Last post: Oct 10, 2019
When your credit score isn’t too healthy, it can be a challenge to raise the business capital that you need to grow. But does that mean that you should be denied the opportunity? There are funding routes out there that a business with bad credit can take to ensure that they can move forward.
Enter, alternative finance. It's a great option for a business with bad credit and often, it's the only option. High street banks have a pretty tight criteria when it comes to lending, but alternative business finance can help when you have a mark on your credit history - a merchant cash advance in particular.
What is bad credit?
Bad credit is a product of failures to keep up with payments on credit agreements or other financial obligations. Your credit report will also take into account things like bankruptcies and legal judgements against you. It's all these things that can make obtaining traditional loans from conventional lenders difficult for a business.
Alternative business lenders recognise that some businesses haven't had the smooth start that others have had. Perhaps they've had cash flow problems, or staffing issues and supplier disputes. That's why they take a more holistic view of a business, rather than focusing on a business's credit history.
How can a merchant cash advance help?
Depending on the nature of your business, a merchant cash advance might be one of your best options. It's not for everyone, as a merchant cash advance relies on a business making the majority of their money through credit card terminals. With this in mind, it works really well for restaurants, bars, salons and shops but doesn't work quite so well for plumbers or marketing agencies, for example.
Typically, you can take out the equivalent of your average monthly turnover and you repay this, plus a small fee, through your card receipts until the finance is repaid to the lender. It's essentially a purchase of the business's future sales. The money you borrow can be put towards new equipment, new stock or to get you out of an emergency situation such as a burst pipe.
One of the biggest draws of a merchant cash advance is that you're not required to pay the money back over set dates in time, as with a traditional bank loan. Instead, you make the repayments proportional to your credit card turnover. If you go through a peak period, such as a gift shop at Christmas would, you pay back more of your merchant cash advance. If you go through a lean period, you pay back less.
Tips on taking out a merchant cash advance
Merchant cash advances have a high approval rate, which is good news for a business with bad credit. Make sure that you are upfront and honest with your lender about your finances when you're applying for a merchant cash advance. It's important to remember though that you are being lent the money on the basis that you will pay it back, so there needs to be an element of trust.
There's no quick fix when it comes to improving your credit score. It takes patience, consistency and following general good practice guidelines; paying your bills on time, paying off outstanding debts and keeping balances as low as possible on any revolving credit, such as credit cards. Make sure you're on top of your finances as much as possible with all your paperwork in order, and do what you can to demonstrate good cash flow.
Given all the advantages, it's no surprise that merchant cash advances have been massively on the rise. Businesses with bad credit are increasingly deciding to use their future credit card receipts as a means of securing quick funding through this popular form of alternative finance.
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