Published By Janet Gershen-Siegel at October 26, 2017
Poor credit is a challenge. There’s no refuting that. But it is not an unconquerable one. You can get credit for your business even when your credit score is terrible.
One means to get business credit is by offering a personal guarantee. This personal guarantee can come from you, but it can also come from an investor. If a family member (your semi-rich uncle, for instance) wants to have a portion of your new business, why not offer a portion for them supplying a personal guarantee to a lender or credit issuer?
Personal guarantees do come with a degree of risk. If your business does not take off, then your investor might be left holding the bag if you do not pay loans etc. That’s why, asking someone to furnish a personal guarantee for you is not something that either of you should take lightly.
Without a personal guarantee, some loan providers will take out a UCC blanket lien on your small business. A UCC blanket lien serves as a notice which will go on your credit report. It indicates that the loan provider has a financial stake in all your business’s assets up until you pay off the loan fully. Thus, there may be unfortunate consequences if you must default. Plus, for really bad credit risks, your loan provider might demand both a UCC blanket lien and a personal guarantee.
A superior alternative is unsecured credit. Unsecured just means you are obtaining credit without putting down any money (with secured credit, you put down a certain sum and can only borrow as much as that sum).
So, how do you get unsecured credit? You get it by putting up collateral for your loan. Don’t believe you’ve got enough for collateral? Reconsider. You may have any range of assets which can be used as collateral for a business loan.
Your business might also have resources which you could draw upon as collateral. Company assets can include landholdings– 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 in essence selling your equipment to the lender and renting 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 line of credit 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, also known as the cost, is 50%).
You can also use your anticipated profits as collateral. Let’s say your business has due invoices out to your customers. You may have offered liberal repayment terms in order to sweeten a deal and get the sale. Or possibly your client is just plain tardy paying you back. With accounts receivable factoring, you can get up to 80% of your owed receivables. Having said that, you must be in business for at the very least a year and the receivables must be with another company (e. g. not with an individual).
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 own dwelling. All of these assets can be used as collateral for unsecured credit, whether that’s in the form of an unsecured business loan or a credit card.
So think of what you and your company possess, or are expecting to possess in the soon. You just may have enough collateral for an unsecured business line of credit even if your personal credit is rotten.