Most entrepreneurs need external financing to get the capital necessary to start and run a business. However, limited credit makes securing financing more difficult. Lenders look at your credit history when you apply for a business loan and other financial products. Your credit history is a record showing your credit accounts and how well you managed your debt repayments.
The information in your credit history is also used to calculate your credit score, measuring your risk as a borrower. A high credit score indicates you’ll likely repay a loan or credit card debt. Hence, you have a better chance of qualifying for a loan at a lower rate.
The problem with startups is they don’t yet have an established track record that details how they handle financial obligations. As a result, obtaining business financing can be trickier since there’s no financial information that the lender can evaluate.
While it’s not easy, securing financing with no credit is possible. Learn how your startup can obtain funding without credit using the tips below.
Securing Financing With No Credit – 5 Tips for Startups
1. Get Your Personal Credit in Order
Your personal credit history can also give lenders an idea of how you handle credit obligations. In most instances, the lender may use your personal credit rating to confirm the startup owner’s risk profile.
Thus, ensure you get your personal credit in order. Check for any errors in your credit report and fix them before you apply for financing for your startup.
2. Seek Loans With No Credit Check
Another viable option is to seek loans with no credit check. Lenders of these loans don’t examine your credit history or credit score when making lending decisions. They also offer fast access to capital so you can quickly get the funds to launch your startup.
But since it’s riskier on the lender’s part, loans with no credit check may come with higher interest rates. Considering that, it’s a good idea to research whether no credit check loans are the right choice for your startup. Websites like CreditNinja.com provide valuable information on this type of loan.
To give you an idea, below are three types of no-credit-check loans:
- Title loans: These loans require you to use your vehicle’s title as collateral. If you fail to pay back the loan, the lender can repossess your vehicle to recover its money.
- Pawn loans: These loans also require collateral like TV, jewellery, or a musical instrument. Your loan amount depends on the appraised value of the item you pawn.
- Payday loans: These loans are short-term that you need to pay on your next payday, typically between two to four weeks.
3. Include a Cosigner in Your Loan
You can also include a cosigner in your loan application. A cosigner can be a friend or family member with better credit or higher income. They will cosign the loan and agree to be legally responsible for repaying in case of a default.
Adding a cosigner can boost your chance of getting approved for business financing with the best deals even when you don’t have credit. However, the cosigner’s credit will be at risk if you miss payments or your loan becomes delinquent.
4. Borrow Money from Your Self-Invested Personal Pension (SIPP)
Borrowing money from your self-invested personal pension (SIPP) is also possible. Since it doesn’t involve dealing with a lender, there’s no credit score requirement that you need to meet. However, note that not all SIPP providers facilitate lending and borrowing.
Before going for this option, it’s also critical to consider how borrowing money from your SIPP will affect your retirement future. With a SIPP loan, you’re paying your interest to your account. The withdrawn amount is also tax-exempt if you repay it by the due date. But if you fail to do so, the funds will be subject to a large tax bill.
5. Establish Your Business Credit
Taking the time to establish your business credit before applying for a loan is still the best approach. Doing so will give your business more financial opportunities. It can also keep your personal finances protected.
Building your business credit for the first time can be overwhelming. Consider the following steps to help you get started:
- Register your new business.
- Open a bank account under your business name.
- Apply for a business credit card.
- Ensure you pay your bills on time.
- Settle payments with vendors and suppliers early.
- Check your business credit report regularly.
A good credit score can help secure more favourable interest rates and terms. But, having no credit is a common predicament among new businesses. Your financing opportunities could be limited when you don’t have a credit history.
The upside is that you can get the right financing regardless of your current credit score. Take the time to research your options and shop with different lenders until you find the one that best suits your startup.