Published By Janet Gershen-Siegel at December 29, 2017
Bad credit is an issue. There’s no refuting that. But it is not an overwhelming one. You can get credit for your small business even though your credit score is a stinker.
One means of getting business credit with bad consumer credit is by granting a personal guarantee. This personal guarantee can originate from you, but it can also come from an investor. If a family member (your semi-rich uncle, for instance) would like to have a chunk of your new business, why not offer a chunk for them granting a personal guarantee to a lending institution or credit issuer?
Personal guarantees do come along with a degree of risk. If your business does not succeed, then your investor could be left holding the bag if you default on loans etc. Subsequently, asking somebody to provide a personal guarantee for you is not something which either of you should take lightly.
Without having a personal guarantee, some loan providers will obtain a UCC blanket lien on your firm. A UCC blanket lien works as a notification which will go on your credit report. It says that the creditor has an economic interest in all of your business’s assets up until you pay off the loan in full. As a result, there may be dire results if you need to default. Likewise, for truly bad credit risks, your creditor might demand both a UCC blanket lien and a personal guarantee.
A better alternative is unsecured credit. Unsecured just means you are getting credit without putting down any cash (with secured credit, you put down a certain sum and can only borrow up to that sum).
So, how do you get unsecured credit? You get it by putting up collateral for your loan. Don’t feel you’ve got enough for collateral? Reconsider. You may have any range of assets which could be used as collateral for a business loan.
You might have a retirement fund, like a 401 (k). Or your semi-rich uncle might give you (or will to you) stocks or bonds. You may own your own dwelling. Each of these assets may be used as collateral for unsecured credit, no matter if that’s in the form of an unsecured business loan or a credit card.
You may also use your anticipated profits as collateral. Let’s say your business has owed invoices out to your clients. You may have given generous payment terms in order to sweeten a deal and get the sale. Or maybe your customer is just plain late paying you back. With accounts receivable factoring, you can get up to 80% of your uncollected receivables. Even so, you must be in business for at the very least a year and the receivables need to be with some other business (e. g. not with an individual).
Your organization may also have properties which you could use as collateral. Company assets can include landholdings– does your business own land, or a building, or part of a building? You can use this real estate as collateral.
It can also mean equipment, if you own it free and clear, although this has to be major equipment. You won’t be able to put together a bunch of smaller equipment. This is called an equipment sale leaseback– you are essentially selling your equipment to the lender and renting it back from them for the cost of your loan payments.
How about business stock? You can use inventory valued at $500,000 or more and use it for a line of credit worth 50% of your inventory’s value for what’s called inventory financing. Or if you have more like $300,000 worth of inventory, you can get an inventory loan for $150,000 (that is, the loan to value, also known as the cost, is 50%).
So take into consideration what you and your company possess, or are expecting to own in the near future. You just might have sufficient collateral for an unsecured business line of credit despite the fact that your personal credit is bad.