It’s easy to understand why business lenders want to run a thorough credit check on potential borrowers. After all, a business’s credit report shows those potential lenders how consistently a potential borrower has paid back its small business loans, how much debt it’s currently carrying, and how heavily it’s leaned on any existing lines of credit. The problem is that many companies with poor credit also need financing. And while these funding options often come with higher interest rates than other forms of lending, there are several ways of acquiring funding for a startup business or company with bad credit.
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Types of Financing Without Credit Checks
Each of the following no credit check business loan options won’t require a hard pull on your company’s credit. Instead, these small business lenders care more about annual revenue, time in business, and your company’s industry than your payment history. However, like every other type of business loan, these categories each have benefits and drawbacks, pluses and minuses. You should have a firm idea of why you need funding, what that funding is going to be used for, and exactly how you’re going to be able to pay these lenders back (if necessary).
The first way to raise money without a credit check is to use one of several forms of business funding built around transactions, not loans. The lenders underwriting traditional loans want to see your credit history because they want to see how you’ve dealt with debt in the past. Not so with these alternative lenders. Instead, they have other metrics that determine how readily you’ll be able to pay them back (and, as a result, how likely they are to earn money). It should be noted that these two business financing options are not loans, and are thus not subject to many of the laws and regulations associated with the lending industry.
Merchant Cash Advance
In a merchant cash advance, or MCA, the provider of the advance isn’t going to be preoccupied with your company’s creditworthiness. That’s because an MCA is the act of your company selling a portion of its future debit and credit card sales. Your repayments on a bank loan don’t matter as much to an MCA provider as your current monthly revenue does.
MCAs move very quickly. Many companies receiving them see the cash hit their bank account as soon as hours after they press “submit.” MCAs are also very flexible. The cash can be used as a working capital loan, to finance equipment purchases, or as short-term cash flow injections.
Payback works by the MCA provider taking a percentage of each debit or credit card transaction daily or weekly. That percentage means that your company will pay more back when it’s busy and less back when it’s slow. If you’re giving 15% of your daily transactions and your company makes $1,500 on a particular day, you’ll pay back $225. If your company earns $20,000 on a different day, you’ll pay back $3,000. While paying less on days when you earn less can be beneficial, the large payments don’t actually get you a head on your payback, since there’s no benefit to paying an MCA back faster.
That’s because they use factor rates, not interest rates. A factor rate is typically a number between 1 and 2. Multiply the size of the advance by the factor rate and the product is the total repayment amount. If you take a $5,000 MCA at a factor rate of 1.2, you’ll pay back $6,000, even if you’re able to repay it within a week.
There’s often no hard credit check on MCAs because what matters to MCA providers isn’t your history of paying debts. Instead, what’s important is the quantity and volume of your card transactions. If you can demonstrate that your company processes a ton of credit and debit card sales, that’s what an MCA provider is looking for.
While an MCA involves buying a chunk of a business’s future sales, invoice factoring involves the sale of a company’s outstanding invoices. An invoice factoring company pays your company a percentage of the total of outstanding invoices and collects the invoices.
There are a few downsides to invoice factoring, along with a couple of limiting factors. There are a few eligibility restrictions for invoice factoring. For example, many factoring companies require you to have a significant amount of outstanding invoices, and you do take on some degree of risk by allowing a third party to handle the acceptance of payments for your company. However, invoice factoring is a simple and fast way to receive an infusion of working capital when it’s needed.
Financing Through a POS System
Depending on which point-of-sale system you choose to use, they may offer their own financing option. These companies will often use data from within their own POS software to determine an appropriate loan option instead of going through your company’s credit history. Each of PayPal Working Capital, Shopify Capital, and Square offer loans in similar ways.
These funding options work by examining your company’s POS account history. When you apply for a loan, you’ll be offered a loan amount and a percentage of each day’s transactions that’ll go toward repayment. Your total interest won’t grow over the course of the life of the loan, and as long as you pay a minimum percentage of the loan every 90 days (depending on the repayment terms) your loan will remain in good standing. Since these loans use your POS account to determine these factors, they don’t require a credit check or personal guarantee.
Many entrepreneurs see crowdfunding as a strong alternative to lending. If you’ve got an established base of customers, crowdfunding can be a simple and effective way to add working capital in times of need. There is any number of platforms available online for crowdfunding, from Kickstarter to GoFundMe to IndieGoGo.
These platforms are best used if you’re looking for funding to create a new product. You can offer early access, personalization, and other rewards for supporters offering more funding.
Crowdfunding has a few benefits. While it’s not as assured as a merchant cash advance, for example, it’s a pretty obvious way of making sure that your project idea is a good one. After all, if your customers are willing to help pay for your company to be able to offer the product, that’s a good sign that customers will be willing to pay for it.
Finally, there’s equity financing. While seeking out a traditional business loan means needing to pay back that loan with interest, equity financing means selling a percentage of your business to an outside investor. You won’t need to pay back equity, but it doesn’t mean giving up a significant percentage of your company’s profits and decision-making powers. You’ll need to incorporate additional decision-makers and profit sharing into your business plan.
Building Up Credit
The last option is, of course, waiting until you’re in a better place credit-wise before starting the application process. Small business owners are anxious to expand and grow, but showing some patience with your business credit score can lead to much more favorable loans down the line.
With good credit, and thus a willingness to allow financial institutions to do hard credit pulls, you might find your business qualifying for a number of far more favorable types of loans, including:
Business lines of credit. Business lines of credit are revolving lines of credit in which a business can withdraw cash up to an agreed-upon credit limit. These loans are helpful because borrowers must only make payments and pay interest on any money drawn under the limit.
Equipment Financing. Equipment financing is a form of financing based on buying, upgrading, replacing, or renting equipment. The borrower makes a down payment and if the lender makes a loan offer, the remainder of the price of the equipment is financed. If the borrower can’t repay the loan, the lender can repossess it and sell it to recoup value.
SBA Loans. SBA loans are guaranteed by the U.S. Small Business Administration. Because lenders don’t face huge risks in underwriting these loans, they’re often offered with minimal interest rates. There are also several loan programs within SBA loans, including microloans. Microloans are offered through community-based nonprofits and sometimes are offered to new businesses or those with bad credit.
Business Credit Cards. These cards function much like personal credit cards and are used to make purchases for businesses. Like personal credit cards, they offer cash back and other rewards to help your business keep costs as low as possible.
Term Loans. While there are several term loans available without a credit inquiry, most substantial loan products do need a hard pull, and often require at least fair credit scores in order for the lender to approve the loan application.
Building up your credit means improving one of the several criteria used to calculate those scores. While you won’t be able to affect the age of your credit history or the industry you operate in, you can absolutely pay down any existing debts. Paying down those debts means improving your credit utilization rate and your total debt, both of which improve your business credit score.