A Poor Credit Rating Doesn't Erase All Finance Options

Q: I have a great idea for a business, but my credit’s shot. Does having a poor credit rating mean I can never secure financing?

A: Before you pull the covers over your head and give up on the idea of ever raising money, take a deep breath and remember that some of the world’s most successful entrepreneurs went broke many times before eventually succeeding.

While poor credit may disqualify you from obtaining a bank loan, as a startup with zero cash flow you're unlikely to get bank financing anyway. You'll probably have better luck with an investor who knows you, believes in your vision and is willing to put up capital in return for equity in your company.

"An entrepreneur in that situation will need to ask for funds from friends and family," says Helen Poon, a partner at consulting firm Ignition Point LLC, which acts as a virtual CFO to emerging businesses. "Otherwise, especially in today's marketplace, it would be really hard to secure debt financing, and the equity route would force the entrepreneur to give up a lot of the company."

That’s why your first call should be to Mom and Dad. After all, they know you better than anyone and they’ve been there through the good, the bad and the ugly.

But while your parents are more likely to write you a check than a bank or a venture capital firm, there may be some strings attached--such as mandatory appearances at holiday dinners and walking their dog while they’re away. And, while your parents are unlikely to disown you if the business fails, they probably won’t be very happy, either.

That’s why, depending on how well you and your parents get along, it may make more sense to take on a financial partner--even if it means giving up a majority stake in your business to a total stranger to get your business off the ground.