“Without business credit, you can’t secure a business loan.”
Many small business owners believe this—but it’s actually a serious misconception. It’s also one reason why plenty of small business owners with relatively new companies rely on personal loans or credit cards to finance their ventures. They just don’t think they have any other option.
That’s a shame, because there are tons of business loan choices for owners without business credit. These small business funding options come with some serious benefits, too, like the opportunity to build or repair your credit history.
With that in mind, let’s take a closer look at what small business owners need to know about business loans and business credit.
If you want to build a thriving enterprise, you’re likely going to need business financing at some point. While it’s possible to accommodate a certain level of growth, at least temporarily, with credit cards or personal loans, eventually most business owners will need a proper business loan to keep pace.
For owners with business credit issues, that can be a challenge. But it’s not an insurmountable problem! There are several options available that can help business owners get the money they need to grow.
While securing a business loan from a conventional lender isn’t impossible with no business credit, it does require a solid amount of work—and there’s still no guarantee of success.
Borrowers should first open a business account at a local bank, then work diligently to cultivate relationships at the institution. While business credit issues are tricky to negotiate, you might just convince a traditional lender to take a chance by exploring Small Business Administration loan programs. These loans come with government guarantees, so lenders are more comfortable extending financing to borrowers with relatively marginal histories.
Collateral, too, can help convince a reluctant lender to commit. It doesn’t necessarily have to be something the business already owns—banks will sometimes allow the items that will be purchased with loan proceeds to be used as collateral, though this depends on the value and the type of items being purchased. New equipment, for example, is commonly used as collateral.
If the conventional approach doesn’t work, there are still alternative approaches you can take a look at. One such option is the merchant cash advance. Under a merchant cash advance, you’re given cash upfront—in exchange for a percentage of your future daily credit card sales.
Businesses with strong, consistent monthly credit card sales are good candidates for this option, even if they have business credit issues. It’s important to look closely at the fine print when entering a merchant cash agreement, however. Rates and fees can vary widely, so it’s a smart idea to shop around and find the best deal possible.
Another way to build business credit is a revenue-based loan. This program lets businesses borrow money based on how much they deposit into their business bank account. The maximum total amount of these loans is based on a percentage of annual gross deposits—usually around 10%. Consistent deposits make banks more willing to extend revenue-based loans to borrowers with business credit issues.
While rates and fees are higher than those associated with a conventional loan, funding can happen in as little as a week. Typically, repayment comes through daily withdrawals from the corporate business account.
Another way to fund your company’s growth while building your business credit is to reach an agreement with a non-traditional online lender. These services cater to business owners who are frozen out of the conventional lending market, whether because they’re young, have lower or nonexistent credit, or something else altogether. Along with a lower barrier to entry, these lenders offer other advantages: they can process a loan very quickly, they’re flexible, and they offer instant approval in some cases.
There are, however, some caveats. Alternative lenders generally charge higher rates and fees in exchange for looser lending requirements. Different platforms also have varying business loan requirements—with regards to credit score, revenue, time in business, and so on—in terms of what you’ll need to be approved. If you’re in need of capital immediately and you’d like to start resolving existing business credit issues, these lenders are often a good option.
Many small business owners with credit issues feel like they have no choice but to finance their company through a combination of personal loans and business credit cards. But that’s rarely the best play, because there are almost always better options available.
Combining business and personal finances often has disastrous results—and doesn’t help you build business credit. In order to provide your business with the capital it needs to unlock its full potential, business loan options are the smart bet.