May 3, 2019
Need a business loan but don’t have excellent credit? Don’t worry, you still have financing options that don’t require a FICO credit check.
Instead of being judged on your credit score, you can get a loan based on outstanding invoices or how much money you earn on a daily basis. And you can be approved for these loan options even if your business is less than a year old.
Most importantly, these loans can help you grow your small business in the short term and build your credit over time.
Here’s what you need to know…
There are several reasons you might want to seek a business loan that doesn’t require a FICO credit check.
Most likely, your FICO credit score is not good enough to receive a business loan from a traditional lender like a bank. Generally, a bank will want you to have a credit score close to 800, i.e., essentially a perfect score.
A score of 700, typically considered a good score, will give you a good chance of getting a big loan. If you have a score under 640 points, though, you probably aren’t going to find a lender at any of the large banks. About 34% of Americans with credit scores fall into this category.
Even if you have a score above 640 points, you might have reasons to avoid a credit check. Hard credit checks can damage your score, so you want to take that into consideration.
In either case, you can receive funding without a credit check, even though there will be limitations. In this situation, the amount of the loans will be less and approval will mostly be based on business performance.
Frustratingly, you can find yourself in a cash crunch even though you are owed money. This situation often occurs in the depths of winter, when many consumers are staying in and clients are slow to begin their new annual budgets.
Accounts receivable financing, or invoice financing, is a loan based on outstanding invoices. Depending on how much money you are owed through outstanding invoices, you can receive a wide range of cash. Small business financing platform Fundbox offers accounts receivable financing in amounts ranging from $100 to $100,000.
The mechanism behind an accounts receivable loan is simple enough — you receive a loan against money due according to your invoices. Once you receive that money, you pay back the loan, plus interest and any fees.
The loan is based on your invoicing documentation instead of your personal credit score, which is why a FICO credit check isn’t required.
“What if a February sales slump takes you by surprise?” explains Rieva Lesonsky of Fundbox.
“Getting financing such as a business loan can take weeks or even months, but you need the money right now. Fundbox invoice financing is an ideal solution because signing up is fast and easy.”
An accounts receivable loan is different from invoice factoring, another common financing method for small businesses. With factoring, a company buys up a portion of your outstanding invoices in order to collect from your late-paying customers — for a fee, of course.
Typically, a factoring company will only provide you with funding for a fraction of the total invoice value. With accounts receivable financing, you can receive up to 100% of your invoice value.
Unlike factoring, you remain in charge of collecting on your invoices; therefore, customers won’t know that you borrowed money. You prevent customer confusion about why another company is contacting them or concern that your business isn’t healthy.
As the name of the loan suggests, you need to have outstanding invoices to receive accounts receivable financing. The whole system relies on how much money you are owed, so this documentation is crucial. If you are seeking a quick inflow of funding but don’t have outstanding invoices, you will want to find another method of financing.
Even though these loans don’t require a FICO credit check, lenders still need to know you have some business history. This timeline is important so you can demonstrate that you have legitimate customers and have shown the ability to collect on your invoices.
Because these services are typically online, you need to have accounting software so you can securely share your data with the company. These companies will want to have an authoritative look at the financial health of your business, which is why accounting software is required. Intuit QuickBooks, FreshBooks, and Xero are a few of many available options.
Although a FICO credit check isn’t required, most companies will not approve you for accounts receivable financing if you have a bankruptcy on your record.
Along with not having a bankruptcy on your record, you need to provide evidence that your business is earning revenue. Although the bar is fairly low, this helps the lender decide that you can pay back the loan with interest.
Many consumer-facing businesses, like restaurants or retail stores, don’t operate using invoices. Instead, these types of companies are often paid via debit or credit card transactions. Lenders developed a program predicated on your future sales based on your credit card receipts to provide quick capital for restaurants and stores.
Nowadays, though, this option is available to almost all small businesses in the form of an ACH cash flow loan.
For many businesses, ACH cash flow loan lenders look at the average daily balance of your business checking account instead of credit card receipts. Credit card receipts are used more often for a type of loan called a merchant cash advance, which is fairly similar to an ACH cash flow loan besides this important distinction.
The ACH refers to Automated Clearing House, which is the system these lenders use to draw small repayments from your business bank account over fixed intervals. These intervals are usually daily or weekly and are agreed upon beforehand.
The repayments for this type of loan are similar to how you might automate utility payments, for example.
Instead of requiring a high credit score, these lenders, like Elevate, base their decisions on your agreement to pay back the loan on a constant, repeating basis.
It is this recurrent access to your bank account that reduces the risk for the lender. If business slows, the repayment period can be extended — with some fees likely, of course. If business increases, you can repay the loan faster.
Although the interest rate is usually higher than traditional bank loans, ACH cash flow loans are a fast way to raise a significant amount of capital for needs like repairs to your storefront.
These loans could make sense for you if you have a low FICO credit score but a healthy amount of money coming into your business bank account on a consistent basis.
Because this type of loan depends on your ability to make smaller, repeated payments, the minimum time you need to have been in business is shorter than accounts receivable financing. Still, you need to show that your business exists and is operational.
ACH cash flow loan lenders will not approve applications from several fields of business: adult entertainment, automobile dealers and parts, legal services, mining, oil and gas extraction, firearm sales, gas stations, transportation and warehousing, travel agencies, and wholesale trade. If you are unsure that your business might operate in one of these industries, contact the lender to see if you can apply.
The minimum monthly sales requirement is higher for ACH cash flow loans because a portion of this amount of money will be taken out every day or week to repay the loan. The lender has to be satisfied that you can keep the business healthy while repaying the loan at the same time.
The person applying for the loan must be the majority owner of the small business.
Businesses can qualify for ACH cash flow loans if they make either $10,000 per month in bank deposits or $7,000 per month in credit card transactions. If you are planning to apply based on bank deposits, you must average 6 bank deposits per month over the past 3 months.
Like with the accounts receivable financing, you must not have any open bankruptcies on your record.
For both these types of loans, lenders will usually need a Social Security Number to determine if you have any bankruptcies or if there are any active liens against you. However, they will not be looking at your FICO credit score.
In many cases, there will be a soft inquiry on your credit when applying for these loans. For example, Lendio does a soft pull during the application process to see which products you qualify for. Unlike a hard inquiry, soft pulls do not impact your credit score at all. Basically, you are the one who requests a hard inquiry, typically for an application for a loan, employment, or lease. A soft inquiry, on the other hand, is requested by a person or organization other than you.
In the end, you are seeking a loan without a FICO credit score check, which is the standard way lenders decide on your trustworthiness, like it or not. Alternatives like these loans won’t be able to offer you the scale or interest rates a standard bank loan carries. These loans are usually smaller, often around $10,000, and will commonly have a higher interest rate. You likely won’t be able to qualify for a loan more than twice your monthly revenue. Also, payback time for these financing options generally ranges from 3-6 months.
By taking out these loans in a responsible manner, you can work to build your credit. Paying off both of these types of loans on time will help boost your credit score, especially because the repayment period is so condensed. Remember, no initial damage is done to your credit score when applying for these loans because no hard pull is required. However, any benefit to your credit rests upon your ability to pay back the loans on time, so be responsible.
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.
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