Researching, applying for, and getting approval for a small business loan can seem like an impossible task when you’re also running a business.
Who has time to assemble two years of tax returns, bank statements, and more for a bank loan, only to wait months as it goes through underwriting? Of course, if you have poor credit you’ll get rejected right off the bat.
Part of any bank’s loan application process is a credit check. If you don’t know your credit score, you could get an unwelcome surprise. Or, if you already know you have a score under 700, you may already know you won’t qualify for a bank loan.
Even if you have a decent credit score, any time someone pulls your credit it lowers your score by five points. If your score is right on the border between “good” and “bad,” why take the risk? If you’re a small business owner, apply for a bad credit business loan or other loan that doesn’t require a credit check, instead.
Simply put, no. Traditional lenders have a stringent and time-consuming process. They require massive amounts of documentation to prove your creditworthiness. In order to apply, you could need to give them:
It can take several months to pull together all of the required documentation and another few months to be approved or rejected. During the loan application process, usually near the beginning so no one wastes their time, the lender will pull your credit score.
Many traditional lenders will not lend to a borrower whose credit score is below 620. Even then, it might have to be a FHA-backed mortgage or other type of secured loan. You might have to pledge collateral to secure a loan – which risks losing that collateral if you default.
Traditional lenders and banks typically, but not always, offer the lowest interest rates and best terms. If you have a great credit score but do not want to spend your time applying with a traditional lender, alternative lenders might offer you a competitive rate without the hassle of a bank’s application process.
But there are no traditional financing options available without a credit check. If you want to avoid one, you’ll have to go to an alternative lender.
When a lender performs a credit check they pull a copy of your credit report. A credit report contains data like open lines of credit and loans, the amount held in your bank accounts, and whether or not you’ve missed or made late payments. Credit bureaus use the data on your report to determine a score.
The range your score falls into determines if lenders see you as “good” borrower or not. Typical ranges are:
The higher the number, the better the score. A mistake like making a late payment could cost you five points, if a vendor reports an invoice to collections the credit bureau would deduct more. A hard credit check subtracts five points, which is why you want to minimize the number of credit checks hitting your report.
A hard pull requests all of the data on your credit report and your credit score. The credit bureaus see it as a sign that you’re applying for access to more credit. It remains on your report for up to two years.
The credit bureaus know that savvy consumers rate shop to see who will give them the best terms. If you’re applying for several lenders for the same type of credit during a short period of time they realize you’re rate checking and won’t penalize you. If four different traditional lenders pull your credit for a small business loan within roughly a month, the credit agency will only deduct a total of five points from your score (for hard pulls) – not twenty points.
A soft pull is more of a background check, performed by a landlord or if you are trying to get pre-approved for a loan. Because they’re not necessarily tied to a request for more credit, soft pulls don’t affect your credit score and won’t stay on your report for long.
It’s always a good idea for small business owners to know their credit score, and to keep an eye on their credit report for unusual activity. There’s no penalty for checking your own score, and you can sign up and pay for credit monitoring services if you are truly concerned.
A simple reason to not want your credit score pulled could be that you know it’s not very good. Many people make financial mistakes when learning how to manage money without knowing the long-term impact on their credit score. A poor credit score may simply reflect the lessons you were learning.
Unfortunately, the process of cleaning up your credit can take a lot longer than it did to ruin it. Which is why you will want to be careful about having your credit score pulled. If you have a score of 670, considered “good,” a five point ding would put you down to “fair.” Sometimes, it is better to raise funds through methods which will not risk hurting your credit score further.
Lastly, maybe you are just exploring your funding options but not yet ready to borrow. Or you are putting together a budget and business plan and want to build in your likely interest rate and loan payment if nothing else changed. Applying for a pre-approval at a bank, or calling to pre-qualify with an alternative lender, will be a soft pull and not hurt your score.
While a small business loan or business line of credit through a bank isn’t an option, you have plenty of other avenues to raise capital. Some options will be available through business and commercial lenders, others with alternative lenders or invoice factoring companies, but none require a credit check. They lend on the basis of other factors.
Alternative lenders will lend on the basis of your business’ revenues. You can qualify for the loan after giving them proof of those revenues – whether it is bank or credit card processing statements. Depending on your revenues, they may not need to check your credit for a pre-approval.
For small business owners whose credit score still reflects past mistakes, a business loan based on revenues access to capital based on your business’ performance. may seem like a more fair method of determining their credit-worthiness. Once they have verified your revenues, the lender disburses money within a few days.
The loan is repaid through automatic repayments from your bank deposits for the length of the repayment term.
Rates: 6.00-50.00%
Terms: 2 months to 3 years
Amounts Available: $50,000 – $3 million
A merchant cash advance does not require a credit check because the amount of capital the lender advances you is based on your credit card sales. After analyzing several months to years of credit and debit card transactions run through your business, they’ll advance you a sum based on estimated future sales.
A merchant cash advance doesn’t charge interest when you take out the advance, they charge a flat fee. After you take out an advance, they’ll take their repayment as a percentage of each in-store sale that you swipe. The lender’s deductions repay the funding and the fee charged on the principal.
Essentially, you sell your incoming receipts to the lender and have access to immediate business funding up to $500,000. This funding option is ideal for businesses that process a lot of credit card sales, such as restaurants, grocery stores, salons, and more. If your customers pay in cash or by check, this will not be a good option for you.
Rates: 6.00-50.00%
Terms: Until paid in full
Amounts Available: $50,000 – $3 million
A business loan with an alternative lender is a great choice for a small business owner who is afraid they’ll be denied a bank loan and they need money fast. Lenders approve same day business loans on the financial health of your business cash flow.
An alternative lender looks at your cash flows and revenue for the past few months to a year, depending on how long you have been in business. Unlike a traditional lender, they work with small businesses which have only been operating a few months.
Alternative lenders offer extremely flexible repayment plans. You can make payments on the loan monthly – just like with a small business loan from a bank – bi-weekly, weekly, or even daily. If you need a loan quickly with a repayment schedule that works with an unusual cash flow pattern, it’s a huge advantage over a traditional loan.
Rates: 12.00 -45.00%
Terms: Two to Eighteen Months
Amounts Available: $5,000 – $1 million
Equipment financing is a type of secured business loan. The equipment you’re purchasing with the loan – a forklift, for example, secures the loan. Equipment financing loans may not require a hard credit check because the equipment you are purchasing with the loan serves as collateral.
Some lenders may want to perform a credit check, but if you have a large down payment it may not be necessary. Depending on the lender, you could need a down payment on the equipment. Others will finance up to 125% of the equipment’s value to cover soft costs like taxes and delivery.
Because the equipment secures the loan, the lender could seize and resell it if you defaulted. This means the lender has less risk of loss, so equipment financing loans typically charge lower interest rates than a term loan. If the lender does require a credit check they will approve you for a loan even if you have a lower credit score because it’s a collateralized loan.
You’ll be asked to provide information on the equipment serving as collateral, including its age, condition, and value. If the equipment represents a large capital investment, the lender may send one of their appraisers to appraise its value.
Traditional lenders require a business history of two years, and higher value loans will have more stringent loan qualifications. Some equipment financing lenders have annual minimum revenues of $250,000.
Many equipment financing lenders offer a 90-day grace period before you have to make payments. Repayment terms are typically shorter than with a small business loan. A typical length would be two to three years, which aligns with the equipment’s useful life or depreciation schedule.
Rates: 6.00-24.00%
Terms: Up to Five Years
Amounts Available: $25,000 and up
It is a reality of running a small business that not all customers will pay on time. It’s not uncommon to have a large balance of past due receivables while your bills still come due, which could put you in a bind. Accounts receivable (“A/R”) financing lenders, or invoice factoring lenders, help you smooth over the bumps in cash flow.
When you take out a loan with a A/R financing lender, you’re pledging the value of your past due receivables as collateral. Your personal credit will not be a factor, but the lender may want to see information about your customers’ credit. With invoice financing, you pledge your receivables but retain control of them, and the lender advances you a percentage of the invoice’s face value.
While the lender won’t pull your personal credit with invoice invoice financing, your customers could have to provide credit information. If their credit is not great, the A/R financing lender might give you a smaller advance or charge you higher fees. Rates already range from 10% to 79% of the invoice’s total amount, so your risk is that the trade-off between short-term cash is giving up a significant chunk of your cash flow.
An invoice financing lender holds an amount in reserve in addition to their fees. This reserve protects them if your customers don’t pay, and they will then advance you a percentage of the invoices’ remaining value, typically 80-85%.
Invoice factoring is when you sell the invoices directly to the lender and they collect on the past due balances. You have no control of the customer interaction, and if the invoice factoring company is rude to your customers it could harm your long-term relationship with them. The lender either takes a percentage or flat fee of the invoices to repay the loan’s capital plus their margin.
For example, if you pledged a $100 receivable and the factor rate you were charged is 10%, once collected the lender would only send you $90. They would keep ten dollars as their fee. The longer the invoice has been outstanding, the higher the lender’s fee will be. The factor rate rises as they wait to be repaid.
Both options turn your receivables into quick cash, but in exchange you will only get to keep a portion of the bill’s total amount once the customer pays.
Rates: 15.00-68.00% plus weekly fees
Terms: typically 90 days
Amounts Available: Percent of your outstanding invoices
Business to business enterprises use purchase order financing, which is similar to invoice financing. When a purchase order comes in, your business may have to purchase the supplies to fulfill the order even though you haven’t received any funds yet. Wholesalers, distributors, resellers, and import/export companies frequently use this type of financing to cover their cost of goods sold.
The loan is a lump sum advanced based upon the amount of a signed purchase order. Purchase order financing gives your business the ability to purchase the supplies needed to manufacture goods for customers who have already placed an order but not yet paid.
Rates: 1.80 – 6.00%
Terms: 60 days
Amounts Available: Depending on the amount of the purchase order
Assets other than equipment and invoices can also serve as collateral for an asset backed business loan. Lenders might accept collateral of commercial real estate, investment accounts, or machinery and equipment that you already own. While the lender has less risk due to the collateral, they will want account statements, an appraisal, or other forms of proof of ownership.
If the value of your collateral is high enough, the lender will not require a credit check.
Rates: 7.00 – 17.00%
Terms: Varies
Amounts Available: Depending on value of underlying collateral
While 401K loans do not perform credit checks, you must be currently working for the employer who holds the 401K, and must have over $10,000 in that 401K to borrow against it. Some employers offer the option to take out loans against this balance. It’s borrowing money from your retirement savings, or that of a spouse, to fund your business now.
Not all employers offer this option. Talk to your Human Resources department or the company who services your 401K to see if it’s possible. The amounts that you are borrowing against must be vested, and you cannot borrow against an employer match.
Loans must be repaid through payroll deductions. If you lose your job or quit during the repayment period the entire amount will be due in full or you will have to pay significant tax penalties.
Rates: Prime + 1%
Terms: Five years maximum
Amounts Available: A percent of your total 401K balance
Another method of generating capital is to sell capital stock to investors. The investor could be a private investor, a venture capital firm, or a family member giving you capital. In exchange for their financial investment, they now own a portion of your business.
While an investor will not perform a credit check, having another person or company with a say in your business could significantly impact how it’s run. A fully-involved investor will want a say in all major business decisions. They may want to be there every day helping you run things, and they could have a different goal for the business’s future.
If they are a silent investor, business operations will continue as normal. However, you may be disbursing income to them as part of a prearranged distribution schedule. Disbursements could be a flat fee or a percentage of revenues.
If you seek out investor financing, be prepared to give up more control of your business than you may like.
Friends and family will not check your credit, but they may want you to sign a promissory note. If you are asking a friend or family member for a significant capital investment they will likely want some reassurances. After all, people do not generally build up enough capital to be in a position to lend others by making uninformed investments.
A friend lending you money may want to see a business plan, revenues, and projected cash flows. They could ask for a share of your business or to become an investor. They may want you to sign a promissory note or other legal document which allows them to go after your personal assets if you default. And they could very well charge you interest at a much-higher rate than an alternative lender.
A loan from friends and family is not always free, and it comes with additional risk of a personal nature. Friendships have been ruined and families divided by a failed business enterprise.
Crowd-funding sites don’t perform a credit check. But you’re asking friends, family, and your network, or strangers who believe in the product you want to sell or your business to give you money. Their donations aren’t loans, but donors often expect rewards or incentives in exchange for giving to your crowdfunding campaign.
Gofundme and Kickstarter are two of the biggest crowd-funding sites, but they both take a percentage of the funds raised. Some of the sites require that you meet your goal before they will release any funds. Do your research before launching your campaign to pick the best site for your business’ goals, and keep in mind that you could alienate some friends and family by asking them to fund your dreams.
Micro-lending sites such as KIVA make it possible for you to raise funds from lenders without a credit check. After providing details about your business and how you plan to use the funds, lenders can find you in search results and decide to lend you part or all of the money.
Non-profit organizations sometimes also make loans available, particularly to small business owners from marginalized communities. They typically lend smaller amounts at below-market interest rates.
Credit checks will not be required for either option, but you could need other documentation. This could include a business plan or statement of intent.
If you are thinking of a fixed-rate, term loan with a set repayment period, then the answer is still “no.” But there are options if you are willing to explore something more flexible and already have accounts open with certain lenders you could receive a merchant processing type loan.
American Express and PayPal are two merchant processing services which will extend credit to a business owner without a credit check, if the business owner already has an account open with them.
PayPal offers Working Capital Loans to small businesses that have been processing their transactions with PayPal through a Business or Premier account for a minimum of three months. A business account owner has to process $15,000 a year, and a Premier account holder $20,000, through PayPal to qualify.
There is a fixed, up-front fee with this loan. Then you repay the loan by letting PayPal take a percentage of all sales they process going forward. If you do not receive any payments in 90 days, you will have to pay them 5 or 10 % of the loan’s amount.
American Express already has your credit information on file if you have a business credit card with them, so they do not need to check it again. But they have more stringent loan qualifications than PayPal’s loans. You must have been in business for a minimum of two years and have $200,000 a year in revenues.
Keep in mind that while many of these small business capital options don’t require a credit check, the lender may wish to perform one anyway. Always clarify whether or not they will pull your credit. If they say it is not necessary, make it clear that you would prefer that they not. With a little work, some research, and after evaluating your situation, it is possible to get a business loan with no credit check.
