If your credit scores are not ‘excellent,’ then you can say that funding for a business is a lost cause. Most people think that in order to secure funding for a business, one needs to have ‘good’ credit scores or some form of collateral for the amount borrowed. Nothing can be further from the truth. A business with ‘fair’ credit scores can definitely secure a no collateral business loan in the US. In this blog, these myths will be busted, and I will show you what lenders are really looking for and how you can secure a place there despite your imperfect credit scores.
Myth #1: “I must have a credit score of 750 or higher to be approved.”
One of the most common myths regarding business loans is that only those who have flawless credit qualify for unsecured business loans. It is no secret that banks place far too much emphasis on credit scores. The truth of the matter is that the current online lending industry is not as finicky. Based on the business’s revenue and operations, many online lenders in the U.S. are willing to offer a no collateral business loan to those who have a credit score ranging from 600 to 680. Your credit score definitely matters, but this is not the only consideration. If everything looks good on your financial statement, money flowing in and out through healthy sales and daily cash flow, then lenders won’t mind that your personal credit score could possibly use improvement.
Myth #2: “A borrower can only secure a loan with collateral.”
This is one mistaken belief that many founders have, where they believe that the only way to source money for their business is by taking a collateral loan. Although more popular in recent times, the trend of cash flow based loaning has increased the number of unsecured loans that a small business owner can access. Here, the lender will see the business’s revenue, expenses, and overall management structure rather than the assets. The business owner must have a steady monthly income, have settled their bills on time for either six to twelve months, and have demonstrated their capability to manage the business. The business owner will then qualify for the no collateral business loan without any physical asset.
What Lenders Consider (In Addition to Credit Score)
For a no collateral business loan, US lenders consider several factors that go beyond the aspect of credit:
- Time in business: Usually at least 6-12 months.
- Monthly or annual revenues: This typically ranges from $10,000 a month or $100,000 a year.
- Profitability and cash flow: It is always desirable to see healthy bank statements.
- Industry risk level: Certain industries receive more scrutiny.
- Recent financial activity: Timely payments and the absence of bankruptcies establish trust.
These parameters might carry sufficient weight to override a subprime credit score and improve your eligibility for credit.
Common Minimum Credit Scores for Online Unsecured Loans
However, it must be noted that each lender has its own set of criteria, but most of the online lenders use the following thresholds:
- FICO scores above 600: May qualify for short-term loans or revolving credit.
- 625-650+ FICO: Typically needed for an unsecured term loan or line of credit.
- 680 + FICO score: Provides access to the lowest possible interest rates, extended repayment periods, as well as maximum amounts funded.
What it means is that having good credit qualifies you for a no collateral business loan, depending upon your performance in the business being excellent.
If You’re a Startup with Fair Credit
In the beginning stages of a startup, entrepreneurs may find it difficult to secure loans due to their lack of established revenue streams. While no collateral business loans are available from many lenders, the majority require that you provide proof of revenue consistency prior to being approved for this type of lending. Listed below are several alternative financing options for entrepreneurs who are in the very early stages of their business:
- SBA microloans
- Revenue-based financing
- Crowdfunding
- Small collateral loans secured by savings, inventory, or equipment.
If you need business loan for a startup, the initial revenue generated and the maintenance of clear financial records will allow you to obtain better unsecured loans at a later date.
Improving Your Approval Probability
Credit score will not matter as much compared to the five aspects of your credit history, which are very important for lenders.
- Improve all of your outstanding credit card debt by cutting back your total possible limits on credit cards to reduce your monthly minimum payments.
- You can build your business credit score by using a business checking account and transacting with suppliers who report to the business credit bureaus.
- Do not have any late payments in the period preceding your loan application.
- Bring with you all your financial documents, such as bank statements, income statements, and revenue reports.
- If you have a sound financial base and also develop a habit of prudent financial management, it enhances your chances of obtaining a no collateral business loan for your business.
Conclusion
Even with good credit, you can get a no collateral business loan. The truth is, current lenders do not care much about credit ratings, but a lot more about cash flow, financials, and profits. Therefore, fix your financial fundamentals, and with a good lender, your credit rating would no longer hinder you from getting financing for running your business.
