Getting Started with Startup Business Loans When You Have No Credit History

Starting a new business is always a risky endeavor. As an entrepreneur, you have a great idea that you want to turn into a successful company. But you need capital to get your business off the ground. This is where small business loans come in.

But what if you have no credit history? Traditional banks and lenders want to see a solid credit score before they’ll approve a loan. When you’re just starting out, you likely don’t have any credit established yet. Does this mean you’re out of luck? Absolutely not! With the right approach, you can get funding for your startup even with no credit history.

In this article, we’ll break down different strategies for securing small business loans when you’re starting from scratch credit-wise. We’ll also look at the pros and cons of different lending options and how to choose the right path for your unique situation.

Bootstrapping Your Startup

The most straightforward approach when you have no credit is to bootstrap your business. This means relying on your own savings, credit cards, or funds from friends and family to cover startup costs.

The main advantage of bootstrapping is that you don’t have to rely on any banks or lenders. You maintain complete control and ownership of your company.

The downside is that you can only bootstrap so far before you need an influx of capital to really grow. Most entrepreneurs can’t fully fund a business on their own savings or credit cards alone.

Bootstrapping works best for simple, low-cost business models like freelancing or consulting. For more complex startups that require inventory, equipment, staffing, etc., external funding will likely be necessary at some point.

If you do decide to bootstrap, be strategic about spending. Stick to only essential upfront purchases. And establish separate business accounts and credit cards to keep personal and company finances separate.

Building Business Credit

One key step to getting a startup loan with no credit is to begin building business credit. This means establishing credit lines and payment history specifically under your company’s name, rather than your own personal score.

Some ways to build business credit include:

• Getting a business credit card and making all purchases on this card (not personal cards). Be sure to pay off the balance promptly each month.
• Opening a business checking account and getting a small line of credit with the bank.
• Applying for credit accounts with business-specific vendors like Uline or Grainger. Make timely payments.
• Taking out microloans of $500-$5000 from online lenders like Kabbage or Fundbox and repaying on schedule.

As you build business credit, you’ll start to accumulate tradelines on your company profile with Experian, Dun & Bradstreet, and other bureaus. This demonstrates that your business honors its financial obligations.

With 1 year or more of positive business credit, many lenders will be willing to extend financing based on your company profile, even if you personally have no credit history.

Getting a Cosigner or Guarantor

Another option if you have no credit is to apply for a small business loan with a cosigner or guarantor. This is someone with strong credit who agrees to be responsible for repaying the loan if you can’t.

Often, a family member or close friend with excellent credit will cosign a loan to help out an aspiring entrepreneur. Some things to keep in mind with cosigning:

• The cosigner becomes equally liable for the debt. Defaulting can hurt their credit.
• If your relationship sours, the cosigner still can’t easily remove themselves from the loan.
• Some lenders allow cosigners or guarantors, while others don’t. Shop around.

Make sure you fully trust any cosigners before moving forward. Outline clear expectations for repayment and keep them informed about the business’ progress.

Alternative Online Business Lenders

In recent years, a whole industry of alternative online lending platforms has emerged to serve the needs of small business owners who can’t qualify with banks. These include companies like Kabbage, OnDeck, and Fundera.

Online lenders use advanced technology to assess risk. They look at hundreds of data points beyond just credit scores to approve loans. This includes business revenue, profitability, online reviews, social media presence, and more.

The advantage is that they are more likely to approve those with no or poor credit. The downside is that their loans often have higher interest rates and aggressive repayment structures. Make sure you can handle the payments before signing.

Some tips for getting approved with alternative lenders:

• Show consistent business revenue and growth over several months. This demonstrates ability to repay.
• Have a solid, well-developed business plan. This indicates you have done your homework.
• Provide explanations for any past credit issues. Be honest.
• Start with a small loan request first to prove yourself before asking for more capital.

Government-Backed Startup Financing Programs

Don’t overlook government small business financing programs in your quest for startup funding. The government offers many loans, grants, and other assistance targeted at helping new entrepreneurs access capital.

Top government loan options include:

• SBA 7(a) Loans – Offered through local SBA-approved lenders. Flexible qualification requirements.
• SBA Microloans – Loans up to $50,000 from non-profit lenders, with less red tape.
• SBA 504 Loans – Fixed-rate financing for major assets like real estate or equipment.
• USDA Business Loans – For those starting rural businesses. More lenient credit standards.
• State and Local Programs – Many states/cities offer small business grants and loans.

The application process for government programs can be lengthy, with lots of paperwork. But if you secure approval, you can get affordable long-term financing that really helps offset the lack of credit history.

Equity Financing Strategies

Equity financing means raising capital by selling shares in your company rather than taking on debt. Common startup equity financing options include:

• Friends and Family – Ask those close to you to invest; set clear repayment/equity terms.
• Angel Investors – Wealthy individuals who help fund startups; get introductions through your network.
• Venture Capital Firms – Institutional investors who provide millions in growth capital.
• Crowdfunding – Raise small investments from a large pool of online contributors.

The benefit of equity financing is you don’t have monthly debt payments hanging over your head. The tradeoff is giving up ownership stakes and decision-making power in your company.

Make sure you don’t give up too much control or ownership when pursuing equity financing. Retain as much as possible for yourself as the founder.

Choose Investors Carefully Based on Value-Add

Vet potential investors carefully based on what strategic value they can add, beyond just capital. Ideal investors:

• Have deep industry expertise to lend
• Can provide key introductions and connections
• Will actively mentor you and be involved
• Share your vision for the company’s future
• Have successfully invested in startups before

The right investors can tremendously accelerate your growth. But make sure to assess how they’ll be involved, not just how much they’re willing to contribute.

Managing Cash Flow and Growth Carefully

Once you secure startup financing, be very careful with managing expenses and cash flow. Too many companies fail because they take on excessive debt or expand too quickly before earning consistent profits.

• Set a detailed budget for how you’ll use the capital and track closely.
• Hire slowly; only onboard employees absolutely necessary at first. Outsource where possible.
• Look for ways to keep growth lean, like forming strategic partnerships rather than acquiring capabilities.
• Only scale up after you have a proven business model and sufficient early revenue.

With careful planning and disciplined execution, you can make every dollar count. This ensures you’ll be able to repay investors and lenders that took a chance on you.