If your cash flow is volatile, these regular withdrawals could cause even more issues down the road.
Merchant Cash Advances
Do you take credit card payments? If so, a merchant card advance could be a good solution for you. Under this option, you partner with a company that will give you an upfront lump-sum of money. In exchange, they will take a portion of your daily credit card sales until the amount plus interest is paid off.
While a merchant cash advance can be very helpful, there are a few things you’ll want to consider. First, some merchant cash advance companies can charge extremely high-interest rates. Be sure that you know the interest rate and how much you’ll pay back in total.
Also, be sure you know how the repayments are structured. Some partners collect a flat fee every day. Others collect a percentage of sales. There’s no right or wrong way to do it. You just need to know how it’s collected so you can adjust your cash flow projections accordingly.
Finally, you may have to switch credit card processors to do this. Some advance partners require you to switch over your processing from your current provider to the partner’s own in-house processing solution. Again, this may not be an issue for you, but make sure you understand what kind of fees you’ll be charged for processing once the advance is paid for.
Maybe your business can only afford the low-interest rates and favorable repayment schedule that comes with a traditional loan. If so, you may be able to get a loan by bringing on a partner who happens to have excellent credit. You can then use that individual’s credit to boost the overall credit of the business.
This is a good solution when the business’s credit and revenue are stable, but your personal credit is a liability. The partner with excellent credit will serve to balance out yours.
Of course, there is a downside to doing this. You’ll likely have to give your new partner equity in the business for a fairly low amount of investment. After all, the asset they’re bringing to the table is their credit score, not their cash. You may not want to part with that kind of equity just to get a loan.
However, if you like the idea of bringing in a partner and you have a prospect in mind, this option could be worth investigating.
The key is to get ahead of your cash crunch as soon as possible. Even if your credit is poor, you have options available. But you need to make sure you have time to explore all your alternatives so you can best choice for you and your business.