And Why You Still Need Business Credit Even if You Already Qualify for Them
When a business owner is looking for funding, it can be a bit confusing. There are way more options that most realize before the fact. Many head straight to the bank and apply for a loan. When they are denied, they are left with confusion and despair. First, they do not know why they were denied, and next, they don’t know what to do if they can’t get a loan. There are a few different options, but the next best thing for most business owners would be alternative small business loans.
What Are Alternative Small Business Loans?
These are loans that come through private lenders rather than banks. The vast majority of these lenders operate online. For the most part, the process is fast and simple. Borrowers fill out an application online, and generally receive approval in as little as a few hours. Once approved, funds are often in the borrower’s account in as little as a day or two.
The fast, easy process makes these alternative small business loans an attractive option for business funding. This is especially true for those who find they do not qualify for loans from traditional lenders.
Is There a Catch to Alternative Small Business Loans?
I know what you’re thinking. If these alternative loans are so fast and easy, why even bother with traditional loans. Do people just not know about them? There has to be some catch. Well yeah, there kind of is. The catch is, interest rates and terms are considerably less favorable than those you may get with a traditional lender.
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That’s because, in an effort to extend credit to those that do not qualify with a bank, alternative lenders have to be a little more relaxed with their eligibility requirements. As a result, they are taking on significantly more risk with their loans. To make up for this, they increase interest rates and loan terms to balance things out.
How do I choose the Right Alternative Loan for Me?
Once you know you are in a position to need alternative small business loans, you can start looking for the right one for your situation. How do you do this? The key is to research, research, research. Extensive research is absolutely necessary to ensure you find the best fit for your business.
While many of them function the same with similar requirements, there are some vastly different and innovative platforms for these types of loans as well. Read all the reviews, but don’t forget to look at the actual lender websites too. Only you know what your specific situation is. Only you know your credit score, how long you have been in business, and how much debt you can handle.
How to Start Finding the Right Alternative Small Business Loans
Start by determining your eligibility factors. You may not be able to anticipate what every single lender will require. However, there are a few things that most lenders will want to know before approving a loan. Things such as credit score, annual revenue, and length of time in business are pretty common.
If you know your score and what your annual revenue is before you begin looking for alternative small business loans, you will be able to weed out the ones you do not qualify for from the beginning. There are so many that you will definitely see the need to do this. Just to show you a sampling of what’s available, we have chosen a few different ones to get you started.
5 Alternative Small Business Loans to Kickstart Your Research
Start here, but definitely do not stop with this list. There are far too many options available, and new ones pop up regularly.
If you start with a search for alternative small business loans, Fundbox is going to be one of the first to pop up. It is a line of credit rather than a loan, but it is a great funding option because there is no minimum credit score requirement.
They offer an automated process that is super-fast. Repayments are automatic, meaning they draft them electronically, and they occur on a weekly basis. One thing to remember is that you could have a repayment as high as 5 to 7% of the amount you have drawn currently, as the repayment period is comparatively short. This means you need to be sure you have enough funds in whatever account you connect them to so that it can cover your payment each week.
Loan amounts come as low as $100 and as high as up to $100,000, but the max initial draw is $50,000. Though there is no minimum credit score requirement, they do require at least 3 months in business, $50,000 or more in annual revenue, and a business checking account with a minimum balance of $500.
As you find with many alternative business loans, lenders often offer options more similar to invoice factoring and lines of credit, as these present less risk than straight term loans. This is true of Fundbox as well as BlueVine.
The minimum loan amount available from BlueVine is $5,000 and the maximum is $100,000. Annual revenue must be $120,000 or more and the borrower must be in business for at least 6 months. Personal credit score has to be 600 or above. It is important to note also, that BlueVine does not offer a line of credit in all states. You can find out more in our review here.
Upstart is one of those that uses a completely innovative platform for alternative loans. The company itself questions the ability of financial information and FICO on their own to truly determine the risk of lending to a specific borrower. They choose to use a combination of artificial intelligence and machine learning to gather alternative data instead. They then use this data to help them make credit decisions.
This alternative data can include such things as mobile phone bills, rent, deposits, withdrawals, and even other information less directly tied to finances. The software they use learns and improves on its own. You can use their online quote tool to play with different amounts and terms to see the various interest rate possibilities. Typically, business loans are available ranging from $1,000 to $50,000. Interest rates vary greatly, ranging from 7.5% to 35.99%. Repayment terms can be either 3 -year or 5-year.
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To be eligible for a loan with Upstart, you must meet the following qualifications:
- Credit score of 620+
- No bankruptcies or negative public records
- No delinquent accounts
- Meet debt to income standards (they only note they will check this ratio, not what their standards are.)
- Have fewer than 6 inquiries in the past 6 months on your credit report, not including those related to student loans, vehicle loans, or mortgages
These are the requirements they list on their website. One independent review said that the requirement for the debt to income ratio is a maximum of 45%. It also says that the minimum annual income has to be at least $12,000. For more information on Upstart, see our in-depth review here.
Founded in 2008 by college roommates, Fora Financial now funds more than $1.3 million in working capital around the United States. There is no minimum credit score, and there is an early repayment discount if you qualify.
The minimum loan amount is $5,000 and the maximum is $500,000. The business must be at least 6 months in operation and the monthly revenue has to be $12,000 or more. There can be no open bankruptcies.
Obtaining financing from OnDeck is quick and easy. First, you apply online and receive your decision once application processing is complete. If you receive approval, your loan funds will go directly to your bank account. The minimum loan amount is $5,000 and the maximum is $500,000.
They do require a personal credit score of 600 or more, and you must be in business for at least one year. Annual revenue must be at or exceed $100,000. In addition, there can be no bankruptcy on file in the past 2 years and no unresolved liens or judgements.
Of course, these are just a few options available. There are tons out there, and many lenders offer multiple types of alternative small business loans. From term loans and lines of credit to invoice factoring, there are funding options for everyone.
You Still Need Business Credit
Though these lenders generally offer personal credit minimums for requirement standards, some will take business credit into account if you have it. In addition, you can always get business credit cards with business credit. The question is, do you have business credit? If not, how do you get it?
Building business credit is a process that takes time, but it isn’t hard. You just have to set up your business to appear fundable, and then work to get accounts reporting to your business credit report rather than your personal credit report. That means applying for credit using your business information rather than your personal information.
Benefits of Business Credit
Business credit allows your business access to funds you never even knew you could get. You can bid on real estate, get new equipment, and cover payroll. This is particularly useful in seasonal companies, where you can go for months with only nominal sales.
These are just a few of the reasons to build business credit. You can’t do that however, unless you know what impacts your business credit score. How do you even get business credit to begin with? This is the part of lot of business owners miss.
Establish Business Credit
If you are simply operating as a sole proprietorship, as many small businesses are, you probably do not have business credit. The reason being, your business transactions are likely being reported on your personal credit report.
To ensure you have a business credit report that is separate from your personal report, you need to separate your business from yourself. The first step in doing this is to incorporate, no longer operating as a sole proprietor. You can choose from organizing as a corporation, S-corp, or LLC. Which one you choose will depend on a variety of factors including the level of liability protection you want and how much you are willing to spend. However, for the purpose of establishing business credit, any of them will work.
You will also want to be sure you have separate contact information for your business listed in the directories, a dedicated business bank account, and a professional website. Find out more about establishing your business as an entity separate from yourself for building business credit here.
How to Get Business Credit
After you establish your business as separate from yourself, you will need accounts reporting to the business credit reporting agencies in your business name. That part is a little trickier, as most places will not extend credit to a business that does not have a credit score. The key is to use starter vendors from the vendor credit tier.
These are vendors that will extend invoices with net terms even without a credit check and report your payments to the business credit reporting agencies like Dun &Bradstreet, Experian Business, and Equifax. Find out more about starter vendors here.
Things to Remember When Building Business Credit
Once you have the ball rolling on building business credit, whether to help you get business credit cards, alternative loans, or some other type of funding, keep these things in mind.
- Paying on time is important
Late payments will affect your business credit score for a good seven years. If you pay your business bills off, as quickly as possible and as completely as possible, then you can make a very real difference when it comes to your credit scores. Be sure to pay in a timely manner and you will reap the rewards of
punctuality.
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- Your Personal Credit Isn’t Totally Off the Table
Experian Business actually offers lenders a blended score that includes your personal credit history. While a great business credit score can help counteract a negative personal credit score when it comes to the business score, you should still take steps to improve your personal score. Find out how here.
- How much credit you use matters
Do not give in to the temptation to use every bit of credit you have at once. That will mess with your credit utilization. This is indicated by your debt-to-credit ratio. That indicates how much of your available credit you are using. If you keep balances close to your limit, it can affect your score negatively.
You Still Need Business Credit, Even if You Can Get Alternative Small Business Loans Without It
If you need funding for your business and do not qualify for loans from a traditional lender, then alternative business loans could be for you. Their requirements are less stringent than those of traditional lenders, so even if your personal credit score is not great, you could still get one. However, regardless of whether you have good personal credit, you need to be building business credit.
This will not only extend the benefits already mentioned, but it can also help protect your personal finances. Despite the fact that your personal credit can at times have a bearing on your business credit, the opposite is typically not true. So, if there is an issue that affects your business credit, your personal credit should stay intact.
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