If you own a small business, you know how difficult it can be to obtain the credit you need to supplement your cash flow and working capital. Vendors, suppliers, banks, and other lenders are reluctant to extend credit to small businesses, especially if they have bad credit, forcing them to live hand to mouth to meet payroll, pay suppliers and fill orders. Yet many small businesses survive and grow even when business is tough. They can do this by securing business funding that is flexible and works with them, even if they have bad credit.
Securing Business Funding with Bad Credit
Small businesses that have cash flow problems and find it difficult to obtain funding for their working capital needs usually have a number of the following characteristics:
- Bad business credit or no credit rating
- Limited operating history
- Limited working capital and cash flow
- Few business assets that are not already encumbered by liens from lenders
- Limited or poor credit rating of the business owner
- Limited personal assets to pledge as collateral
Unfortunately, these characteristics are strikes against you when you apply for a loan from a bank or other lenders. Banks have limitations on the number of loans they can make to businesses with bad credit and they have to set aside additional capital in case of credit losses which does not earn a return.
Obtaining a small business loan with bad credit is even more difficult when the economy is weak, and the Federal Reserve is raising interest rates. In this environment, banks and other traditional lenders tighten their credit requirements and focus on larger customers with greater financial strength.
Fortunately, there are alternative funding solutions that small to mid-size businesses, including those with bad credit or no credit, can work with to obtain the working capital they need.
Alternative Funding Solutions
Alternative funding sources, such as invoice factoring companies, do not have the same limitations as traditional lenders. They are more flexible and can work with clients to custom-tailor programs to support their business model.
A key alternative funding solution for small to mid-size businesses, including those with bad credit, is invoice factoring. The cash you have invested in generating accounts receivable can be freed up with invoice factoring to increase cash flow and working capital. Even if your accounts receivable has a lien from another lender, a factoring company can often successfully negotiate an agreement with the lender to carve out accounts receivable for a factoring program.
Invoice factoring accelerates the conversion of accounts receivable into cash, providing immediate cash flow and working capital. Funding is not dependent on the creditworthiness of your business. Instead, the creditworthiness of your customers is used for determining whether you can factor your invoices.
Typically, businesses are forced to wait 60 days or more before they are paid for the products or services they provide. Factoring turns those invoices into nearly immediate cash. This allows business owners to have the necessary cash on hand to sustain operations and meet obligations to their customers while not depending on a traditional lender for a line of credit.
Advantages of Invoice Factoring
Some of the advantages of invoice factoring include:
- Faster than business loans – In most cases, rather than waiting weeks or months for bank approvals, you can have cash in your bank account within days of accepting a factoring contract and having your customers approved.
- Flexibility and control – Factor all of your invoices or only specific ones. You select which customers you’d like to factor. You may elect to use a process called “spot factoring” which is a funding method where you simply take a valuable invoice and turn it into nearly immediate cash with no long-term agreement. This is common when a company has a single, one-time need for immediate capital to get them over a period of slower cash flow that is not expected to continue.
- Strengthen or repair your credit profile – With sufficient cash flow, you can meet vendor and supplier payment commitments. As you build up a positive credit history by paying in full and on time, it will gradually boost your business credit score. Invoice factoring helps to strengthen your credit profile using the strength of your customer’s credit, not the bad credit of your business.
- Streamline credit and collections – Invoice factoring eliminates the hassle and expense of chasing customers for payment. It also provides credit and background checks on your customers, and online reporting is available 24/7 to help you manage your invoices and cash flow.
Qualifying for Funding
Even if you have been turned down for a business loan or line of credit, you can convert your open invoices to cash almost immediately with invoice factoring. Qualifying for funding is relatively easy. The key requirement is to have unpaid invoices that are payable by dependable and creditworthy customers. Whether you need immediate capital or regular access to cash, invoice factoring can help you meet your financial obligations even if you have bad credit.
Customized Solutions Work Best
This is one reason more businesses are turning to Capstone. Regardless of what your business credit situation is, your financing needs are not the same as every other small business. We don’t take a one-size-fits-all approach to fund working capital since every business operates differently and has different cash demands. We take the time to understand your business model, your goals, and your overall financial situation. We work with you to develop a customized solution for your business funding needs. We understand the importance of cash flow to the long-term success of your business and we are committed to providing solutions to help you succeed.
Capstone is here to help. Let us work with you today to help you find the best solution to your cash needs without taking on more debt. Whether you are facing an immediate one-time cash need to secure a contract or you need a long-term solution to cash flow, contact our skilled team of representatives today and let us work with you to find the best options for your funding needs.
