Published By Janet Gershen-Siegel at August 31st, 2017
So, you’re finally doing it. You took the plunge and you started your own small business. But there is so much you need! Whether it is renovations for your location or payroll or the ramp-up costs for getting manufacturing started, all of those things need money. You need to get a credit line for your business.
Because you are not made of money.
But your business is new, so its credit score is not so hot. As a result, you are probably wondering how to finance a business with bad credit.
But let’s step back a little, because you should also be thinking about where to establish business credit.
A credit line, or line of credit (LOC), is an arrangement between a borrower and a financial institution or private investor which sets a maximum loan balance that a borrower can access.
A borrower can access funds from their line of credit anytime, so long as they don’t go over the maximum set in the agreement, and as long as they meet any other requirements of the financial institution or investor for example, making on time payments.
Credit lines offer many unique benefits to borrowers including convenience. Borrowers can use their line of credit and only pay interest on what they use, unlike loans where they pay interest on the total amount borrowed. Credit lines can be reused, so as you acquire a balance and pay that balance off, you can use that accessible credit again, and again.
Credit lines are revolving accounts similar to credit cards, and compare to other kinds of financing such as installment loans. In many cases, lines of credit are not secured, much the same as credit cards are. There are some credit lines which are secured, and thus easier to qualify for.
Credit lines are the most routinely requested loan type in the business world even though they are preferred, true credit lines are uncommon, and hard to find. Many are also very hard to qualify for, requiring good credit, good time in business, and good financials. But there are other credit cards and lines that few people know about that are available for start-ups, poor credit, as well as if you have absolutely no financials.
A lot of credit line types that most business owners imagine come from conventional banks and traditional banks use SBA loans as their prime loan product for small business owners. This is because SBA guarantees as much as 90% of the loan in the event of a default. These credit lines are the most difficult to qualify for because you must qualify with SBA and the bank.
There are two fundamental sorts of SBA loans you can normally get. One form is CAPLines. There are actually 4 types of CAPLines that can work for your small business.
You can also get a lower loan amount more rapidly using the SBA Express program. A lot of these programs offer BOTH loans and revolving lines of credit.
From the SBA … “CAPLines is the umbrella program under which SBA helps business owners meet short-term and cyclical working capital needs”. Loan amounts are offered up to and including $5 million. Loan qualification prerequisites are the same as with other SBA programs.
This one advances against expected inventory and accounts receivables. It was developed in order to help seasonal businesses. Loan or revolving are available.
This one finances the direct labor and material costs of executing assignable contracts. Loan or revolving types are offered.
This one was made for general contractors or builders constructing or renovating commercial or residential buildings. This line is for finance direct labor-and material costs, where the building project serves as the collateral. Loan or revolving kinds are available.
Borrowers must use the loan proceeds for short term working capital/operating needs. If the proceeds are used to acquire fixed assets, lender must refinance the portion of the line used to acquire the fixed asset into an appropriate term facility no later than 90 days after lender discovers the line was used to finance a fixed asset.
Private investors and alternative lenders also grant credit lines. These are a lot easier to qualify for than conventional SBA loans. They also call for much less documentation for approval. These alternative SBA credit lines ordinarily demand good personal credit for approval.
Unlike with SBA, many of them don’t demand good bank or business credit approval. Almost all of these types of programs call for two years’ of tax returns. Tax returns have to show a profit. Rates can vary from 7% or greater and loan amounts range from into the millions. Loan amounts are generally based upon the revenues and/or profits on tax returns. At times lenders may ask for other financials including a profit and loss statement, balance sheets, and income statements.
A lot of these cards report to the consumer credit reporting agencies. They all call for a personal guarantee from you. You can get approval typically for one card max as they discontinue approving you when you have two or more inquiries on your report.
Most credit card companies furnish business credit cards including Capital One, Chase, and American Express. These have rates similar to consumer rates and limits are also similar.
Some of them report to the consumer reporting agencies, some report to the business bureaus. Approval requirements resemble consumer credit card accounts.
Typically, when you apply for a credit card you put an inquiry on your consumer report. When other lenders see these, they will not approve you for more credit since they have no idea how much other new credit you have recently obtained.
So they’ll only approve you if you have no more than two inquiries on your report within the most recent six months. Any more will get you declined.
But with this form of business financing, you work with a lender who concentrates on securing business credit cards. They can in most cases get you more approvals than you can get on your own.
This is because they are familiar with the sources to apply for, the order to apply, and can time their applications so the card issuers won’t decline you for the other card inquiries. Not only will you get cash, but you build your business credit as well. And soon, you can then use your new company credit to get even more money.
Like with anything, there are substantial benefits in working with a source who specializes in this area. The results will be far better than if you try to go at it on your own.
You need to have excellent personal credit now. Or use a guarantor or a credit partner to boost the numbers. Generally these people want a piece of the business in trade for their help. Creditors want to know you’ll pay them back. Most sources will charge 9 to 12% success-based fees. Only pay the fee off what you secure.
With all preceding cards above, you must have good consumer credit in order to get approval but what if your personal credit is not good, and you don’t have a guarantor?
This is when building business credit makes a ton of sense even when you have good personal credit, setting up your company credit helps you get even more money, and at times without a personal guarantee.
You can get a credit line for your business, if you know where to look. Learn more here and get started toward building company credit.