If everyone who wanted to start a business had perfect credit and plenty of cash to fund their endeavors, there would be many more innovative companies out there. As it stands, it can be difficult for people with less-than-perfect credit to get their businesses off the ground.
It's particularly hard to get loans at big banks, where loan approval for small businesses recently hit a new high of 27.2 percent. That means, of course, that more than 77 percent of loan applications are still being rejected. Even at small banks, where the approval rate is higher, it's still below 50 percent.
High credit score minimums account for part of why it's so difficult to get a loan. Personal loans usually require no lower than a score of 640, but you need a score of 800 or above to get approved for a business loan.
No wonder so many entrepreneurs try to avoid credit checks.
Why do lenders do credit checks?
When you apply for a credit card or loan, you allow the creditor to request a copy of your credit report. This is where the lender learns about your borrowing history, which includes:
- How often you’ve paid late
- How many of your debts have gone into default
- How long you've been using your credit
The information in your credit report aggregates into your credit score, a three-digit number between 300 and 850. The more negative events you have in your report, the lower your score gets and the harder it is for you to get a loan.
Hard vs. soft credit checks
Credit checks can affect your score as well, though not all of them will. Some are known as “soft inquiries,” meaning that they're not associated with new credit applications. For example:
- An existing lender checks your credit to update your account
- You check your own report to keep an eye on your finances
- An employer checks your credit as part of a standard screening
Soft inquiries don't count against your credit score. Hard inquiries may cause your score to drop because they indicate an application for new credit.
All new credit applications and accounts only count for 10 percent of your score, so the effect of a hard inquiry is minimal. However, when your score is already low, every point counts. How can you get some money to get your business moving without a credit inquiry?
New business loans, no credit check: what are your options?
There are lenders who offer small business startup loans with no credit check, but you need to know where to look. Here are five possibilities to get you started.
1. A small business line of credit
Most loans offer you a lump sum of money, the total of which you and your lender agree on when you apply. A line of credit is more flexible. Your lender specifies a limit and you can borrow up to that limit according to your needs.
Lines of credit can be ideal for developing businesses because you don't have to borrow everything at once. You can take out what you need, start repaying, and then take out more if an expense comes up.
Some lenders will conduct a credit inquiry before approving a business line of credit, but many won't. Instead, they'll look at how your business is performing and how a line of credit might help you to stay in the green.
Unfortunately, because a lender will want to see your business books before approving you for a loan, you might have trouble getting one if you've been in business for less than six months.
2. A merchant cash advance
When a business needs capital and can expect enough future sales to repay that money in the near future, a merchant cash advance may be the way to go. The process is most common among businesses that frequently take debit or credit card payments through a merchant services provider, but those with other business models can arrange alternative forms of repayment.
Merchant cash advances, or MCAs, are usually lump sum payments that you pay back in fixed automatic bank withdrawals or a percentage of your credit card sales.
You can usually qualify for an MCA by providing your credit card receipts, but be aware that some lenders might check your credit score. Make sure it won't be a hard inquiry. Either way, though, you might be committing to an interest rate well into the triple digits and daily or weekly payments.
If you're an entrepreneur needing short-term cash, a microloan can often get it to you quickly. The application process is fast and designed for new businesses so you won't need to present a business credit score.
The qualifications for a microloan vary by lender, but you'll usually have to explain why you need the money and how you'll use it. You'll also need to document how you intend to repay the loan. Once you meet all the requirements, though, you can get your money within a few days.
As always, make sure you look carefully at the application terms. Some lenders don't require credit checks to give you a loan but might ask for your scores to determine your rates.
4. Equipment financing
If you need a loan to buy equipment for your business but don't have the cash to pay for it in full, equipment financing may help you get it. The equipment itself serves as collateral for the loan, which means that you can qualify without submitting extensive financial documentation. Financing is also tax deductible up to $500,000.
Unfortunately, it also comes with a fixed interest rate of up to 30 percent. That means you'll ultimately end up paying more than the item is worth. And if it takes you a long time to pay it off, you might find yourself with a fully paid piece of obsolete equipment.
5. Your own home equity
If you're a homeowner as well as an entrepreneur, you may have considered tapping your home equity. You may have also gotten discouraged because home equity loans and HELOCs require you to have good credit.
There is another way, and it doesn't require a credit check at all. It's called Sell and Stay by EasyKnock, and it allows you to sell your home while remaining in place as a tenant. You pay rent to EasyKnock until you're ready to relocate or repurchase the property.
It's not a loan, so you're not putting your home at risk. Instead, you get a percentage of the equity you've built up, free and clear, and you don't have to go through the emotional pain of moving.
Get your equity and grow your business
There are start-up loans with no credit check required, but why take on the stress of borrowing if you have other options? EasyKnock lets you liquidate your equity and invest it in your next great adventure – your own business. Call us today and find out how.