Dealing with a bad credit score may give you the feeling that your business is dead before it has even begun. Banks and business loan providers will often look at your personal credit score before anything else. For aspiring entrepreneurs striving for financial independence and security after the pandemic, this experience can be exhausting.
Working with investors is another way to fundraise for your business. While many investors will want a credit check, you have more leeway for selling them on your vision. Here’s how you can attract investors to your business when you have bad credit.
Start Rebuilding Your Credit Score
Rebuilding your credit score is an ongoing process. As with planting a tree, the best time to do it was years ago; the second best time is right now.
Start by creating a financial management plan that allows you to pay down existing debts. The lower your debt ratio, the better your credit score will become. It’s also helpful to investigate online loans for bad credit, so you can borrow a nominal amount and pay it back on schedule to showcase financial responsibility. If you have negative items like collections or late payments, you can request data validation from the creditors and have them remove the items if they can’t provide them.
If you’re strategic, you can also use a small loan to move your business forward without investors. This could put you in a better position to appeal to investors in the future as your credit score improves. However, it’s important not to borrow unless you can pay it back according to your terms to avoid further damage.
Starting to improve your credit score gives you evidence that you have gone through a rough patch, and now you’re on an upswing. Investors will have more confidence in someone who is steadily improving their credit rather than someone with a stagnant bad score.
Tell a Compelling Story
When attracting investors, you’re selling them your ideas and dreams. Yes, they’ll want to see your forecasting and metrics, but your brand story also plays a pivotal role in their decision-making. For some investors, your story and passion could be the tipping point that encourages them to look past your credit and evaluate your potential.
Start with the problem that your product offering solves for customers. Encompass the emotions your customers feel when they face this problem, how the competition falls short, and why your product is the only viable solution.
Next, dive into how the product and your business model work. Start with the emotional component before moving into the tangible metrics and functionalities.
Purchasing is an emotional decision. One Harvard professor surmised that 95% of the purchasing decision process is rooted in emotion. While investing is more logical and strategic compared to most consumer transactions, there’s an emotional component that can’t be ignored. Investors need to connect with your brand story before they see the financial picture— especially if bad credit is involved.
Highlight Your Team
When pitching investors, the product is only a part of the equation; you’re also selling investors on your team. The challenge many entrepreneurs face when pitching to investors is having a single founder or one-man band. Investors typically have more confidence when a team is already established.
Choosing a cofounder or team can be challenging, especially if you feel protective of your creation. Reach out to trusted colleagues with complementary skills that fill gaps in your offering.
For example, if you’re a developer who has created a specialized social media and fundraising platform for people with cancer, consider who else you might need to make the business work. You might benefit from a marketing specialist, a medical consultant, or an expert in grant writing and fundraising from the non-profit sector.
Put together a dream team, then highlight how the team adds value to the business. Having a trustworthy, talented team also detracts attention from your credit score.
Show Proof of Concept
Investors want to see that your product has merit. Your credit score doesn’t matter if your product offering has no value. Proof of concept is validation that your product indeed solves the problem you’ve highlighted and works with minimal issues. Of course, a prototype isn’t expected to be flawless— you need development funds for that— but it will showcase that the concept works in application.
If you’re presenting a software solution, you can develop a beta program that invites testers to use the software in return for valuable feedback and testimonials.
Slack is known for having one of the most successful beta launch programs of all time, which led to its status as a multi-billion dollar business. During the beta launch, the team encouraged friends and family to try the software and share feedback. They used this feedback to make improvements and streamline the software. Meanwhile, they encouraged users to publicly share their experiences, creating social proof. This showed investors that people saw value in the product, which led them to see the value as well.
The same strategy can be applied through primary market research, hosting focus group sessions, and interviews to collect feedback and data about the product. This feedback also creates tangible targets for resource allocation. As investors want to know how their money will be used to make more money, this feedback is invaluable.
Showcasing financial stability is crucial when trying to attract investors despite having bad credit. While poor credit summarizes financial struggles, there are other signs that your business is financially viable.
One of the best ways to showcase viability is to be proactive in seeking investors. In other words, ask for money before you need it rather than as a rescue mission. Show your investors clear financial documents showing where your business is and how it’s currently sustaining itself. If your business isn’t sustaining itself, be clear on what it needs to get there and how you’re surviving in the meantime. Cash flow plays a powerful role in this stage of the game.
It’s also important to be proactive and transparent when discussing finances and your credit score. Don’t bring up your credit unless asked, but don’t hide it either. Control the narrative and be honest about challenges you’ve faced in the past while shifting the focus to the corrective actions you’ve implemented since.
Some investors won’t care about your credit history; they’ll only care about how much your business can generate for them. By crafting a compelling story and highlighting your strengths and proof of concept, you’ll attract the right investor to your business.