Having entrepreneurial dreams is great, but what do you do when they don’t necessarily line up with your credit history?
If you haven’t built up credit in the past and you’re trying to raise capital for your business, you might be asking yourself, “How can I get a small business loan with no credit history?” While you might have to get creative in order to find financing with no credit, you do have options.
Here are some ways to secure small business financing with no credit history at all.
Alternatives to a Small Business Loan With No Credit History
If you don’t have any credit history, you might not be the ideal candidate for a traditional business loan, but there are other options available to help you get the money you need to grow your company.
1. Invoice financing
Invoice financing allows you to borrow money against your outstanding invoices. Think of it like a cash advance using your outstanding invoices as security. You’ll have to repay the total amount, plus a fee, when your loan comes due. Some companies will also allow you to receive an advance on a purchase order.
Note the difference between invoice financing and invoice factoring. With invoice factoring, you sell your outstanding invoice to a third party, who then collects the payment on your behalf.
If you can’t get a small business loan with no credit history, a different option is to try crowdfunding your business. You’re probably familiar with companies such as Kickstarter or GoFundMe, which help you rally the troops and can also work as a form of product or idea testing. Through these companies, you offer your investors rewards in exchange for their funding.
There’s also the concept of debt crowdfunding, which helps you crowdfund a loan. Some roganizations will help crowdfund small business loans without doing credit checks and basing their loan on your creditworthiness.
3. Line of credit
Instead of an installment loan, you might consider a line of credit. With a line of credit you’re approved for a maximum amount, but don’t necessarily have to use that total amount. You can spend up to your maximum at any time.
While traditional lenders might require a more extensive credit history before they extend your business a line of credit, some online lenders are more flexible and don’t require a credit check for approval.
4. Small Business Administration grants
Don’t discredit the advantage of any grants for small businesses that might be offered in your area. Research opportunities with your local business bureau and state initiatives. You can view some federal small business grant opportunities here.
5. Shareholder loan
This type of financing is provided by shareholders to a business. Through this process a shareholder will give funds to the business, often using business shares as collateral. The loan will eventually have to be repaid, with interest. You set the terms of the loan formally at the time it is extended.
6. Business credit card
Applying for a business credit card can help cover the daily expenses of your business. Finding a business credit card with an APR of 0% can help you initially get the money you need to get your business up and running. If you pay off the credit card before the introductory rate expires, you won’t owe anything in interest. Make sure you pay attention to when the interest rate jumps, however, because if you still have money owing on the card you could be in for huge interest payments that you didn’t budget for.
Documents You’ll Need
If you don’t have credit history, most lenders will want to see your business financials to determine your creditworthiness. Be prepared to show them your bank accounts and any financial documentation that can prove your revenue and show lenders that you truly will be able to repay them.
You might also need to show a DUNS number for some small business grants. This number is linked to your credit file at the reporting agency Dun & Bradstreet. It’s free to get but can take up to a month for the paperwork to process.
How to Build Your Credit History
It’s a good idea to get started building business credit as soon as possible.
Here’s what you can do to begin building the credit history for your business.
1. Incorporate your business
Depending on where you are in your business journey you could have incorporated long ago, or still be debating whether you should. It’s a smart financial move to incorporate your business because this keeps its finances separate from your personal finances. Make this your first step if you haven’t done it already.
2. Get an Employer Identification Number
Your Employer Identification Number (EIN) is like a Social Security Number (SSN) for businesses. When you do start applying for credit, you’ll either have to submit your SSN or EIN. If you only have your personal SSN to submit, then your creditworthiness will be based on your personal credit. Having an EIN helps you develop business credit.
3. Register with business directories
Get the address and phone number for your business listed in directories, such as the Better Business Bureau, the Yellow Pages, and Yelp. Credit reporting agencies do pull information from these sites to help establish the legitimacy of your business.
4. Get a DUNS number
The leading credit reporting agency for business is Dun & Bradstreet. Getting a credit file established with this agency is very helpful when it comes to building credit for your business. You can start the process of getting a DUNS number online.
5. Start using a business credit card or line of credit
In order to establish some credit history, you’ll need to start using some forms of credit. Even if you have to get a secured credit card, this is an important step to follow. Credit cards are considered revolving credit, which is part of the credit mix that agencies review when giving you a credit rating. Part of your credit rating is based on how healthy each different type of credit you have is, so diversify.
6. Check that your information is being reported
Keep an eye on your business credit reports and quickly correct any mistakes, including ones that might seem minor to you, such as your contact information or facts about your business. The credit bureaus are looking for a complete picture, so the more information you give them the better. Make sure your timely payments are being reported to the credit bureaus.