This might sound like a familiar situation for many business owners: Your business is poised for growth, but you’re having trouble obtaining the capital you need to support that growth. Why? Due to derogatory listings on your personal or business credit reports.
Don’t lose hope just yet! Here I’ll discuss ways of obtaining alternative financing even with derogatory listings on your credit report, as well as how to remove said listings going forward.
What Is A Derogatory Listing?
Derogatory listings include collections, foreclosures, bankruptcies, late payments, tax liens, judgment liens, and judgments in general, all of which have a negative effect on your overall credit rating. These listings account for the bulk of how your credit score is weighted, which means having these listings on your report can seriously drag down the quality of your score. But even with these listings, there are actually some funding options that you can consider to grow, develop, and sustain your business, while you work to remove the derogatory marks.
Top Funding Options for Businesses With Derogatory Listings
1. Trade Credit
Various vendors and suppliers will often provide operational materials and services to a business on trade credit. Trade credit is an agreement between a vendor and a business that allows the business to pay after the products or services have been provided—let’s say 30, 60, or 90 days later.
Here’s a pro tip: when you secure trade terms with your vendor or suppliers, make on time (or early) payments. Payment history is the number one factor influencing your business credit scores, so the more you pay on time, the better. Even one day late can ding your business’s credit score!
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2. Accounts Receivable Factoring
If you allow your commercial customers 30 to 90 days to pay for your services, a factoring company can help you even out your cash flow while you’re waiting for payments to come in. Usually how it works is that they will buy up your outstanding invoices, then advance around 80% of the amount back to you upfront. Once all of your clients pay in 30 to 90 days, they will provide the remaining 20% of the receivables to you minus a discount or convenience fee (usually around 3%). You can obtain this service even with bad credit because the approval is based on the strength of your clients.
3. Purchase Order Financing/Vendor Line of Credit
With this product, the lender will work with your chosen vendors to pay them directly for the operational materials you need for your business. Once said materials are received, you make the sale and collect payment from your customers, the lender would then be paid from a portion of the revenue including various fees for their service.
4. Secured Credit Cards
A secured credit card does not have a credit requirement because it requires a deposit up front that is used as collateral for your line of credit. It functions like a normal credit card in that you are required to make payments on what you’ve borrowed with funds separate from what you have used as collateral.
5. High Risk Merchant Cash Advances/Alternative Business Loans
A merchant cash advance is a purchase of your future credit card receivables in exchange for providing a lump sum amount upfront. An alternative business loan is a fixed payment schedule with shorter terms and higher costs than a traditional business loan. With low credit scores, you can obtain higher costing merchant cash advances and alternative business loans to use to grow your business, known as “C or D Paper” deals. “A and B Paper” deals are considered the higher credit grade deals.
6. Real Estate Hard Money
Even with bad credit, you might be able to finance particular real estate deals using hard money lenders who approve based on the value of the project, rather than your “less than excellent” credit history.
Sites like Kickstarter, Indiegogo, and GoFundMe and allow businesses to raise the capital needed to grow, develop, and sustain their business from customers or prospects interested in what you offer. You offer up a reward in exchange for a small investment. The reward can be anything from a thank you email to your actual product.
Equity crowdfunding is another form of raising funds from the masses, but this form of financing involves giving up some ownership in your company. Under the JOBS Act Title III, businesses can raise as much as $1,000,000 within a 12 month period, from individual investors who can invest up to $2,000 or up to 5% of their net worth or annual income.
8. Personal Savings and Friends/Family
If you are fortunate to have a “Rich Uncle” then you can certainly leverage his experience, resources, and capital to help fund your growing enterprise as he is less likely to pull a credit report on you before he loans you the money. Also using your personal savings or borrowing against your personal savings through the use of shared secured loans (which are usually offered through Credit Unions) are a good way to get financing to grow your business.
Removing Derogatory Listings
If you have a derogatory listing on your report that should have been removed but has not been yet, you can work with the credit bureaus directly to get it removed. That being said, most derogatory listing would remain on your report for about 7 – 10 years:
- Collections: Remain for about 7 years, depending on the type of debt
- Foreclosures: Remain for 7 years
- Late Payments: Remain for 7 years
- Paid Tax Liens: Remain for 7 years
- Unpaid Tax Liens: Might remain for up to 15 years, if they are ever removed
- Judgment Liens/Judgments: Remain for 7 years
- Ch. 13 Bankruptcies: Remain for 7 years
- Ch. 7 Bankruptcies: Remain for 10 years
If the time has passed on any of the above, but the listing is still on your credit report, then you can contact the Credit Bureaus directly to get them removed.