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The first column of this series addressed planning for business expenses. This week I’m exploring funding for credit challenged individuals. With tougher credit standards imposed since the mortgage loan debacle began escalating last fall, securing additional funds will be more difficult with personal credit problems. It is essential to plan for as many contingencies as possible, think creatively, and focus on details before you seek funding.
While your personal credit may be damaged, it is important to take action to improve it at the same time you are building excellent business credit. You might be tempted to use personal credit cards to pay business expenses. However, you must avoid charges exceeding 30 percent of the available limit on any personal credit card to ensure that your personal credit ratings will improve.
Here are five potential sources for start-up money:
- Small Business Administration (SBA). There is a myth about accessibility of SBA loans. You must have good personal credit to qualify for an SBA loan. If you’re considering an SBA loan, make an appointment with the SBA loan officer at a local SBA Preferred lender. Ask to have your personal credit checked. Tell the loan officer you want to know if your credit is strong enough to qualify for an SBA loan. You need to know before you devote many hours to preparing the loan package.
- Find a partner. If you have a superb idea and believe strongly in the potential of your business, you will be able to find a financial partner who will loan you the money to start it. You can draw up a lending agreement that clearly defines the way you will repay the loan and buy out your partner’s interest. While you may need a partner to start, it does not mean you must keep a partner indefinitely.
- Involve family and friends. Rather than thinking about borrowing from one person, consider dividing up the amount of money you need and ask for small amounts from several people. Someone may feel comfortable loaning you $500 while they would never consider loaning you $5,000. Be sure that everyone is paid the same interest rate. Spell out, in writing, exactly how you will repay funds. Don’t leave anything open to interpretation. And be realistic about your timeframe. You may be acting with sincerity and integrity, but if someone believes you’re not meeting promises you made, it can cause unnecessary conflict. Work out all the details before you accept a loan.
- Prosper.com. I wrote a column about new ways to borrow. (See Two New Approaches to Personal Loans.) One of the sources featured is Prosper.com. Prosper is the leading people-to-people lending marketplace. If you have a strong business idea and can present compelling reasons why people would want to loan you money to start your business, this might be the perfect funding vehicle for you.
- Sell to Buy. Carefully examine what you own that you could sell to generate cash. If you have an attic, basement or garage full of stuff, you might want to clean it out with a giant eBay sale. I’m always surprised by how many people overlook the value of their unused clutter. When our only revenue-generating outlet was a garage sale, sometimes it wasn’t worth the effort required to sell it. Now, with Amazon and eBay marketplaces, a considerable amount of cash can be generated by a major clean out.
Another alternative, when you’re cash and credit challenged, is to start small. While you might want to launch with all the bells and whistles, many businesses can be ramped up at a gentle pace, allowing revenues generated to fund company growth — sometimes called bootstrapping. This is the way Apple Computer started. The founders built and sold a few computers at a time to buy parts to build more computers. There are some unique advantages to this approach. If you’re starting a business with products or services that are new to you, beginning small and growing gradually gives you the opportunity to make smaller mistakes. It can be a great way to learn inexpensively.
If you are committed to building an exciting enterprise, there are many ways to start. Explore. Be flexible. If one path doesn’t work, believe you will find a way to launch your company without using personal credit. And employ the credit building tools in my series, You Can Build Awesome Business Credit, to create a strong company credit foundation so your business will qualify for funding to grow in the future.