How Can I Get a Business Loan With No Credit?

There may be some options if you have no credit history.

Securing a business loan when the owner's credit is poor or nonexistent can be a difficult task. There are some alternatives to traditional loans or loan sources. If the loan source needs to be external -- that is, no borrowing available from friends or family -- one important factor is to remain open and creative. There are transitional methods that can be used; they get the borrower "somewhere else," toward a more traditional funds source.

Startup: Before You Shop

Start cheap, but real.

If getting a business loan is the ultimate goal, the owner needs to act like he is in business. That means, among other things: having a business name; having a business entity, either a sole proprietorship, LLC, corporation or partnership; having a business bank account; and having a business identity including phone, cards and brochures. These basics not only convey seriousness, they provide a vehicle for the business to grow efficiently. When a lender says yes to a loan request there needs to be an account to deposit proceeds in.

Quasi-Loan No.1: Asset Liens

You can pledge assets.

If the prospective borrower has no credit history, the lender could consider a relatively modest loan secured by readily-valued assets. These may be securities, life insurance policies, or the right to a stream of income such as annuities, rentals or contracts. The lender will look to the liquidation value of the assets as the ultimate repayment source in the event of default. If the borrower has no such assets, the lender can allow someone else to pledge or assign their assets on behalf of the borrower, such as a relative. The main issue here is that the value of the assets underly the loan without the necessity, except in a default situation, for the assets to be liquidated.

Quasi-Loan No. 2: Merchant Advances

Consider merchant advances.

If the new business intends to accept credit cards, merchant advances can be a potential source of operating cash. In essence, merchant advance firms provide a cash outlay to the business owner, and make recovery via a percentage sweep of future credit card transactions. The operating history or time in business is a key factor for merchant advance firms. They will also usually require that a partner processing company become the processing vendor for all transactions, to ensure that their recovery sweep is processed. Fees for merchant advances can be relatively more expensive than loans, however, remember these are transitional steps.

Quasi-Loan No. 3: Secured Credit Cards

Secured credit cards can be a transition jump start.

The use of a secured credit card, where the issuer specifies a line limit equal to a cash deposit that it holds in reserve, can be an excellent credit-building mechanism. If a business owner has a supply bill for $500, will be collecting $1,000 in invoices next week, and has only $500 now, it's better to use that $500 as a deposit for a secured credit card, and use the card to pay the current pending supply bill. When invoices are collected, the card balance can be paid. The act of using the card generates a reportable "credit extension" which will start building a credit history. In addition, most secured credit card issuers will pay the customer a nominal interest rate on the deposit being held. It will not be unusual for the business owner to start receiving mail offers for traditional unsecured credit cards within a few months of making timely payments on the secured card.

Quasi-Loan No.4 : Asset-Based Credit Lines

Asset-based loans are a second-level step.

For manufacturers, distributors and some service businesses, a "second level" option can be asset-based credit lines. In varying forms, these loans provide advances against collateral such as accounts receivable in exchange for the right of collection. In ABL, or outright purchase, as in factoring, the funder makes advances of 70 to 85 percent of the business invoice. Upon payment, the unadvanced amount, less the funder's fees, are passed back to the borrower.

Summary

A traditional loan is the goal to chase.

The business owner needs to be mindful that the alternatives discussed are intended to be transitional. Historically, merchant advances and asset-collateralized advances will have the highest cost and most stringent restraints relative to other sources. As the borrower's creditworthiness improves, asset-based loans or factoring advances will still cost more than traditional unsecured credit but will be cheaper than merchant advances. The important associated mindset for the business owner needs to be an awareness of one's credit situation. As credit use becomes reported and is kept progressing the owner must be ready to ask for and shift to funding sources featuring less cost and more flexibility.

References

• Genesis Business Cash Advance
• First Commercial Credit
• Business Factors
• Bank Rate; 10 Questions Before Getting Secured Credit Cards