The process of securing a business loan can be an intimidating task but to put an asset as collateral to get the capital is a risk that not all entrepreneurs like to take. In a lot of cases, most new businesses do not have any significant assets to offer in the first place. So, it becomes an uphill battle. But what about a business loan without collateral? It may sound daunting but rest assured, it is not out of reach.
Contrary to the practices of the past, today’s lenders do not just assess a loan application based on collateral. Nowadays, the absence of collateral doesn’t necessarily means end of funding opportunities for startups and small businesses. Your credit score can be the deciding factor whether your business can secure the funding it needs or not. In today’s time, lenders tend to put more value into credit scores since they view it as a reliable indicator of financial responsibility.
The purpose of this article is to explain how a solid credit score can boost your chances of getting a business loan without collateral and highlight the importance of personal guarantees, credit checks, and a solid business plan in this process.
Why Credit Scores Matter for No-Collateral Business Loans
With no collateral loans, lenders tend to take greater risks in offering funds without having any physical assets as a security to recoup the loan amount, in case of a default. That’s why they need assurances of a borrower’s trustworthiness and responsibility. And a strong credit score sends a signal to lenders that you have a history of being financially responsible and you manage your debt obligations efficiently. All this makes you a safer bet for repayment.
While applying for any no collateral loans, lenders tend to check two types of credit scores:
- Personal Credit Score: This is your individual financial history and is very important for startup owners or small businesses that haven’t yet established a formal business credit profile.
- Business Credit Score: In case your business has been in operation for some time, then lenders will also look at its credit history to assess its financial health.
A combination of both the scores will determine whether you qualify for small business loans without collateral. So, it becomes essential that you maintain a good personal and business credit score as they will boost your chances of getting your loan approved but that too at better interest rates and loan terms.
Personal Guarantees in No-Collateral Business Loans
Since offering a business loan with no collateral is a risky venture for lenders, many of them ask for personal guarantees to secure the funding. This simply means that in case your business is unable to repay the loan, you will be personally responsible for the repayment. And in such case, the lenders may use your personal assets like your home or savings to recoup the balance owed to them.
Preparing for a Credit Check
While applying for a no-collateral business loan, it is best to be prepared for a thorough credit check. Check out a few steps listed below to ensure your credit score works in your favor:
1. Review Your Credit Report
Reviewing your personal and business credit reports is one of the basic rules that you should follow every time you prepare to apply for a business loan. You can get a free credit report from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion. You can go through the statements to check for any errors or discrepancies and get them corrected immediately, if found. If you neglect this step and an error surface during the credit check, it can lower your credit score and affect your chances of loan approval.
2. Improve Your Credit Score
It is understandable that not everyone’s credit score might be as high as they would like. But there are many ways to improve it before applying for a business loan. Keep in mind, do not proceed or start an application without checking your credit report and/or improving the scores if you can.
If your credit scores are not great, you can pay off your existing debts, ensure timely payment of all your bills and reduce your credit utilization to improve your scores.
3. Have a Solid Business Plan
Rember, your credit score is not the only determining factor for lenders. A solid business plan is crucial in showing them that you are a good investment. Your business plan should include revenue projections, a clear growth strategy, and a detailed breakdown of how you plan to use the business loan. This will increase the faith of your lenders in you as a loan applicant and will definitely boost your chances of getting your loan approved.
4. Consider Alternative Business Funding
Don’t be disappointed if your credit score isn’t perfect. The financing options have not dried out. You should consider revenue-based financing or other types of alternative business funding to get the funding you need. These types of financing do not require a perfect credit score to provide capital. Instead, they look at other factors like business’s revenue stream to determine loan eligibility. But be aware that these funding options come with higher rates of interest. So, assess carefully before proceeding with this type of funding.
Conclusion
A solid credit score highlights a lot of things about a borrower- the history of repayment and being financially responsible, your debt management pattern and more. It can be your greatest asset when applying for a business loan without collateral and even with collateral. A good credit score can help you get the funding you need at lower interest rates and affordable loan terms. Your chances of getting approved for small business loans improve drastically if you have perfect credit scores. But even if you don’t have a solid credit history, alternative business funding options like revenue-based financing are available to provide the funding you need, and when you need it.
