A bad credit record is a common stumbling block for many small businesses who apply for finance. Fortunately there are still a few finance options you can explore but the success of these will largely depend on the causes of the bad credit record.
The majority of lenders want to see both your business and personal credit records. They use these records to assess the risk of lending you money. The credit records tell them what accounts you have, your payment history and any court orders issued against you or the business. If you have a good history of paying your debts, you will be seen as a low risk customer. If you have a poor credit rating, many lenders will reject your finance application.
A bad credit rating is an obstacle but it doesn't have to be the end of the road for you as an entrepreneur. There are alternative ways of finding finance. A bad record just makes it considerably more difficult. Let’s have a look at some of the options you can try:
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The good news is that it's possible to restore a business’ credit record, although it does take time.
Here are some action steps that can help you deal with your bad credit record:
The office of the Ombudsman reports that complaints from businesses are far too rare and urges a more proactive approach by business owners. To date, most complaints have been from business owners who had been blacklisted in their personal capacity for business debts, even though they haven’t signed personal surety for the unpaid debts of their companies or Closed Corporations. These complaints are routinely upheld by the Ombudsman and rectified by the bureaus.
The Credit Information Ombudsman can be contacted on 0861 662 837.
In South Africa, a bad credit record will almost certainly disqualify you from formal, institutional lenders, such as banks. However, the Small Enterprise Finance Agency (SEFA) has a mandate to assist small businesses with access to finance and they might be willing to work with you even if you have a bad credit record. Before you approach them, you must have prepared a document that clearly explains how the bad credit record came about, what steps you have taken to rectify it and what you have done to ensure that your credit record remains clean in the future. It is a good idea to read the modules in the What are Lenders looking for? section as this provides you with valuable information about what lenders offer as well as what they are looking for in order to approve a finance application.
Contact your nearest Absa branch to find out more about this fund.
Smaller lenders are often more willing to work with you to understand how your bad credit rating occurred. If you can convince them that you have learnt from the experience that caused the poor rating and that this will not happen in the future, they might well consider your finance application in a favourable light.
The amount of finance you require and how this money needs to be spent will determine whether government grants can assist you. In general, grants are available for smaller expenditures and some of them require you to match the grant. That is, if the equipment you want to buy costs R500,000 then you can apply for a grant of R250,000 and you will have to fund the remaining R250,000.
Family and friends know you and if you have a good relationship with them, there is a good chance that they can assist you with smaller amounts needed for your business.
Depending on the stage and state of your business, you might want to consider selling shares in your company. This is called equity investment. Early stage companies could consider Angel Investors whilst more mature companies can follow the Venture Capitalists route.
Either way, you would need to prepare explanations for the reasons why your credit rating is poor. Fortunately, Angel Investors and Venture Capitalists are business people and they understand that issues can arise that cause negative credit ratings. However, they will want to hear your explanations so that they can decide for themselves whether you and your company are worth investing in.
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.