• Small business owners in the startup phase or with bad credit may want to avoid a hard credit check when they apply for business financing. 
• Let’s explore why hard credit checks matter, no credit check business loans, how to start a small business with no money and no credit, and more in this article from Nav’s experts.

What Is a Hard Credit Pull, and Why Does It Matter?

A hard credit pull, also known as a hard inquiry or hard credit check, is a type of credit check that happens when a lender or creditor reviews your credit report. This is part of the decision making process for whether or not to lend money to a potential borrower. You’ll typically have to go through a hard credit check when you apply for new credit cards, loans (like mortgages, auto loans, or small business loans), or other forms of credit.

During a hard credit pull, the lender requests access to your full credit report from one or more of the major credit bureaus. This allows them to assess your creditworthiness and history. Hard credit pulls can have a temporary negative impact on your credit score. The exact impact can vary depending on your overall credit history and the number of recent hard inquiries. Generally, a single hard inquiry might lower your score by a few points.

Hard inquiries typically remain on your credit report for about two years. However, their impact on your credit score diminishes over time.

On the other hand, a soft credit check (or soft credit inquiry) occurs when you check your own credit report, when a lender pre-approves you for an offer, or when employers conduct background checks. Soft inquiries don’t affect your credit score.

What Are the Qualifications for a Business Loan?

Qualifications for a business loan can vary depending on the lender, the type of loan, and the specific circumstances of your business. However, there are three main factors that lenders typically consider when evaluating a business’s eligibility for a loan:

1. Revenue and profitability: Lenders typically want to see a consistent and sufficient level of revenue and profitability to ensure that your business can generate the income needed to repay the loan.
2. Credit score: Both the personal credit score of the business owner(s) and the business’s credit score may be assessed. A higher credit score generally increases your chances of qualifying for a loan and getting favorable terms. However, there are business loans without a hard pull that don’t look into your credit score.
3. Time in business: Some lenders require that your business has been operating for a certain period before they consider you for a loan. The specific length of time required can vary but is often at least one year.

Other factors can include your business plan, your debt-to-income ratio, the amount of collateral you can put down, or your industry. 

The application process for business funding depends on what you apply for. Traditional lenders typically have more strict requirements and a longer loan application process. Alternative lenders, like online lenders that offer business lines of credit or other financing options, can have a more streamlined and fully digital process.

Can I Get a Business Loan With a 500 Credit Score?

Small business lenders, especially traditional financial institutions that offer traditional business loans, often have minimum credit score requirements (and usually need excellent or good credit) before they will consider your application. This helps lenders make sure that they are lending to businesses that have a history of repaying their debts. A credit score of 500 is considered poor credit. While there are business loans available to borrowers with poor credit, your options will be extremely limited. Plus, you’ll likely have higher interest rates and worse repayment terms with these types of loan offers. 

On the other hand, you can apply to no credit check loans or bad credit business loans. These loans don’t check your credit during your application and instead rely on factors like monthly revenue or annual revenue, collateral, or future sales. These include:

Business cash advances

With a business cash advance, your business can get an advance against future revenues, based on historic revenues. Also called merchant cash advances, this funding is typically available to businesses with healthy cash flow. You usually don’t need to sign a personal guarantee, although you may find higher rates and fees than with other types of funding (but it is usually a fixed fee, so your cost of borrowing won’t change with the market). 

Invoice financing

With invoice financing, you work with a financing company that makes sure outstanding invoices get paid. The financing company gives you up to 80% of the total funds as an advance. You usually don’t need a personal guarantee, and you may not be liable for uncollectible invoices.

Vendor financing

With vendor financing, vendors or suppliers give short-term funding to clients for products you buy from them. Net-30 financing terms are the most common, and they give your business 30 days to pay. You may not need a personal or business credit check, but this depends on the vendor. Also, you usually don’t need a personal guarantee.

Microloans

Microloans are smaller loans that come from microlenders (sometimes nonprofits) who may be able to work with borrowers with bad credit. However, you may have to go through a hard credit check when you apply for a microloan, so be sure to ask.

Small business grants

Small business grants are offered by the government and companies to support businesses without requiring that they pay back the funds. These are often very competitive but can be niche in their requirements, so if you qualify for one or more, it’s a good idea to apply.

It’s best to work at establishing and building up your credit — as well as building business credit scores — to open up more favorable loan options with better rates and terms. Learn how to establish business credit in this Nav guide.

How Can I Start a Business With No Money and Bad Credit?

Starting a new business with no money and bad credit can be challenging, but it’s not impossible. While traditional funding options might be limited, there are creative strategies and alternative approaches you can consider to launch your business. Here are some steps to help you get started:

1. Bootstrap the business: Start by assessing what skills, resources, and assets you already have. Can you provide services or products using your existing talents or knowledge? Bootstrapping involves starting small, minimizing expenses, and reinvesting any profits back into the business.
2. Use a lean business model: Embrace a lean business model where you focus on providing value to customers with minimal upfront costs. This might involve using free or low-cost tools, working from home, and keeping overhead expenses to a minimum.
3. Validate your business idea: Before investing any resources, validate your business idea by conducting market research and getting feedback from potential customers. This can help you refine your concept and ensure there’s a demand for your product or service.
4. Offer services: If you have skills that can be offered as services, such as consulting, freelance writing, graphic design, or social media management, consider starting a service-based business. These types of businesses often require little to no initial capital.
5. Form a partnership: Partner with individuals or businesses that complement your offerings. Collaboration can help you pool resources, share costs, and reach a wider audience.
6. Get crowdfunding: Platforms like Kickstarter, Indiegogo, and GoFundMe allow you to raise funds from a community of backers who believe in your idea. In exchange for their support, you can offer rewards or early access to your products.
7. Apply for grants and competitions: Research grants, contests, and business competitions offer funding to entrepreneurs. Many organizations and institutions offer financial support to innovative business ideas.
8. Use microloans and online lenders: Explore microloan programs or online lenders that cater to individuals with lower credit scores. These loans often have smaller amounts and more flexible eligibility criteria, but may or may not require a hard credit pull.
9. Tap into personal savings and assets: If you have personal savings, you can use a portion of it to fund your business. You might also consider selling unused assets, such as electronics, furniture, or collectibles, to generate extra funds.
10. Keep a side hustle or day job: While building your business, consider keeping a part-time job or taking on a side gig to provide a steady income and support your basic living expenses.
11. Reach out to friends and family: Approach family members and friends who believe in your business idea and might be willing to invest or lend you money. Be sure to formalize any agreements and treat these arrangements professionally.
12. Explore government programs: Some government agencies offer support to small businesses, including those with limited resources. Research local and federal programs that might offer help.

Starting a business with no money and bad credit is challenging, but your dedication, resourcefulness, and perseverance can make it possible. It’s important to have a solid business plan, be willing to adapt and learn, and be open to seeking guidance from mentors and other entrepreneurs who have faced similar challenges.

Do I Need Collateral to Get a Business Loan?

Whether you need collateral to secure a business loan depends on the type of financing, the lender’s requirements, and your financial situation. Collateral is an asset or property that you pledge to a lender as a form of security in case you’re unable to repay the loan. If you default on the loan, the lender can seize the collateral to recoup their losses.

The requirement for collateral can vary based on the type of business loan you’re seeking: 

• Secured loans: These loans are backed by collateral. Examples include many small business loans, SBA loans, and commercial real estate loans.
• Unsecured loans: Unsecured loans don’t require collateral. Instead, lenders rely more heavily on your creditworthiness, business financials, and other factors. Examples may include equipment financing, merchant cash advances, invoice factoring, business credit cards, and some other short-term loans.

If you have bad credit or limited business history, lenders may be more likely to require collateral as a way to reduce their risk. Loan providers that don’t require collateral will likely need you to sign a personal guarantee, which is an agreement that you will use your personal assets to repay some or all of the funds if the business fails to do so.

What’s the Best Place to Find a Business Loan?

Using Nav is the best place to find a small business loan that syncs with your business’s specific qualifications. If you need fast funding, you’ll likely want to look at an alternative lender that can provide a fully digital application and funding within one or two business days (a no credit loan will likely be from an alternative lender). If you’re aiming for the lowest rates, you may want to look at loans from traditional banks or SBA loans.

FAQs

• What’s the best way to get a business loan with bad credit?

  Getting a business loan with bad credit can be challenging, but it’s not impossible. While you work on improving your credit score, be sure to research lenders, consider putting down collateral, and be able to demonstrate strong cash flow.

• What is the difference between a business loan and a personal loan?

  A business loan is specifically designed to provide funds for business-related expenses, such as starting or expanding a business, purchasing equipment, hiring employees, covering operational costs, or investing in marketing and inventory. A personal loan is intended for individual use and can be used for various personal purposes, such as consolidating debt, funding a vacation, paying medical bills, or making home improvements.

• Can I get a loan without using my EIN?

  It’s possible. In some cases, small business loans for individual owners might not require the use of an EIN. Your personal information, credit history, and income may be sufficient for loan approval. However, if you’re applying for a business loan, especially for a larger or more formal business entity, you might be required to provide your EIN as part of the application process.