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If you’re new to the world of small business funding, you might be disappointed to learn that your credit score is a major determinant of your business’s financial fate.
When you need a business loan to grow your company, you can be sure that your credit score will be checked before you’re approved.
With that being said, these days, there are more types of business loans out there than ever. And some small business lenders are more lenient on credit scores than others.
One of the types of business loans that happen to be available to business owners without perfect credit is equipment financing.
But just how easy it is to get an equipment loan? Does no credit check equipment financing really exist?
We’re here to help you answer that question and sort out your options for equipment financing when you have bad credit.
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If you’re wondering whether equipment financing without credit checks exist, the short answer is, “No.”
Virtually no lender will lend to a business without pulling the owner’s (or the business’s) credit score. (At least, no lender you should work with would.)
But just because there aren’t really “no credit check” equipment financing options out there doesn’t mean you’re totally out of luck when it comes to finding the capital you need to purchase equipment and grow your business.
Let’s dig deeper into the issue to give you a full picture of what your options might be.
It’s frustrating to find that having bad credit or no credit at all precludes you from many small business funding options.
Why do lenders care so much about your personal credit?
Well, when you think about what your personal credit really shows, it makes a lot of sense.
Your personal credit is a three-digit number that essentially shows how reliable and responsible you are with your finances.
It tracks your behavior with and history of your financial accounts—how many credit accounts you have open, how much debt you currently have on the accounts, and so on.
Most importantly, your credit score is an indication of how often you pay your credit accounts on time, and in full—which is particularly interesting to small business lenders.
If you have a long history of paying what you owe when it’s due (and have a great credit score to show it), lenders can have confidence that you’ll pay back what they’ve lent you. An indication of the opposite, however, will leave lenders skeptical if you’ll actually pay back what you owe on time and in full.
So for this reason, almost all lenders will check your credit before working with you—and hence why no credit check equipment financing options don’t really exist.
There is one notable difference between equipment loans and other financing options, giving hope to those looking for no credit check equipment financing.
Here’s what you need to know about equipment financing:
They’re collateralized loans.
Your next question is, logically, what’s a collateralized loan?
Well, in most cases, collateral is an asset that’s pledged against a loan as security for the loan’s repayment.
Generally, collateral can be personal or business assets: real estate, equipment, cars, deposits, and so on.
In the case of equipment financing, the equipment you’re purchasing with the financing specifically acts as collateral for the loan.
Say you’re buying a new delivery van with the loan. The equipment loan will typically amount to 100% of the value of the vehicle or a large percentage of it. You can use that vehicle right away while paying off the equipment financing in regular (often monthly) payments.
However, if things go south and you end up missing your payments, your lender could seize that vehicle and sell it to recoup their losses incurred by your missed payments.
This is the concept behind collateral and is what makes asset-based financing unique.
So, what does this all mean?
Why is the collateral-aspect of equipment loans good news to business owners looking for no credit check equipment financing?
Well, the value of the fixed asset you’re purchasing (the equipment) provides a security blanket for the lender. In the case that you can’t pay, they’ll end up being able to recover most of the value of the equipment loan by repossessing the equipment and liquidating it.
This means that your credit score is much less important in qualifying for equipment financing than it is when qualifying for, say, a medium-term loan.
In fact, you might still be able to be approved even with less-than-stellar credit. (Remember, the equipment itself protects the lender’s interest!)
If you’re looking for no credit check equipment financing because you have bad credit, you won’t find a lender who totally ignores your credit, but you might find a lender who’s willing to work with bad credit borrowers.
That’s why you shouldn’t rule out equipment financing despite the need for a credit check.
If you’re in this boat, it comes down to shopping your options. If you compare different equipment lenders out there, you might find a lender willing to work with borrowers in your credit tier.
You might not be looking for equipment financing with no credit check necessary simply because you have bad credit.
Some borrowers, instead, look for no credit check financing options because they don’t want their credit pulled.
Why would this be a concern?
Well, it comes down to how your credit score is calculated.
One piece of the credit score pie is what’s called “New Credit.”
New credit is a part of the calculation that takes into account the new credit accounts and debts that have been added to a credit report.
And while building up a long history of responsible credit accounts is a good thing for your credit score, frequently opening new accounts can be detrimental to your score. FICO’s research shows that people who frequently open new accounts are more likely to be delinquent on those accounts—and the FICO algorithm accounts for that correlation.
Here’s where the “no credit check” aspect comes in.
Every time you add a “new” credit account, there’s a (very good) chance that the lender will make a hard inquiry on your credit report to see the full report and decide if they want to extend credit to you.
A hard inquiry results in dings to your credit score, especially if the credit reporting bureaus are seeing many hard inquiries over a short period of time.
For borrowers conscious of the standing of their credit score, the lack of a hard credit check (i.e., no credit check) is appealing.
If you’re approaching equipment financing with this mindset, here’s what you need to know.
There’s such a thing as a “soft” credit pull. Soft credit pulls do not affect your credit score.
Every time you check your credit report, for instance, you’re performing a soft credit pull.
A few lenders will only do a soft credit pull when assessing your eligibility for a loan. If the hard credit inquiries are something you’re worried about (and thus why you’re on the hunt for no credit check equipment financing), filter your search toward equipment lenders who only do a soft credit pull. Funding Circle, for instance, approves term loans for equipment needs and only does a soft credit check.
But when it comes down to it, hard credit inquiries shouldn’t be as feared as they are. Some hard credit inquiries don’t affect scores at all. Some do, but only for a limited amount of time. The effect a hard credit pull can have on your score is really dependent on the type of borrowing history you’ve had.
This is all to say that, if you’re looking for no credit check equipment financing not because you have bad credit but because you are trying to avoid a hard credit inquiry, you shouldn’t be too worried about a hard credit pull in the end.
Looking for no credit check equipment financing because you have bad or no credit history?
Well, if you can’t qualify for traditional equipment financing, there might be other options that fit your business’s equipment needs.
Here are two options to consider.
When it comes down to the structure of short-term loans, they really aren’t that different than equipment financing.
Equipment financing is essentially a term loan (collateralized by equipment) that’s paid off over a set period of time.
A short-term loan is a type of term loan that’s paid off over a set period that’s typically shorter than the average term loan or average equipment loan.
You receive a lump sum of capital that you’ll pay back with daily or weekly repayments, with interest on top.
Here’s why short-term loans could work well in place of equipment financing:
You might never have thought of a business credit card as a “loan” before.
But it might be time to broaden your horizons, especially if you’re running a newer business.
Like a line of credit, a business credit card gives you access to a pool of funds that you can use for business purchases—granted you pay off your credit card balance each month.
While using a business credit card certainly wouldn’t equate to using an equipment loan, you can still use a credit card to cover smaller equipment charges. As long as your credit limit allows it, you can put a smaller equipment purchase on the card, and pay down the card as you can.
The benefit of using a business credit card to finance small business purchases is that business credit cards might be easier to qualify for than more traditional equipment loans.
Credit cards like the Capital One Spark Classic for Business are available to borrowers with personal credit scores as low as 550. (Not only is the Spark Classic accessible, it also comes with a fair amount of perks—like unlimited 1% cash back, no annual fee, and no balance transfer fees.)
While business credit cards are certainly not “no credit check equipment loans” (credit cards do come with credit checks), they are more accessible financing methods to help cover the smaller equipment purchases your business needs to grow.
Unfortunately, business owners looking for no credit check equipment financing will be disappointed to find that equipment loans with no credit check don’t really exist.
Don’t lose hope, though!
You might be surprised to find that equipment financing could work for borrowers with limited credit, so don’t cross this type of business loan off your list.
Consider your options with a variety of equipment lenders, and keep a keen eye out for alternatives that could fit the bill while you grow your credit.
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