Applying for business loans is daunting, so much so that the concept of no credit business loans may be enticing to cash-strapped business owners. According to Fed Small Business' 2019 Small Business Credit Survey, only 47 percent of employer firms that applied for credit received all of the financing they sought. As such, potential borrowers will most likely face a stark reality—they do not have all the financing they want or need.
The same survey also reveals that applicants with good credit, or a personal FICO score above 720, were more likely to receive all of the financing they sought, compared to applicants with decent credit (a 620-720 FICO score) or bad credit (less than a 620 FICO score). Furthermore, a low credit score—an indication of higher credit risk—is the biggest reason for credit denial.
The reality is that large and small banks still make up the largest percentages of places where small business owners apply for credit. Thus, if these institutions are not providing all of the financing that small businesses need, owners must consider alternative options.
Owners, especially those with decent or bad credit, tend to seek out online lenders or alternative financiers because these providers give capital (albeit often at higher rates) despite the owner's credit profile. Additionally, community development financial institutions, or CDFIs, provide business loans to owners without good credit given the mission-oriented nature of these organizations.
Invoicing factoring may be appropriate for businesses that want access to cash without taking on additional business loans, which often require good credit.
While it is nearly impossible to plot out how to get a business loan with no credit, you may want to consider these financing options by several online lenders and CFDIs.
A character-based loan is a type of unsecured loan based on the lender's faith in the borrower's reputation more than their credit profile. A borrower's character is one aspect of the “5 Cs" of traditional lending, but in a character-based loan, a borrower's character takes on a more outsized portion of the decision. (An attractive quality for someone looking for no credit business loans.)
One drawback from these loans, however, is that borrowers are typically able to obtain only small loans amounts by this method. Two organizations that provide character-based loans are:
Women's Economic Ventures (WEV), a CDFI based in Santa Barbara, California, was created almost 30 years ago to create an equitable and just society. WEV's Loan Program provides startup and expansion capital of up to $50,000 to small businesses that can't qualify for traditional bank financing, and prides itself on making character-based loans.
Community Ventures, a CDFI based in Kentucky, provides character-based loans based on two main approaches: (1) utilizing a loan review committee that includes members who are part of the community that the borrower belongs to in order to make the lending decision, and (2) learning about the entrepreneur through three to six months of advising the company via one-on-one coaching.
As the name implies, lenders utilize several traits in their underwriting software to determine whether a borrower should receive a loan. These traits, which feed into the lenders' algorithms, are typically proprietary and can span from employment history, business profile income or payment history on utilities, to name a few.
It’s important to remember that algorithm-based loans are not exclusively based on an owner's credit profile. Here are two options for algorithm-based loans:
Funding Circle, an online small business lending platform, connects businesses who want to borrow with investors who want to lend in the UK, U.S., Germany and the Netherlands.
The company uses their proprietary risk model to determine whether a potential borrower will receive a loan, and if so, at what terms. It leverages its algorithm to make loans and publicly states its minimum requirements, which include a personal FICO credit score of a least 620 and a business operating for at least two years.
QuickBooks Capital provides funding for QuickBooks small-business customers. Their competitive advantage is that they review your business' attributes and overall business health from the business details you enter in QuickBooks, as well as other relevant information.
Their algorithms use the transactions within your business bank accounts, your personal and business credit history and/or current liabilities to determine loan approval. In general, they also look for a FICO of 620 or higher, and at least $50,000 in revenue in the past year.
While invoice factoring provides cash to a business, it is technically not a loan. With invoice factoring, a business sells its accounts receivable (invoice) to a third party (called a factor) at a discount. Businesses will pursue invoice factoring to meet the company’s immediate cash needs without going the traditional lending route.
Invoicing factoring may be appropriate for businesses that want access to cash without taking on additional business loans, which often require good credit. Here are two companies that offer invoice factoring:
BlueVine was founded with the goal of combining the latest advancements in technology and security with the expertise and care of their team. BlueVine's invoice factoring process is simple: (1) apply online, (2) get approved, (3) submit an invoice and (4) get your cash.
Similar to other invoice factoring companies, BlueVine provides ~85-90 percent of the money upfront. Once the customer pays the invoice, you will get the rest of the money minus their fee.
StreetShares was founded by military veterans who recognized that many banks were not lending to small businesses. Through its online platform, StreetShares offers invoice factoring based on the credit history of the businesses that owe you money, not you, which is attractive if you're looking for no credit loan loans.
These companies are just a few of the many alternative financers out there. Consider exploring how to get financing through character-based loans, algorithm-based loans or invoice factorings. These alternative financing options can set your business up for success. But keep in mind that while these alternatives to traditional loans are easily accessible, they usually come with a higher cost.
Read more articles on alternative financing.
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