By Fernando Berrocal

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As a startup entrepreneur, you will discover that virtually all startups (regardless of size and industry) need to borrow money at some point. However, that does not imply that all founders find uniform footing when searching for business funding. In essence, who will lend to you and in what circumstances will primarily depend on your business credit score and trade history. 

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So, what are the possibilities for business loans for your brand-new startup? In this post, we will take a deep dive into how your credit score relates to the type of business loan you might obtain. 

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When Your Credit Score Is Excellent

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If you have an excellent business credit score, the business world will be your playground (in terms of financing possibilities). You have a high chance of getting any kind of bank loan you choose. This situation has been harder to replicate since lending standards were toughly tightened in 2009 as a result of the world financial crisis of 2008.

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When Your Credit Score Is Good

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On the other hand, if your score is decent but not outstanding (such as  in the circumstance described above), you can encounter obstacles in the pursuit of long-term borrowing (generally speaking). Banks will still conduct business with you and your business, although you could experience some minor inconveniences. These circumstances might entail having a shorter loan term, less capital at your disposal, and, of course, an overall higher interest rate.

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When Your Credit Score Is Average

As long as your business is financially stable, you may still be eligible for some short- and medium-term loans with a moderate credit score. Repayment of a short-term loan must occur within a calendar year. On the other hand, you might contemplate pursuing a medium-term loan, which would take between one to five years to be returned.

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When Your Credit History Is Damaged or Insufficient

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For a variety of reasons, many businesses experience different types of financial challenges.  This may, in turn, lower their overall business credit score as a result. Startups in particular lack a trading and payment history, and a score that is not full might somehow be detrimental. Banks might not be eager to collaborate with you, but there are a lot of alternative business opportunities to consider.

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Alternative Lenders

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 An alternative lender is a type of lender that is primarily interested in your business potential.  They use standards that are extremely different from banks. Your business strategy and the assets you hold are also taken into account–in addition to your credit score. Alternative lenders may ultimately provide you with the funding you require to outperform the competition, whether it is through different factors such as asset-based financing, emergency loans, invoice factoring, or discounting.

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Credit Line for Businesses

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Similar to an overdraft, a line of credit lets you borrow and pay back money whenever you choose to do it. Because of this, it is often considerably simpler to get and is much more flexible than a regular bank loan (though sometimes it can be more costly).

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Financing Based on Business Assets

With a (business) asset-based loan, you can borrow money using the assets of your business as protection.  This is in case you can’t repay the debt for any reason that may occur. The interest rate for this type of financing tends to be more competitive, since the loan is secured with your business.  With this type of loan, your credit score should be essentially meaningless.

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Discounting and Factoring of Invoices

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These innovative approaches can permanently control a problematic cash flow–and enable you to borrow money against your invoices as soon as you send them out. Repayment is made when clients pay you.  If you choose factoring, you may even designate the financing business to handle collections. If you don't have a separate accounting department, this is the ideal option to choose.

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Peer-To-Peer Lending

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The peer-to-peer lending option mainly involves other businesses or individuals lending to you directly through an internet gateway. From their perspective, this can be rather dangerous, but it ultimately enables them to generate far more interest than they would from a regular bank account.

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In conclusion, you may always take out personal loans to finance your business if you have no credit history at all–even if you are unable to obtain financing from an alternative lender. However, keep in mind that if your startup fails (which is almost always the case), you are personally responsible for the debt. In the case that you have provided a personal guarantee, your home and/or car may be also at risk.

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Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.