If your credit scores aren’t in good shape, it can be challenging to get access to financing for your small business. Fortunately, there are commercial lenders that offer small business loans with no credit check, and in some cases, it can be what you need to keep your business afloat.
But it’s important to understand that many of these loans typically come with high-interest rates and fees. In some cases, offers of guaranteed approval may even be scams. Here’s what you need to know before you start shopping around for a loan.
Do Small Business Loans Require a Credit Check?
The vast majority of small business loans do require a credit check. This information helps lenders determine the likelihood that you’ll pay back the debt that you’re incurring.
If you have a low credit score, it can indicate that you’ve had some trouble keeping up with payments in the past.
Alternatively, it could mean that you’re relatively new to credit, and there simply isn’t enough information about your dealings with other creditors to determine your creditworthiness.
Depending on the lender and the type of loan, a credit check may involve your business credit scores, personal credit scores, or both. Well-established businesses with a good business credit history may not need to undergo a personal credit check.
But if your business is a startup without a track record of borrowing and repaying debts, lenders may rely more heavily on your personal credit history to determine your eligibility for the loan or credit card.
That said, there is a contingency of commercial lenders that don’t require a credit check. These lenders may rely on other factors, such as your cash flow, accounts receivable, or collateral to determine whether you’re a good fit for the loan.
These types of loans can be appealing for business owners who don’t have good business or personal credit histories.
But it’s important to note that these loans can also be prohibitively expensive and make it difficult for you to repay, especially if your company is dealing with cash flow issues. If you can’t repay the debt, it could mean the end of your company.
Can You Get a Small Business Loan With Bad Credit?
Some of the best business loans, which include SBA loans and bank loans, typically require solid credit scores and operating histories. However, it is possible to get approved for financing when you need it, even if your credit score is in bad shape.
This is true for all sorts of business loans, including, but not limited to:
- Term loans
- Lines of credit
- Business credit cards
- Microloans
- Equipment loans
- Merchant cash advances
- Invoice financing
- Invoice factoring
That said, term loans and lines of credit typically have higher credit standards than the other options listed, and business credit cards may require you to put up a security deposit equal to your credit limit, which can be challenging if you’re already experiencing cash flow problems.
One thing to keep in mind is that while it is possible to get financing for your business, even with bad personal or business credit scores, these loans are typically expensive and may have short repayment terms.
In other words, if your company is in dire straits financially, taking out one of these loans could potentially do more harm than good.
Some of them may even include personal guarantees, which means that if your business can’t afford to pay off the debt, the creditor can seize your personal assets or sue you to recoup the debt. That’s true even if your business structure provides limited liability protections.
Business Loans That You Can Get With Bad Credit
There are several different types of small business loans you can qualify for with bad credit. But we’ll only discuss a few: equipment financing, invoice factoring, and merchant cash advances.
Each of these loan options is different in terms of its purpose, what lenders consider, how much it costs, and how you’ll repay the debt. As such, it’s important to do your research and compare several loan options to determine the best fit for you.
Here’s a summary of each to help you decide if it’s a good fit for you and your business needs.
Equipment Financing
An equipment loan is a type of business financing that’s specifically designed to help you purchase equipment for your business. That can include things like vehicles, commercial ovens, furniture, farm machinery, computers, and more.
Many forms of business financing come in the form of secured or unsecured loans, but all equipment loans are secured.
More specifically, when you use equipment financing, you’ll use the equipment you’re purchasing with the loan as collateral. In the event that you can’t repay the debt, the creditor can seize the equipment and sell it to recoup the remaining loan balance.
Equipment loans can often be available for business owners with bad credit because of their secured nature. That said, most lenders will still have a minimum score of 650 or above.
If your score is in the 500s, there will still be options available, but you may need to make a larger down payment or pay a higher interest rate as a result.
The good news is that equipment loans typically have better terms than unsecured term loans and lines of credit, so they can still be relatively affordable.
Also, you’ll usually have a longer repayment term than short-term loans, so you can get equipment financing with bad credit without worrying too much about short-term cash flow implications.
That said, you’ll need to consider the potential consequences of nonpayment, losing the equipment, and how that will affect your business.
Invoice Factoring
Invoice factoring is a form of financing that involves selling unpaid invoices to a third party. In return, you’ll get a portion of the invoice upfront as a lump sum.
Then, when the factoring company collects the payments from your customers, it pays you the remaining balance, minus its factoring fee.
Invoice factoring can be available regardless of your business and personal credit scores because it’s not technically a loan. This is because, unlike invoice financing, you’re selling the invoice to the factoring company, not using it as collateral to get a loan.
Depending on the situation and the company, you’ll typically receive 80% to 90% of the invoice amount upfront. The factoring fee, which will be deducted when you receive the final payment, is usually between 1% and 5%.
Invoice factoring can be worth considering if you need cash urgently and have outstanding invoices, but they’re not due for a while yet.
However, because of their short-term nature, they’re generally expensive, and it might be better in the long run to tighten up your accounts receivable terms.
Also, factoring companies will typically base their decisions partly on the creditworthiness of your customers, not yours. That said, they’ll also consider your sales volume and who will be responsible if the invoice goes unpaid.
Merchant Cash Advances
Merchant cash advances are also technically not loans but commercial transactions. Instead of being a term loan, it’s an advance on your future sales or cash flow.
In return, you’ll make weekly or even daily payments based on your debit and credit card sales or bank account cash flow.
Merchant cash advance providers may or may not check your credit when you apply, so it’s possible to get one without a good credit score. Keep in mind, though, that this form of financing can be one of the most expensive forms of business financing available.
Also, instead of charging you an interest rate, which is then amortized over a fixed repayment term, merchant cash advance providers charge a factor rate, which is typically 1.2 to 1.5.
If you have a 1.2-factor rate on a $10,000 advance, that means you’ll ultimately repay $12,000. If it’s 1.5, you’ll pay $15,000.
One of the issues with this approach is that the factor rate is fixed. So even if you pay back the debt early, you won’t save any money. In contrast, if you pay back a term loan or line of credit early, you can save on interest charges.
Merchant cash advances can be appealing to small business owners with fairly strong sales and a short-term cash need. But because they’re so expensive and can include predatory clauses in their contracts, it’s generally best to avoid them.
What Is a Good Credit Score for a Business Loan?
A good credit score for a business loan can vary depending on the type of loan you’re looking for. But, in general, having a personal credit score of 700 or higher will give you a better chance at qualifying for most loans with affordable rates and fees.
If you’re trying to get a traditional bank loan, line of credit, or an SBA loan — a score of 750 or higher will give you the best chances of securing favorable terms.
Of course, this is based on loans that check your personal credit. If you’re looking for loans based on your business credit scores, it depends on the type of business credit score.
For example, with the Dun & Bradstreet PAYDEX Score and Experian Intelliscore Plus, which range from 0 to 100, having a score of 80 or higher is considered good business credit.
If you’re looking at the Equifax Small Business Credit Risk Score, which ranges from 101 to 992, a score of 556 or higher is considered to be in the good range.
If you’re hoping to build your business credit, but you’re having a hard time finding affordable financing, the Credit Strong business credit builder loan can help. It doesn’t require a personal credit check to get approved, so it’s ideal for new business owners.
Unlike a traditional loan, you won’t get the loan funds upfront. Instead, Credit Strong will place the loan funds in a separate account and lock them while you make your monthly payments.
Then, once you’ve completed your repayment schedule, you’ll receive the loan funds and use them however you want to build your business.
Loan terms include 60 and 120 months, but you can cancel at any time without penalty. This can be a good option if you’re looking to establish a long business history and it can be used alongside other types of business loans to grow your business effectively.
Apply for a Credit Strong business credit builder loan to get started.
The Bottom Line
It’s possible to get a small business loan without a credit check, but if you need a loan that offers capital now, you may be faced with high-interest rates and fees. That said, there are business lenders who require a credit check but will work with you if your credit is in poor shape.
Whether or not you choose to borrow now, it’s important to be proactive about building your business credit to improve your odds of approval the next time you need financing.
The CreditStrong business credit builder loan can help you build a solid foundation and achieve your business goals.
