Published By Janet Gershen-Siegel at November 25th, 2017
Craving funding but the high and mighty banks are saying no? Bad credit does not need to be a dead weight around your company’s proverbial neck. However, it does make it more difficult to acquire a business loan. You can get small business loans, even if your credit is a catastrophe.
For a new business particularly, your small business credit will be poor as a matter of course. This is because you just will not have the type of record and seasoning which can make your commercial credit score rise.
And, for this reason, it would make lenders not want to loan your company money.
As a result, loan providers are not going to be too passionate about granting your company a small business loan. This is because they genuinely have no clue if your small business will be able to pay back the loan.
But you are nonetheless, obviously wondering how to fund a company with poor credit.
Because of this, lending institutions will typically get a UCC blanket lien in case they do give your company a loan.
A UCC blanket lien is a note which is included with your credit report. It says that the lender has an interest in all of your small business’s assets until you repay the loan completely. Therefore, there might be dire consequences if you need to default.
Plus, many of these loans will also require personal guarantees.
But if a loan does not require a personal guarantee, then your business will normally get unsecured business loans. And those come with excessive rates of interest.
These kinds of small business loans can be short term. So you have to pay them back swiftly. Or they can be receivables financing. So that is where you get a loan based on business you expect to be coming in.
This is because you have unsettled invoices which your clients have not paid to you yet. Or it can be vendor cash advances.
These all come with lending rates which are often 40% or higher.
The primary advantage to unsecured small business loans is you don’t need to provide a personal guarantee or accept a UCC blanket lien. If you wind up defaulting on the loan, then your home and other individual assets will not be confiscated. And neither will your inventory.
However, this also implies that you usually have to have strong revenue or a significant amount of time in business. In general, your individual credit must be fair or better. And that’s even without any a personal guarantee requirement.
It’s all about the interest. According to Nerd Wallet, Kabbage can provide an unsecured business loan – yet the annual percentage rate can be as much as 99%! If you think that’s usury, think again. In Ohio, the usury laws don’t apply to unsecured loans.
Another drawback is that unsecured business loans often mandate that your small business has operated for a minimum of six months. Or you can’t have any personal bankruptcies. Or your business must show a minimal yearly earning amount.
And this means opening your records to your lender. But not everybody will view these as being disadvantages.
If you can meet any of these criteria already, then you most likely won’t see this as a true disadvantage. But if your business is brand new, and you do not as of yet have regular customers and revenue, then you may be locked out of your few remaining options.
And the same is true if you have had personal bankruptcy problems.
For all of these options, you will always have a better interest rate if your credit score is better than poor. And you will more than likely have more choices, so you can shop around and compare plans.
So, what can you do? Why, you can build business credit, of course!
Business credit is credit in a business’s name. It doesn’t attach to an entrepreneur’s consumer credit, not even when the owner is a sole proprietor and the sole employee of the corporation. As such, a business owner’s business and individual credit scores can be very different.
It is a great way to get small business loans.
Considering that small business credit is independent from personal, it helps to secure a business owner’s personal assets, in case of litigation or business bankruptcy. Also, with two distinct credit scores, an entrepreneur can get two separate cards from the same vendor.
This effectively doubles purchasing power.
Another advantage is that even startup businesses can do this. Visiting a bank for a business loan can be a recipe for frustration. But building company credit, when done properly, is a plan for success. It’s a vital way to easily get small business loans.
Individual credit scores depend upon payments but also other factors like credit utilization percentages. But for corporate credit, the scores really merely depend on whether a small business pays its debts on time.
Growing small business credit is a process, and it does not happen automatically. A company needs to actively work to develop company credit. Having said that, it can be done readily and quickly, and it is much speedier than developing individual credit scores.
Merchants are a big part of this process.
Doing the steps out of order will lead to repetitive denials. Nobody can start at the top with corporate credit. For instance, you can’t start with store or cash credit from your bank. If you do you’ll get a rejection 100% of the time.
A company must be credible to credit issuers and merchants. Therefore, a small business will need a professional-looking web site and email address, with site hosting bought from a supplier like GoDaddy.
And company phone and fax numbers must have a listing on 411.com.
Also the company phone number should be toll-free (800 exchange or comparable).
A corporation will also need a bank account devoted purely to it, and it must have every one of the licenses essential for operating. These licenses all must be in the particular, accurate name of the company, with the same company address and telephone numbers.
So note that this means not just state licenses, but potentially also city licenses.
Visit the Internal Revenue Service website and get an EIN for the small business. They’re totally free. Choose a business entity such as corporation, LLC, etc.
A business can begin as a sole proprietor. But they will more than likely wish to change to a variety of corporation or partnership to decrease risk and make best use of tax benefits.
A business entity will matter when it involves taxes and liability in the event of a lawsuit. A sole proprietorship means the entrepreneur is it when it comes to liability and taxes. Nobody else is responsible.
If you operate a company as a sole proprietor, then at least be sure to file for a DBA (‘doing business as’) status.
If you do not, then your personal name is the same as the small business name. Consequently, you can end up being personally liable for all business financial obligations.
Additionally, per the IRS, with this arrangement there is a 1 in 7 probability of an IRS audit. There is a 1 in 50 possibility for corporations! Avoid confusion and noticeably lower the odds of an Internal Revenue Service audit as well.
Begin at the D&B web site and obtain a free DUNS number. A DUNS number is how D&B gets a small business into their system, to produce a PAYDEX score. If there is no DUNS number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s websites for the company. You can do this at https://www.creditsuite.com/reports/. If there is a record with them, check it for correctness and completeness. If there are no records with them, go to the next step in the process.
By doing this, Experian and Equifax will have activity to report on.
First you ought to build trade lines that report. This is also known as vendor accounts. Then you’ll have an established credit profile, and you’ll get a business credit score.
And with an established business credit profile and score you can start getting revolving store and cash credit.
These sorts of accounts tend to be for the things bought all the time, like coffee, shipping boxes, outdoor work wear, ink and toner, and office furniture.
But to start with, what is trade credit? These trade lines are credit issuers who will give you starter credit when you have none now. Terms are oftentimes Net 30, rather than revolving.
Hence if you get an approval for $1,000 in vendor credit and use all of it, you must pay that money back in a set term, like within 30 days on a Net 30 account.
Net 30 accounts have to be paid in full within 30 days. 60 accounts have to be paid completely within 60 days. In contrast to with revolving accounts, you have a set time when you must pay back what you borrowed or the credit you used.
To begin your business credit profile the proper way, you should get approval for vendor accounts that report to the business credit reporting agencies. Once that’s done, you can then make use of the credit.
Then repay what you used, and the account is on report to Dun & Bradstreet, Experian, or Equifax.
Not every vendor can help like true starter credit can. These are vendors that will grant an approval with a minimum of effort. You also want them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
But you may have to apply more than once to these vendors, and you may need to purchase some things you don’t really need, to verify you are dependable and will pay on time. Consider donating nonessential things to charity.
Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs, then move to revolving store credit. These are companies such as Office Depot and Staples. These companies are likelier to have items you need.
Use the small business’s EIN on these credit applications.
Are there 8 to 10 accounts reporting? Then move onto fleet credit. These are service providers such as BP and Conoco. Use this credit to buy, fix, and take care of vehicles. Make certain to apply using the small business’s EIN.
Have you been responsibly handling the credit you’ve up to this point? Then move to cash credit. These are businesses like Visa and MasterCard. Keep your SSN off these applications; use your EIN instead.
These are service providers such as Walmart and Dell, and also Home Depot, BP, and Racetrac. These are commonly MasterCard credit cards. If you have 14 trade accounts reporting, then these are in reach.
Know what is happening with your credit. Make sure it is being reported and take care of any mistakes as soon as possible. Get in the habit of taking a look at credit reports and digging into the particulars, and not just the scores.
We can help you monitor business credit at Experian and D&B for only $24/month. See: https://www.creditsuite.com/business-credit-monitoring. Update the info if there are inaccuracies or the details is incomplete.
So, what’s all this monitoring for? It’s to contest any inaccuracies in your records. Errors in your credit report(s) can be taken care of. But the CRAs often want you to dispute in a particular way.
Disputing credit report errors commonly means you mail a paper letter with duplicates of any proofs of payment with it. These are documents like receipts and cancelled checks. Never send the original copies. Always mail copies and keep the originals.
Disputing credit report mistakes also means you specifically spell out any charges you dispute. Make your dispute letter as clear as possible. Be specific about the concerns with your report. Use certified mail so that you will have proof that you sent in your dispute.
Always use credit smartly! Don’t borrow more than what you can pay off. Monitor balances and deadlines for payments. Paying off in a timely manner and in full will do more to boost business credit scores than virtually anything else.
Building company credit pays off. Good business credit scores help a business get loans. Your loan provider knows the small business can pay its debts. They know the small business is authentic.
The small business’s EIN attaches to high scores, and lending institutions won’t feel the need to require a personal guarantee.
Business credit is an asset which can help your corporation for years to come. Learn more here and get started toward establishing corporate credit.
If your small business can hang on till your credit – either business or individual or both – improves, then your options will significantly improve, too.