Can I Get a Small Business Startup Loan Without a Credit Check?
Starting or growing a small business might require capital that you just doesn’t have yet. That might mean you’ll have to consider options that don’t include traditional bank loans.
“I have 433 small business that I’ve mentored to launch and (only) six of them have gone through traditional lending,” said P. Simon Mahler, a SCORE mentor and entrepreneur director at Aspatore Ventures.
A 2017 Federal Reserve survey polled more than 8,000 small businesses regarding their financing needs for the year. About 40 percent of the firms applied for new funding. Of those that were borrowing money, 48 percent borrowed from large banks, 47 percent borrowed from small banks and 24 percent from online lenders. And 18 percent also turned to other forms of lending for their capital.
For a variety of reasons, not all of the businesses that applied for financing received what they requested. Two main types of businesses suffered the most. The smallest of small businesses, microfirms, with annual revenues of up to $100,000 — and startups, companies in business less than five years — experienced financing the most, with shortfalls at 70 percent and 61 percent, respectively.
Credit and traditional loans
Your credit history basically shows your track record of how promptly you pay your bills. A lender looks at your credit score to determine how risky of an investment you are. Many traditional lenders like to play it safe — they look for a borrower’s minimum credit score to be at least 680.
Your credit report will also include the number and type of credit accounts you have, your outstanding debt and the age of your accounts. All of those factors will help determine your credit score.
Alternative financing options
Just because a traditional lender might consider you risky because of a low credit score doesn’t mean you actually are. It takes time for a business to build credit and a lot of small things can lead to dings in a personal credit score. That’s why there are still options out there that might not require as high a credit score as a traditional bank business loan.
Even if you’re a newer business, if you have a steady stream of sales coming in, invoice financing might be an option. In an invoice financing arrangement, your invoices serve as collateral and you receive upfront cash based on your company’s average invoice volume. Your credit history will still come into play, but perhaps not as heavily as in a traditional loan arrangement. In fact, the credit of the people who owe you money might be more important than your own.
According to a 2017 small business survey from the Federal Reserve, 24 percent of the businesses surveyed applied for funds through online lenders, and the majority of those were medium- to high-risk credit applicants. Approximately 71 percent of medium- to high-risk credit applicants were able to receive credit from online lenders.
Microlenders are typically individuals who give very small loans, typically less than $50,000. Some government organizations, such as the U.S. Small Business Administration and some nonprofits, offer these types of loan. Those who have lower credit scores or not much working capital might find these small business loans easier to get.
Maybe a credit check is OK
According to the 2017 survey by the Federal Reserve, 87 percent of the companies surveyed relied on the owners’ personal credit scores to obtain financing.
Your credit might not be as bad as you think, plus you still could find financing options, even if it is. FICO is a common personal credit score model creditors use. FICO scores range from 300 to 850. Your FICO score will give you a good idea of how likely it is you’ll be able to get a loan, where you can get it and what kind of interest rates to expect.
Here’s a look at the FICO score ranges and what they mean:
800 + (Exceptional)
This score is well above the national average and consumers with a credit score of 800 or above carry a very low risk for a lending institution. Just 1 percent of those consumers are likely to become delinquent on payments. Business owners with this credit score should not have a problem getting funding.
740 to 799 (Very Good)
Those with credit scores between 740 and 799 should also not have much of a problem receiving loans from lenders. They will also likely be able to get low interest rates on their loans.
670 to 739 (Good)
A score between 670 and 739 is in the “median” range, making the borrower “acceptable.” Only 8 percent of borrowers in this credit score range are likely to become delinquent. What starts to differ at this score is the interest rate, however, which might not be as favorable as for someone with a higher credit score.
580 to 669 (Fair)
This score range is below the national average, and borrowers will find it more difficult to get loan approvals. If they are approved they will most likely end up paying a higher interest rate than those with better credit scores.
579 or lower (Poor)
In this score range, about 61 percent of consumers are likely to become delinquent, which means lending institutions might not issue you credit at all.
Financing options that don’t require a credit check
Invoice factoring occurs when a business sells its outstanding invoices to a factoring company that quickly repays the business a percentage, usually between 75 percent and 90 percent of the invoice value. Once the customer pays the invoice, the factoring company pays your business the remainder of the invoice value minus the factoring charge and fee.
This isn’t a loan, but it can help a small business that might have cash flow problems. Because it isn’t a loan, whether a factoring company will work with your small business or not isn’t dependent on your credit score, but rather on your customers’ credit scores, whom the invoice factoring company is depending on to pay in a timely fashion.
This might seem impossible, but if you are a startup business, “bootstrapping” could end up being impressive to not only investors but potentially banks as well, if you don’t have strong credit, Mahler said. Consider the bare minimum of what you need to get your business going. What is absolutely crucial and can you grow from there? Funding your business might seem less daunting once you strip away all the nonessentials.
Those who are successful in the crowdsourcing arena are marketers who “paint their story eloquently with emotion and passion behind it,” Mahler said. Here’s how crowdsourcing works: You pitch your business idea on a website like Kickstarter and ask for upfront pledges or sales to fund your business. You need to be internet savvy and have a good understanding of social media and internet marketing to be a successful crowdsourcer. You also have to understand the conditions of each of the platforms you might use. “Invest in a good video,” Mahler suggested.
Mahler also warned against relying too heavily on crowdfunding, which can not only be time-consuming, but inconsistent. “When people put all their eggs in the crowdfunding basket, they fail, too,” Mahler said.
Friends and family
The best way to treat loans from family or friends is like you’re getting them from a bank. “Give them interest or equity or monthly payments,” Mahler said.
Draw up paperwork. Stick to an agreement. Business can ruin relationships, so it might not be the safest financial move to keep friends and family close. To avoid those pitfalls, make things as official as possible.
A business plan is nice, and often crucial for securing financing, but Mahler suggests that along with giving potential investors your projections, you explain your passion and story to them. Create a short pitch deck (no more than 13 slides) to help paint the story of your business beyond the numbers. Showing good faith to investors can also be a stepping stone to obtaining loans for larger financial institutions. “One way to bolster a loan application is to find an investor that’s not related to you that will give you $3,000 and you pay them back and you can get a letter from them,” Mahler said. “And then take that into a microlending place or an alternative lending place.”
A good place to find investors for a small business is to plug into your local entrepreneurial community. Conduct your due diligence on each investor and make sure you are comfortable with him or her, then come to an agreement on a term sheet.
Small business grants
It’s worth the research to see if your business might qualify for a small business grant, which means a government entity, corporation or nonprofit helps fund your business. Grants can be open to any small business or targeted at specific audiences, such as female- or minority-owned businesses. Organizations like Challenge.gov, Grants.gov, local economic development administrations and the SBA all offer grants.
The bottom line
Just because you have a low or nonexistent credit score doesn’t mean your business is doomed. There are safe borrowing options for business owners. As a small business, however, it’s important to remember that borrowing more money than you can pay back in the time frame allotted can only hurt your future, both as an individual and as a business. Be honest with yourself about your goals — and the time you need to get there— when you create your business plan and present any investment opportunity to potential lenders.