Getting a Startup Loan with No Credit
The problem for many entrepreneurs is that their new business hasn’t yet had a chance to establish a track record. If a lender’s usual qualification metrics are based on longevity, they need to take a different approach for startups.
Rather than look at business credit, they’ll focus on your personal credit score and overall business experience. This approach works because the 2 scores share so much DNA. At its core, a credit score is a formula that lenders use to predict whether or not you’ll repay the money you borrow.
As far as predictions go, it’s much more accurate than a crystal ball. It draws from data showing how consistently you’ve repaid your bills in the past, as well as whether or not you make full or partial payments. So if you have always taken care of commitments like your mortgage and car payments, there’s a good chance you’ll approach your loan payments with that same degree of discipline.
The fact that lenders can lean on a personal credit score for startups is great news for small business owners who have solid credit scores. Their financial history will not only put lenders’ minds at ease but will also qualify them for lower interest rates and more favorable repayment terms.
But the entrepreneurial life is notoriously challenging and fickle, so many applicants find themselves with serious issues on their personal credit reports. For borrowers with low scores, online lending platforms can be a match made in heaven. Lenders on these platforms are more willing to play ball. In some cases, they won’t even do a credit check. And they might even offer generous rates and terms to those who’d be promptly shut down by a traditional lender.
When your credit score is less than stellar, it’s important to let your business experience shine. Remember, it shares equal billing with your financial history. Be sure to make a compelling case in your application for why a lender should trust you with their money.
For example, if you’ve worked for 7 years in your business’s industry, make sure to highlight that fact. Then select a handful of crucial lessons you’ve learned during that time so you can weave them into your business plan. Like a college professor, your tenure can become your calling card.
The Best Small Business Loans for Borrowers with Credit Issues
While there are countless loan products out there for entrepreneurs, those with low credit scores often find the most success with ACH loans, merchant cash advances, or business lines of credit. These 3 options are uniquely structured in a way that makes your credit score less important.
This doesn’t mean you can simply stroll up and qualify for financing with an awful credit score. But if you have experience in your industry and some positive aspects appearing on your credit history, you’ll have a fighting chance of getting approved.
Here are some crucial details regarding these 3 financing options:
1. Business lines of credit: If you can use a credit card, you can use a business line of credit. The amounts range from $1,000–$500,000, with the money becoming available in 1–2 weeks. Rates start in the neighborhood of 8% but can go all the way up to 24%. The financing typically has a 1- to 2-year maturity.
A business line of credit is engineered for flexibility. If your restaurant needs a new fryer, buy it. If you need to hire employees, go for it. If you want to bulk up your inventory, do it. Nearly any expense that goes toward starting and sustaining your business is fair game.
Like credit cards, this type of financing gives you access to revolving credit. This differs from most loans, which give you a lump sum of money. With a line of credit, you simply dip into it whenever necessary. There’s no pressure to spend it, and you’ll only need to pay for what you use.
The qualifications for a business line of credit are quite lenient. Your credit score should be 560 or higher. And it’s helpful to have been in business for at least 6 months and make $50,000 or more in annual revenue.
2. ACH loans: One of the reasons these loans are popular is their rapid funding. Once approved, you can often get the money in just a couple of days. This quickness can be a substantial advantage for small businesses in the startup phase.
Of course, just as with ultra-fast sports cars, you pay a premium for that speed. On either a daily or weekly basis, the lender will take an agreed-upon amount from your bank account as an ACH deduction (hence, the name). The amount you can borrow is usually lower than you might get with other loans, but that’s a fair trade-off for the convenience they deliver.
This financing option is known as a “cash flow” loan because the daily balance in your bank account is what truly matters. And because the focus is on your current and future finances, your history is far less likely to be scrutinized. When you consistently have a substantial balance in your business account, your credit score is less of a hindrance in the approval process.
3. Merchant cash advances: Similar to ACH loans, merchant cash advances (MCA) enable you to borrow against your future earnings. The amounts range from $5,000 to $200,000, and the money can become available in just 24 hours. The interest rates can be steep, starting at 18%.
Repayment begins as soon as the money hits your account. Unlike an ACH loan, which is repaid as a fixed amount, this form of financing is repaid with a predetermined percentage of your daily credit card deposits.
The qualification process for a merchant cash advance is quite simple. You won’t need to assemble mountains of paperwork or track down obscure documents. Most likely, the lender won’t even ask you for collateral. The main thing the lender will want to review is your past 4–6 months of bank statements or receivables.
In some cases, the lender won’t even pull your credit. On top of that, your personal risk is lower than it would be with many other small business loans.
“One of the other benefits of an MCA is that a personal guarantee on the money is not always required,” says Forbes. “The advance often can be strictly in the business’s name. That means your personal credit as the business owner won’t necessarily be attached to the advance and that you may not personally carry any liability. There are times when a personal guarantee or collateral, such as real estate, may be required, depending on the amount of the advance you’re requesting. Typically, if you stay within 100% to 150% of your monthly revenue stream, a guarantee won’t be required.”
All of these benefits add up to make a merchant cash advance desirable to all kinds of small business owners. It’s a versatile financing option that offers convenience that’s hard to beat.
How to Choose Your Best Loan Option
The first step to finding the loan that matches your business needs is identifying how much money you’ll need to borrow. Business lines of credit offer up to $500,000, while ACH loans and merchant cash advances provide far less. In this way, knowing how much you need can help eliminate options in a hurry.
“The source of funding you choose is often determined by the amount of money you need and your business model,” explains Forbes. “Each business trajectory is different, and your capital needs will largely be determined by your startup costs, infrastructure needs, and operational overhead.”
Likewise, you’ll need to decide how quickly the money should arrive. ACH loans and merchant cash advances can fund in just a couple of days, but business lines of credit can take up to 2 weeks.
Next, you’ll want to crunch the numbers and see which loan gives you the best bang for your buck. There are plenty of easy-to-use loan calculators available, so don’t worry if math isn’t your strong suit.
A common issue that small business owners face is lenders using inconsistent metrics and factoring. When disclosures vary from lender to lender, it’s hard to line up comparables and make an informed decision.
The Innovative Lending Platform Association saw this problem and decided to come up with a solution. They partnered with several of the top lending platforms in the industry to create a comparison tool they call SMART Box™ (Straightforward Metrics Around Rate and Total cost). With this resource, you can decipher various pricing metrics and find a common language between financing options.
“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, president and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”
Currently, you will find versions of SMART Box™ customized for business lines of credit and merchant cash advances. Because ACH loans share so much in common with merchant cash advances, you can draw some similarities from the process as well.
SMART Box™ is a helpful tool, but it will never replace the need for good ole’ fashioned due diligence. Take your time as you review your loan options. This can be tricky when you feel pressure to get fast funding, but it’s never wise to rush into a situation where you’re borrowing a large sum of money. Proceed with caution and you’ll encounter far fewer surprises down the road.
Work to Bolster Your Credit Score
It’s true that merchant cash advances, ACH loans, and business lines of credit can provide financing even when your credit is unimpressive. But that’s no reason to accept the status quo. You should put effort into improving your credit, which will open more doors to you in the future. Not only will you qualify for more loan products, but you can also receive more favorable interest rates and repayment terms.
“You may hear a lot of theories about tricks to quickly fix your credit, but there are 2 things you should focus on above anything else: Always pay on time, and keep your rotating account balances low,” explains a credit guide from Business Insider. “If you can do those 2 things and resist the urge to tinker with your credit report, much of the rest of your credit will take care of itself.”
In order to maintain stellar payment history, sign up for automatic payments whenever possible. This practice may sound obvious, but a surprising number of small business owners still neglect it. Making manual payments might seem fine, but the chaos of entrepreneurship usually intervenes and you ultimately miss one or more obligations.
To avoid this fate, always automate your payments. If you can’t sign up through the payee, just add them to your banking system. At the very least, make a regular calendar reminder so you won’t be forced to rely solely on your memory.
Another way to reduce negative forces on your credit score is to proactively monitor it with the 3 major bureaus: TransUnion, Experian, and Equifax. Did you know that 1 in 5 Americans has a mistake on their report? These errors will linger as long as you let them, so regularly check to make sure you aren’t being dinged for something incorrect.
If you do find a problem, take immediate action to remedy the situation. You can submit a complaint and clear your report. It won’t be long before your credit score enjoys a corresponding bounce.
Entrepreneurs are notorious for putting their heart, health, and soul into their small businesses. They work long hours to build something from the ground up. This legacy is certainly worth celebrating. Just remember that amidst the daily grind, your credit score is a behind-the-scenes force impacting multiple aspects of your business. And the positive actions you take to help your score can add up in a major way.