Published By Janet Gershen-Siegel at January 17, 2018
Poor personal credit is an issue. There’s no refuting that. But it’s not unbeatable. You can get loans for your business even if your credit score is a stinker.
One way of acquiring business 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, say) would like to have a portion of your new business, why not offer a chunk in exchange for them giving a personal guarantee to a lender or credit issuer?
Personal guarantees do come 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 and the like. For that reason, asking somebody to grant a personal guarantee for you is not something which either of you should take lightly.
Without having a personal guarantee, some loan providers will secure a UCC blanket lien on your business. A UCC blanket lien functions as a notification which will go on your credit report. It says that the creditor has a financial interest in all of your business’s assets up until you settle the loan fully. Thus, there may be unfortunate repercussions if you have to default. Also, for truly bad credit risks, your loan provider could demand both a UCC blanket lien and a personal guarantee.
A much better option is unsecured credit. Unsecured just means you are acquiring credit without putting down any funds (with secured credit, you put down a certain sum and can only borrow as much as that sum).
So, how do you acquire unsecured credit? You get it by putting up collateral for your loan. Don’t imagine you’ve got enough for collateral? Reconsider. You may have any number of assets which may be used as collateral for a business loan.
You may have a retirement fund, like a 401 (k). Or your semi-rich relative might give you (or will to you) stocks or bonds. You might own your residence. All these assets may be used as collateral for unsecured credit, whether that’s in the form of an unsecured business loan or a credit card.
Your organization may also have assets which you could use as collateral. Company assets can include land– does your business own land, or a building, or a portion 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 significant equipment. You won’t have the ability to combine a bunch of smaller equipment. This is referred to as an equipment sale leaseback– you are basically selling your equipment to the loan provider and leasing it back from them for the cost of your loan payments.
How about business inventory? You can use inventory valued at $500,000 or more and use it for a credit line worth 50% of your inventory’s value for what’s referred to as 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, AKA the cost, is 50%).
You could also use your expected profits as collateral. Let’s say your business has payable billings out to your customers. You may have granted generous payment terms to sweeten a deal and get the sale. Or possibly your client is just plain behind in paying you back. With accounts receivable factoring, you can get up to 80% of your unsettled receivables. However, you must be in business for at least a year and the receivables have to be with some other company (e. g. not with an individual).
So take into account what you and your business own, or are expecting to possess in the future. You just may have enough collateral for an unsecured business line of credit even when your personal credit is rotten. And while you’re at it, work to improve your bad personal credit.