If your credit rating is too low to take out a traditional loan, you might have better luck with the options in this article.
Many smaller SMEs are deemed not creditworthy by finance and credit providers, further increasing the odds of growth and survival for larger competitors and more established businesses.
Cash flow issues can starve growth. And often these issues are outside of your control. Such as late invoice payments.
If your finance provider says you’re not creditworthy enough to borrow money, what options are available to you?
If you’re not creditworthy enough for a low interest, long term loan. You could get access to a high interest, shorter-term loan.
But it’s risky.
Most traditional loan providers say you’re not creditworthy enough to lend to, so the providers of short term loans want to make the additional risk worth it.
Expect to pay upwards of 10% (compared to 3.75% for a credit stretch).
There are very few occasions when a loan like this makes sense. If you need money very quickly and can pay it back within a few days/weeks, for example.
So if these loans aren’t the answer, what other options do you have?
P2P lending sites, like Lendino in Denmark and Funding Circle in the UK, offer anyone, business owner or not, the chance to invest a small sum into an SME.
Rates can be between 1.8% and 7% and some companies, like Funding Circle, don’t require repayment until 12 months later.
Decisions take around 24 hours. And the criteria for creditworthiness is lower than with a traditional loan.
However, they require a lot of information from you; including full bank statements for the past six months, all daily financial transactions, P&L statements, balance sheet information and more. So expect that to take some time.
If you’re looking to expand your operations, this is a good option for you.
If you’re looking for something faster, that doesn’t require so much information and admin to get started, you may be interested in our next option.
A credit stretch
A credit stretch, from Fellow Pay, doesn’t care about your creditworthiness. If you’ve been turned down for a loan due to your credit rating and you’re dealing with clients that our tool deems creditworthy, you will get finance from us.
If you’re a small business with more established customers, there’s a very high chance that this option will work for you.
Not only that, by taking out a credit stretch you will offer your customer 60 days extra pay their invoice.
A credit stretch is the only finance option that provides a benefit to both the buyer and the seller.
If you really want that traditional loan, you could get a guarantor. But it’s only advisable if they have a legitimate interest in the business.
A business partner or wealthy friend will do.
Commonly, they will put a residential or commercial property they own up as security for the loan.
I don’t need to tell you what level of responsibility this puts on you and the risk this adds to your guarantor.
The lender will need to see that the deal makes sense from a business perspective. That removes parents and family from acting as your guarantor unless they’re involved in the business with you.
This option doesn’t make sense to me.
It would make more sense to pitch a successful friend or business partner to invest money into your company for a small shareholding. Then you’re really in it together and you have another experienced business brain who can help you to grow to the heights you envision.
A good option, but takes A LOT of work to set up and promote.
Mainly for new businesses or companies who are launching a brand new product. Not a good option for companies that lack creditworthiness and need a loan to support themselves through hard times or a period of general growth.
The best options
There are two best options and they depend on what your goals are.
If you have plans to add an extension to your office or need the money to launch a new product line, choose P2P lending. You can get long term loans at reasonable prices that you won't start paying back for 12 months.
Alternatively, if you have completed work for a customer (or a range of customers) and want the money now, even though payment terms are 30, 60 or more than 90 days, you should opt for a credit stretch.
The credit stretch is the least risky option seeing as you’re borrowing money against work you’ve already completed and you’re able to offer those customers access to 60 extra days to pay the invoices, that they can use to continue their growth.
So, your next step is to decide what your goals are and then start the application.
With Fellow Pay, it’s as simple as creating an account, letting us know the total amount of your invoices, waiting to find if your customer is creditworthy (2 mins) and then getting the money the second you and your customer sign the agreement.