The biggest challenge most small businesses face is access to capital. Small businesses need lots of cash to get off the ground, grow, and expand. For most business owners, it is hard enough to get a loan from their local bank, but for some, it is almost impossible. These are the “credit invisibles,” according to a survey from the Consumer Financial Protection Bureau.
The report found that “there are 26 million adults in the United States without a credit record.” This amounts to 11 percent of U.S. adults. Additionally, our results suggest that another 19 million adults (about 8 percent) have credit records that are considered ‘unscorable.’” That amounts to almost 20 percent of American adults who have limited access to credit because they either have no credit report or there is insufficient data to score their credit habits. As a small business owner or start-up entrepreneur, being ‘credit invisible’ is a formidable hurdle.
“Consumers with limited credit histories established in the records of the three NCRAs generally have a harder time obtaining credit as a result because many lenders do not extend credit to consumers without a scored credit record or do so only in quite narrow circumstances,” the report stated.
Fortunately, many alternative lenders are employing new methods of risk analysis to help small business owners in this category. There are lenders that loan tens of thousands of dollars almost instantly because the repayment is taken out of daily sales. There are also peer-to-peer (P2P) lenders that provide smaller dollar amounts but do not require much credit history. Online lenders abound as well, offering quick cash to promising business owners.
The downside to alternative lending is that the interest rates are usually much higher than with bank loans, but the cost is often worth it to those with little or no business credit who cannot qualify for funding elsewhere.