Researching, applying for, and being approved for a small business loan can seem like an impossible task when you are trying to run a business at the same time. Banks require large amounts of documentation which takes time and energy to pull together and prepare. If you are new to small business borrowing you will not know what is considered “normal,” or if you are being charged a fair rate.
And then, of course, there is the credit check. If you do not know your credit score, you may be frightened to find it out. Or if you already know that it is not great, you may not think you will qualify for a small business loan.
The good news is that it is possible to obtain a bad credit business loan, or forms of funding, without a credit check.
Can I get a traditional business loan with no credit check?
Simply put, no. A loan application at a traditional lender is a time-consuming process. It can take a month to two months to pull together all of the documentation they require and another few months to be approved or rejected.
During that loan application process, they will pull your credit score. This usually happens close to the beginning of applying for a loan so that no one wastes their time. Many traditional lenders will not lend to a borrower whose credit score is below 620, and even then often require it be a FHA-backed mortgage or other type of secured loan.
Traditional lenders and banks typically, but not always, offer the lowest interest rates and 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. But there are no traditional financing options available without a credit check, and you will have to go to an alternative lender in that instance.
What is a credit check, exactly?
Your credit report comes with a numerical score that represents how well you handle money. The higher the number, the better the score, which is why if you make a financial mistake is it reflected in your credit score by points being deducted.
If you miss or make a late credit card payment, for example, points will be taken away. Defaulting on a loan causes significant damage. 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. It is seen as a sign that you are applying for access to more credit. It will remain on your report for up to two years.
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. Soft pulls are not tied to a specific application request so they do not affect your credit score and it will not stay on your credit for long.
Note that you will not be penalized for rate checking if you are applying for several lenders for the same type of credit during a short period of time. The credit bureaus know that savvy consumers rate shop to see who will give them the best terms. If four different traditional lenders pull your credit check for a small business loan within roughly a month, the credit agency will only deduct five points from your score (for hard pulls).
It is always a good idea for a small business owner to know their credit score, and to keep an eye on their credit report for unusual activity. There is no penalty for checking your own score, and you can sign up and pay for credit monitoring services if you are truly concerned.
Why Would I Not Want my Credit Pulled?
A simple reason to not want your credit score pulled could be that you know it is not very good. Many people make financial mistakes because they are learning how to manage money and do not know the long-term impact on their credit score. A poor credit score may simply reflect that lessons you were learning.
Unfortunately, the process of cleaning up your credit can take a lot longer time than it did to ruin it. Which is why you will want to be careful about having your credit score pulled. If your credit score is right on the border of a typical credit range, say just slightly above 620, a five-point ding could put you back in a worse bracket. Sometimes, it is better to raise funding through methods which will not risk hurting your credit score further.
Lastly, maybe you are just exploring your options. You know that you will need access to capital down the line, so you want to determine if you should focus on repairing your credit score. Or you are building a business plan and want to build in what your interest rates would likely be 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.
What are my Options if I Do Not Want My Credit Pulled?
While a traditional small business loan or business line of credit through a bank will not be 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.
Revenue-Based Business Loans
Alternative lenders will lend on the basis of your business’ revenues. While you will have to give them proof of those revenues – whether it is bank or credit card processing statements – they may not need to check your credit for a pre-approval based on revenue.
In these circumstances, your ability to obtain capital comes from your business’ performance. For small business owners whose credit score still reflects past mistakes, a business loan based on revenues may seem like a more fair method of determining their credit-worthiness.
These lenders will have you set up automatic payments from your bank deposits to last the length of the repayment term. The advantages are that, once they have verified your revenues, money will be disbursed to you within a few days.
Terms: 2 months to 3 years
Amounts Available: $50,000 – $3 million
Merchant Cash Advance
A merchant cash advance does not require a credit check because the amount of capital the lender gives you is based on your credit card sales. The lender advances cash after looking at several months to years of transactions run through your business that were paid by credit and debit cards. This business funding no credit check option is ideal for businesses which process a lot of credit card sales, such as restaurants, grocery stores, salons, and more.
A merchant cash advance does not charge interest when you take out the advance. Rather, the lender deducts a percentage of each in-store sale that you swipe. The lender’s deductions repay the funding and the fee charged on the principal is their profit. Essentially, you sell your incoming receipts to the lender based on past cash flow, and have access to immediate business funding up to $500k. If your customers pay in cash or by check, this will not be a good option for you.
Terms: Until paid in full
Amounts Available: $50,000 – $3 million
Alternative Lender Business Loans
A business loan with an alternative lender is a great choice for a small business owner who is afraid he or she will be denied for having poor credit. You can be approved for a bad credit business loan if you have no credit or bad credit, on the basis of your business.
An alternative lender will ask to see 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 will work with small businesses which have only been operating a few months.
Alternative lenders also 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. This is a huge advantage if you need your loan repayment schedule to work with an unusual cash flow pattern.
Rates: 12.00 -45.00%
Terms: Two to Eighteen Months
Amounts Available: $5,000 – $1 million
Equipment financing loans may not require a hard credit check because the equipment you are purchasing with the loan serves as collateral. They are a type of secured business loan. A new forklift would secure the loan, in other words.
Some lenders may want to perform a credit check, but if you can put down enough of the equipment’s cost it may not be necessary. Because the lender’s capital is secured by the collateral, 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.
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. 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.
Be prepared to provide information on the equipment serving as collateral. This includes its age, condition, and value. If the equipment represents a large capital investment, the lender may send one of their appraisers to look at and appraise its value.
Many equipment financing lenders offer a 90-day grace period before you have to make payments, but the loan’s terms are for a shorter time than a term loan. A typical length would be two to three years to align with the equipment’s useful life or depreciation schedule.
Terms: Up to Five Years
Amounts Available: $25,000 and up
Invoice Factoring and Financing
It is a reality of running a small business that not all customers will pay on time. It is not uncommon to find yourself with a large balance of past due receivables and bills that are coming due. Waiting for payment is a frustrating aspect of being a small business owner, and could mean that you need to get a loan. 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 are 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. Invoice factoring is when you sell the invoices directly to the lender and they collect on the past due balances; invoice financing is when they are pledged. Both 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.
The lender either takes a percentage or flat fee of the invoices to repay the loan’s capital plus their margin. If you pledged a $100 receivable, for example, 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 have to wait to be repaid.
An invoice financing lender holds an amount in reserve in addition to their fees. This reserve protects them if your customers do not pay, and they will then advance you a percentage of the invoices’ remaining value, typically 80-85%.
If you work with an invoice factoring lender and sell your invoices rather than borrow against them, they will collect on them. Customers could become confused, or think that your business is not doing well. 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. So make sure that the factoring lender will treat your customers respectfully before selling your past due receivables.
With invoice financing, your personal credit will not be pulled, but 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 could be charged 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.
Rates: 15.00-68.00% plus weekly fees
Terms: typically 90 days
Amounts Available: Percent of your outstanding invoices
Purchase Order Financing
Similar to invoice financing, purchase order financing is used by business which are business to business enterprises. 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. It gives your business the ability to purchase the goods or supplies needed to manufacture goods for a customer who has 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 a loan. Commercial real estate and investment accounts would be two options, as well as 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%
Amounts Available: Depending on value of underlying collateral
401K loans do not perform credit checks, but are only available to people in a specific set of circumstances. You must be currently working for the employer who hold the 401K, and must have over $10,000 in that 401K. If the employer offers the option to take out loans against this balance, you might be able to get a 401K loan. It is borrowing money from your retirement savings, or that of a spouse, to fund your business now.
Not all employers offer this option, and you will have to talk to your Human Resources department or the company who services your 401. The amounts that you are borrowing against must be vested, and you cannot borrow against an employer match.
The reason you have to currently work for the company is that 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
Investor financing is a term which covers an exchange of capital for stock in your business. It could be a private investor, a venture capital firm, or a family member giving you capital but in exchange they now own a portion of your business.
While an investor will not perform a credit check, they could significantly impact how you run your business. If they are a silent investor, business operations may continue as normal but you may be disbursing income to them, as well. It can be helpful to have a silent partner if they are willing to continue to invest in the business.
If they intend on being a fully-involved investor they 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 you seek out investor financing, be prepared to give up more control of your business than you may like.
Friends and Family
Friends and family will not check your credit, but they may want to examine your books. 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 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. 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. Friendships have been ruined and families divided by a failed business enterprise.
If you raise funds through a crowd-funding site there will be no credit check. You are asking friends, family, and your network, or strangers who believe in the product you want to sell or your business to give you money. It is not a loan, rather more of a gift, but donors often expect rewards or incentives in exchange for give 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.
Microloans and Non-Profits
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 who are often individuals can find you in search results and decide to lend you part or all of the money.
Non-profits 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.
Are there any options for a no credit check loan with a traditional lender?
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.
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, and then 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 their loan qualifications are more stringent than PayPal. 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 do not 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 an evaluation of your situation, it is possible to get a business loan with no credit check.