If you have poor to fair credit, which is any personal credit score below 630, you’re often out of luck when it comes to getting loans from traditional lenders. However, many alternative sources such as Premier Business Lending and nonprofit lenders believe that credit scores are not always the most important factor to consider, and they have stepped in to fill this funding gap.
Small business owners frequently have trouble getting funds from traditional lenders because they often cannot meet the strict requirements. Small business owners with bad credit face even more obstacles when getting financing, even from some alternative lenders. If you are able to secure a loan, you’ll typically see much higher APRs and fees. It’s important for borrowers to pay attention to rates, fees and terms when evaluating loan options for their business. Certain lenders will also require collateral or personal guarantees to secure loans. Premier Business Lending has several options from a product standpoint in order to help todays small business owners. Before you agree to accept funds from a lender, be sure that you understand the terms and risks associated with the offer.
The best way to take advantage of a business loan if you have bad credit is to have a strong business plan with clear goals. You should also be making every effort to repair your bad credit, which can include paying your bills on time, cutting costs and reducing credit card usage. You can check your credit report for free once a year, so keep track of the progress you are making. It can take years to fix a damaged credit score, but actively taking steps toward improvement will benefit you and your business in the long-run.
Besides traditional term loans and lines of credit, small business owners with bad credit should also consider other ways of getting funds such as secured small business credit cards, invoice factoring, merchant cash advances, personal loans and business grants.
Indeed, there are reasons for continued optimism for small business owners in the new year:
1) Although rates went up, the increase was small, which is good news for borrowers seeking capital. The hike was something for credibility, since they signaled a change for months, rather than actual impact. Lenders are showing signs of opening up the purse strings. The flow of capital is the life blood of small business. Big banks and institutional lenders are approving higher percentages of loan applications, and smaller banks are granting about half of the requests.
2) While the Fed signaled, it would raise rates in 2017, the amounts will likely again be small. It is better than being overaggressive, and the rest of the world’s economy is not growing. Incremental increases give the Fed the ability to measure impacts.
There has been an influx in equipment leasing we have seen in the first quarter of 2017 which shows economic structure and balance. Rather it is a short term working capital loan, a bridge loan or an equipment purchase Premier Business Lending has shown the ability to help guide business owners through the sometimes-confusing financing industry. This is one of the key principles in which the company was founded, truly being an educational resource to business owners.
Convincing a lender of your need and viability as a business can often be the biggest hurdle
There comes a time for virtually every small business when the need to secure outside financing arises. Whether it’s to fund day-to-day operations, invest in new equipment and inventory, or simply have enough cash on hand to get through slower seasons, many business owners rely on outside financing.
But while funding opportunities abound, convincing a lender of your need and viability as a business can often be the biggest hurdle. It’s a stressful, complex, time-consuming process. Here are three categories a small business owner should keep in mind in order to get in and stay in lending shape and increase your chance of approval.
1. Before applying keep a clean house.
Before you ever need to apply for financing — whether it’s through a traditional bank loan or an option from alternative lenders such as Alternative Loans, lines of credit, bridge loans or a SBA Loan — there are actions you can take to prepare.
A lender will look at four primary factors to determine your eligibility. In order of importance, they include cash flow, time in business, credit score and collateral.
Cash flow: It may go without saying, but every business should ensure its books are accurate and updated.
In addition, lenders primarily underwrite by looking at the inflows and outflows of your business’s bank account. Key metrics that a lender will look at are average daily balance (the higher, the better), volume of deposits and total number of non-sufficient funds (NSF).
Time in business: Much like credit, the longer you can demonstrate a track record of your time in business, the better. It’s critical your business is registered locally and your nine-digit tax information is registered appropriately.
Credit score: Your personal record of financial management is just as important as your business’s. After all, it’s indicative of overall management and attention to detail. Not sure what your credit score is?
Collateral: Assets are crucial when it comes to securing financing because the lender needs reassurance that there’s a way to recoup costs if the loan defaults. Be sure to document all equipment, property and anything that could qualify as an asset under management, along with the associated value as each asset is added to the business.
If you can check all four boxes, you’ll have the best chance at getting the right loan. Conversely, if you have zero boxes checked, you’re unlikely to be approved. If you happen to only have one of the four, there might be an option, but with a higher interest rate or less than favorable payment terms increasing your cost of acquiring the capital you need.
2. During the process leave no stone unturned.
Once it’s time to apply, get your ducks in a row. Lenders will review your application with a fine-toothed comb, looking for discrepancies, omissions, and any reason to deny your request. To improve your chances of securing financing — and doing so quickly — there are some items you should expect to provide.
Bank statements: Be ready to provide a minimum of three to six months of bank statements, but note that your profit and/or loss over the last two years are usually the most relevant metrics. Be sure you can provide detailed information for that period of time. Without it, lenders can’t properly assess your business and need for financing.
Tax returns: Depending on the loan product, there’s a good chance lenders may want to see tax returns over the past two years. Have those on hand in both printed and digital copies when possible.
Current debts and credit: You’ll also be expected to provide information on all debt such as leases, liens and credit adjustments. For all property expenses like mortgages, be sure this information is current and on-hand.
For further background, there’s a chance the lender will conduct interviews with your coworkers or landlord, so prepare all your associates and contacts for a potential call.
3. Getting the “right” financing for you.
At the end of the day, your goal is to secure financing and affiliated terms that are right for your business right now. Remember, a “good” loan depends on the intended need.
With all the options, available and constant changes to the lending space, many business owners skip over some crucial details and believe the lowest rate is the best loan, but that’s not always the case. The best loan could be the largest loan size, longest repayment terms, fastest to fund and arrive in your bank account, or the lowest payback amount.
In reality, it depends on how soon you need the loan, how much you can afford to pay back, the duration of time you need the loan for and how much effort is needed to acquire the loan. Ultimately, it boils down to whether the cost associated with acquiring financing will help grow your business in a way you wouldn’t be able to otherwise.
By determining your financing needs and cost you’re willing to absorb to grow, you’ll have a better idea of the type of financing and terms you’re willing to accept. At every stage of growth in your business, be sure to stay in lending shape by dotting your i’s and crossing your t’s along the way so nothing can slow you down.
Small businesses will no doubt play a key role in our economy’s recovery. But one of the biggest challenges for them is getting small loans to make improvements and expand. One local finance company is stepping-up to fill that gap.
The only stain the economy left on Jason Jordan cabinet-making business is wood stain — lots of it.
Jordan did what many couldn’t in the last few years; he not only survived the recession, but thrived through it.
Deciding to open his own business, he did what he knew: cabinets. And when his business outgrew his garage, he needed money to expand. But Jordan says banks declined his loan applications. Then he found Premier Business Lending, which is a turn key financial institution. SBA Loans for start-up, short term working capital loans and Equipment Financing Loans. The Organization lent him a total of $150,000 in the past two years, allowing him to buy equipment to process more orders.
“Thousands of small businesses cannot acquire a loan through a bank. And the bank does not do it because they can’t make money doing it,” said Premier Business Lending Managing Partner Eric Jenkins calls it a financing gap. Premier Business Lending has been filling the gap for years by lending. But it is now expanding the program with $500,000 in new loans, available to any qualifying small business owner in the Sacramento area.
Jordan was able to hire five employees after securing his most recent loan in California, if each one was able to hire just one additional employee, it would solve our state’s unemployment rate immediately. “So the access to capital component, the loan, is the catalyst for job creation across the board,” said Eric Jenkins.
The economy of Northern California, home of Silicon Valley, is steeped in innovation and entrepreneurship. Technology companies including Hewlett-Packard, Apple and Intel had their humble beginnings in this region. The San Jose and San Francisco metropolitan areas ranked third and sixth, respectively, on the 2015 Kauffman index of startup activity, which measures the rate at which new entrepreneurs and new businesses are popping up.
Large and small businesses perform well. Northern California is home to Fortune 500 companies including Oracle, Google and Facebook, but small companies have a place here, too. The state has a network of Small Business Development Centers located throughout Northern California that offer free one-on-one counseling for small-business owners.
The Bay Area is key. Northern California’s economic epicenter is the San Francisco Bay Area. Eight of the top 10 cities on our list are in Alameda, Contra Costa, Marin, San Mateo and Santa Clara counties.
Tourism matters, too. Technology drives Northern California’s economy, but tourism is important, especially for Monterey. All the cities on our list are within a few hours’ drive of major destinations including California’s dramatic northern coastline, Yosemite National Park and San Francisco.
Sacramento is the capital to the 7th largest economy in the world (California).
Sacramento is #5 on the top 10 list of travel-worthy state capital cities chosen by the Readers’ Choice Travel Awards.
Historic old Sacramento brings in over 2 million annual visitors.
Downtown Sacramento brings in over 175,000 visiting conventioneers, thousands of spectators and well over $50 million in generated economic impacts.
The metropolitan area offers more than 150 restaurants and nightclub venues.
Sacramento ranks in the Top 15 for America’s “Coolest Cities” per Forbes Magazine.
With an array of activities, Broadway Theater, museums, concerts in the park—Sacramento’s downtown brings in 4 million people annually.
Over 1,200 registered lobbyists in Sacramento representing hundreds of trade associations.
Over $50 million added to the regional economy each year from the entertainment and tourism industry.
The new Golden One Center, which opened in October 2016, is anticipated to be a LEED Gold Certified Building. This would make the Golden One Center the first LEED Gold Certified entertainment venue in California.
Best places to start a business in Northern California data
Horizontally scroll through the table below to see the data
The Biggest Reason Banks Deny Loans to a large number of Small-Business Owners
No one ever promised that the challenges to growing a small business would be small. Entrepreneurs regularly confront issues that can threaten the very core of their companies, not the least of which is difficulty securing the financing they need to run and grow a sustainable business.
Premier Business Lending, a turnkey financial company in El Dorado Hills CA found finding capital is becoming harder for a significant proportion of small businesses despite the wider variety of financing options available. Even though there are more lending options for small businesses than ever before, a crucial step is missing in the process; and no one is paying attention, leaving business owners increasingly frustrated over their rejections for credit lines and loans.
The dream and the reality don’t add up Premier Business Lending discovered a scenario confirmed by a new Creditera survey of 250 small and midsize businesses, which brings to light the struggle around bank financing, small business loans and the rejections small businesses suffer.
The realities small businesses face
The Small Business American Dream Gap Report examined today’s economic landscape compared to a year ago and found that despite the positive outlook for small businesses, nearly three out of 10 small businesses reported finding it harder than in the past to reduce operating costs. A quarter of small businesses, meanwhile, found it harder to plan for unforeseen expenses. Within the previous year, the survey revealed, 20 percent of the small businesses surveyed said they had considered shutting down, primarily because of lack of growth or cash issues.
Those kinds of struggles had led 53 percent of those small businesses to apply for funding or credit lines over the past five years — and more than one in four said they had sought loans multiple times. Yet, 20 percent of those applying over the past 60 months reported being turned down, and 45 percent of those denied said they’d been rejected more than once. The most frustrating finding was that nearly a fourth — 23 percent — of these businesses didn’t know why they’d been denied.
As a result, 26 percent of business owners avoided hiring and expansion because, they said, they were frustrated with trying to access funds. Instead, they ponied up the money from their pockets and personal accounts. Those unable to tap into alternative funding sources turned to personal finances to cover expenses and keep their businesses going, a practice that put them at substantial risk.
In addition, the study determined that the last time the small business owners surveyed had needed funds, 62 percent had withdrawn personal savings, 22 percent had used business credit cards, 24 percent had used their personal credit cards and 10 percent had relied on family and friends. Only 36 percent of those seeking funds had obtained bank loans.
The crucial, yet missing, link
The study revealed that a primary reason small businesses can’t obtain bank loans is their failure to understand their business credit score. Some 45 percent of entrepreneurs surveyed didn’t even know they had a business credit score. And 72 percent didn’t know where to find information about it. Even when they did, more than eight in 10 small business owners surveyed acknowledged that they didn’t know how to interpret their score.
Education and empowerment around creditworthiness is a core issue, and can make or break a small business’s ability to get financing. Many business owners starting out are unaware of business credit, and may do significant damage to their credit without realizing it — primarily by maxing-out personal credit cards and/or credit lines because they believe they have no other choice. This short-term approach leads to significant long-term damage.
Need more information about business credit? Consider the FICO score. Just as every individual consumer has a one based on his or her personal credit record, every business has one developed by the FICO Liquid Credit Small Business Scoring Service — the FICO SBSS score. Banks use this score to evaluate term loans and lines of credit up to $1 million.
The score further rank-orders small businesses by their likelihood of making on-time payments, based on their personal and business credit history, along with other financial data. On a scale of 0 to 300, a small business must score at least 140 to pass the pre-screening process the SBA sets on its most popular loan — the 7(a) loan.
If a business with poor credit history — or none at all — is denied financing, lenders are not required to notify the owner of the reason for the rejection.
It’s crucial, therefore, for business owners to learn about their SBSS score and build credit, with timely payments to vendors and suppliers to keep that score up. Boosting the score may take years for companies with a derogatory or nonexistent credit history, so the process of strengthening creditworthiness needs to begin long before a credit application is submitted.
A number of business credit bureaus will generate a business credit score, including Dun & Bradstreet, Equifax, Experian and FICO. Anyone can purchase a business credit report from Dun & Bradstreet, Equifax or Experian, but it comes at a cost.
Until recently, there was no direct way to access the FICO SBSS score, but Premier Business Lending out of El Dorado Hills Ca while researching for small businesses found that you can now get that number through Creditera’s subscription service. It’s the only place small businesses can get that score online.
Why all of this matters
Ultimately, those who understand business credit are better positioned to succeed. The study found that nearly 40 percent of small business owners who didn’t know their business credit score anticipated growth of less than 5 percent, while nearly three quarters who did, envisioned growth of up to 20 percent.
Another answer to the perplexity surrounding rejected funding came from a revelation in the study about owners’ understanding of credit issues. The small business owners surveyed who understood their business credit scores, the study reported, were 41 percent more likely to be approved for a business loan than those who did not. And they were 31 percent more likely to consider expanding their businesses.
Some 80 percent of those in the know about their scores, moreover, considered their funding process to have been smooth, and half of those owners indicated that they were less likely to turn to personal savings to grow their companies.
Business owners, then, should determine where they stand, and take control of the factors critical to the lenders, credit card companies and even other businesses they work with. When owners understand their scores, they have an easier loan approval experience, are empowered to grow and thrive and help the overall economy thrive. That way, everyone wins.
Spreading the word that you’re considering a loan for your business can be met with all kinds of opinions. From general naysayers to cautionary anecdotes, everyone you meet will have a story as to what might happen if you take out a loan to start or expand your business venture.
While it’s true that not every reason is a good reason to go into debt for your business, that doesn’t mean that good reasons don’t exist. If your business is ready to take a leap, but you don’t have the working capital to do so, here are six reasons you might re-consider applying for a small business loan in Sacramento. Chris Wilcox, Managing Partner with Premier Business Lending says “Today’s marketplace is a great opportunity for small business owners to take advantage of expanding credit windows and private investor funds. It is much easier for small business owners to access capital while helping their business expand.”
1. You’re ready to expand your physical location.
Your cubicles are busting at the seams, and your new assistant had to set up shop in the kitchen. Sounds like you’ve outgrown your initial office location. Or maybe you run a restaurant or retail store, and you have more customers in and out than you can fit inside your space.
This is great news! It likely means business is booming, and you’re ready to expand. But just because your business is ready for expansion, doesn’t mean you have the cash on hand to make it happen.
In these cases, you may need a term loan to finance your big move. Whether it’s adding an additional location or picking up and moving, the up-front cost and change in overhead will be significant.
Before you commit, take steps to measure the potential change in revenue that could come from expanding your space. Could you cover your loan costs and still make a profit? Use a revenue forecast along with your existing balance sheet to see how the move would impact your bottom line. And if you’re talking about a second retail location, research the area you want to set up shop to make sure it’s a good fit for your target market.
Young businesses can often have a hard time qualifying for larger loans if both the business and the owners don’t have a strong credit history to report. Taking out a smaller loan and making regular on-time payments will build your business’s credit for the future.
This tactic may also help you build relationships with a specific lender, giving you a connection to go back to when you’re ready for that bigger loan. Be careful here, though, and don’t take on an early loan you can’t afford. Even one late payment on your smaller loan could make your chances of qualifying for future funding even worse than if you’d never applied for the small loan at all.
3. You need equipment for your business.
Purchasing equipment that can improve your business offering is typically a no brainer for financing. You need certain machinery, IT equipment or other tools to make your product or perform your service, and you need a loan to finance that equipment. Plus, if you take out equipment financing, the equipment itself can often serve as collateral for a loan — similarly to a car loan.
Before you take out an equipment loan, make sure you’re separating the actual needs from the nice-to-haves when it comes to your bottom line. Yes, your employees probably would love a margarita machine. But unless you happen to be running a Mexican Cantina, that particular equipment may not be your business’s best investment.
4. You want to purchase more inventory.
Inventory is one of the biggest expenses for any business. Similar to equipment purchases, you need to keep up with the demand by replenishing your inventory with plentiful and high-quality options. This can prove difficult at times when you need to purchase large amounts of inventory before seeing a return on the investment.
Especially if you have a seasonal business, there are times when you may need to purchase a large amount of inventory without the cash on hand to do so. Slow seasons precede holiday seasons or tourist seasons — necessitating a loan to purchase the inventory before making a profit off it.
In order to measure whether this would be a wise financial move for your business, create a sales projection based on past years’ sales around that same time. Calculate the cost of the debt and compare that number to your total projected sales to determine whether taking an inventory loan is a wise financial move. Keep in mind that sales figures can vary widely from year to year, so be conservative and consider multiple years of sales figures in your projection.
5. You’ve found a business opportunity that outweighs the potential debt.
Every now and then, an opportunity falls into your lap that is just too good to pass up — or so it seems, at least. Maybe you have a chance to order inventory in bulk at a discount, or you found a steal on an expanded retail space. In these instances, determining the return on investment of the opportunity requires weighing the cost of the loan versus the revenue you stand to generate through the available opportunity.
Let’s say for instance, you run a business where you get a commercial contract for $20,000. The trouble is, you don’t have the equipment to complete the job. Purchasing the necessary equipment would cost you about $5,000. If you took out a two-year loan on the equipment, paying a total of $1,000 in interest, your profits would still be $14,000.
If the potential return on investment outweighs the debt, go for it! When you’re weighing the pros and cons, it often helps to perform a revenue forecast to make sure you’re basing your decisions on hard numbers rather than gut instinct.
6. Your business needs fresh talent.
When working at a startup or small business, you wear a lot of hats. But there comes a time when doing the bookkeeping, fundraising, marketing and customer service may start to wear on you — and your business. If your small team is doing too many things, something will eventually fall through the cracks and compromise your business model.
Some businesses choose to invest their money in their talent, believing that this is one way to keep their business competitive and innovative. This can be a great move, if there’s a clear connection between the hiring decision and an increase in revenue. But if having an extra set of hands around helps you focus on the big picture, that alone may be worth the loan cost.
Regardless of the exact reason you’re considering a business loan, the point is this: If, when all costs are factored in, taking out the loan is likely to improve your bottom line — go for it. If the connection between financing and a revenue increase is hazy, take a second look at whether taking out a loan is your best choice.
You want to be confident in your ability to pay back a business loan over time and to see your business succeed. Every business decision involves taking a risk. Ultimately, only you can decide whether that risk is worthwhile.
These days there’s nothing traditional about small business financing. You see, the credit crunch of 2008 created a lending gap: Traditional banks want to loan a half-million dollars or more, but most small businesses only need $250,000 or less.
Traditional lenders rarely look twice at a small business any more, and when they do, only 20% of applications pass muster. These are not very encouraging numbers for small business owners who want to take it to the next level sometime this generation.
What’s a small business owner to do? SBA-backed loans are still the most affordable, but they take forever to process, require a back-breaking pile of paperwork, and are only given out to a very select few since the rules are so strict.
Luckily, nature abhors a vacuum. To fill in the gap, the list of alternatives is growing all the time, which is both a good thing and a bad thing, depending on how well you handle a headache-inducing list of options. Lines of credit, term loans, factoring, merchant cash advances, invoice financing—look, it’s great to finally have choices, but it all sounds like synonyms for “out of my league.” So how do you know what’s right for your business? Glad you asked.
Let’s start with online, also known as alternative, lenders. If an established business can show it is growing successfully, an alternative lender will often provide an infusion of capital to keep up the momentum because they believe in the company and its owner. Since you are not dealing with a bank, but a company that is lending its own money, their analyses and criteria are very different from a bank’s.
It’s also faster and easier to get approved than it would be at a traditional bank, though neither the fastest nor the easiest. Their offerings range from term loans to lines of credit, inventory financing to receivables factoring.
If you want something even faster and easier, consider daily debit or merchant cash advances (MCAs). An MCA lender gives the owner a pile of cash in return for a percentage or flat amount of the business’s daily sales. The great part is how quick they are, and they are even less stringent than online lenders that offer more traditional financing options like term loans and lines of credit. The not-so-great part is the extremely high rates you pay for your money. Also, if your income tends to fluctuate month by month, or day to day, this may not be the best option for you.
In the world of small business financing, the more options, the better.
Remember the days when you’d need funding to start or grow your business, and you’d get in your car and head down to the bank on the corner?
You knew your banker personally, perhaps even had kids in the same class at school, or would often see them at your favorite local restaurant. This personal relationship helped fuel a strong financial relationship; you knew exactly where to go to get the loan you needed.
But, the days of driving to your local bank for a business loan are long gone. Not only are community banks getting eaten up by the big banks, but bank lending to small businesses is at an abysmal rate. If you’re a small business owner, and you walk into a bank, you’ve got around an 80% chance of getting denied. Yep. That’s right.
Instead of sitting here, drowning in these depressing statistics, let’s take a look at why this drop in small business bank lending is happening.
Why lending to small businesses is declining
When small business lending took a hit during the recession, most thought it was purely a victim of the economic downturn and would eventually inch its way back up.
However, that hasn’t been the case. The total dollar volume of bank loans to SMBs has declined by 20% since the start of the recession. And, it just continues to trend down. Here is why:
Increased regulation. Post-recession, banks have had to tighten up their standards and be extra-cautious about the risk in their portfolios. Remember, they are making these loans with my money, your money, and your neighbor’s money. Hence the reason they have to be so cautious. Unfortunately, small businesses are inherently riskier than their larger counterparts, which makes banks think twice before extending them credit.
Downturn in community banking. Small businesses have historically had more success finding a loan at a community bank than a big bank. In fact, community banks have 3 times the approval rates on small business loans than the big banks. But, our number of community banks have been declining since the 1980’s, inadvertently hurting America’s job creators. With fewer community banks, there is less opportunity for business owners to find a loan at a traditional banking institution.
Less profit on smaller loans. More often than not, small business owners are looking for smaller loan amounts. In fact, our average loan size at Premier Business Lending is $50,000. Other data shows that about 80% of small businesses want loans that are less than $500,000. But, it doesn’t make financial sense for banks to provide these smaller loans. Why? It costs banks just as much to underwrite a $1 million dollar loan as it does a $100,000 loan. Therefore, they can make way more money focusing on larger loans. At the end of the day, banks are businesses too.
When you stop and look at the reasons banks have cut their lending to small businesses, it makes sense. But, it is still frustrating that business owners are having to face so much rejection. That being said, small business owners need to learn to approach their loan search differently. It’s no longer about expecting the banks to give you credit; it’s about being aware of multiple ways to fund your business and preparing to try a few different sources.
But, what are other sources of funding outside the bank?
Meet “alternative” lending. Online lenders have started emerging over the years to help fund borrowers that can’t find capital at the bank, and given the decline in bank lending to small businesses, the alternative lending industry is booming.
Alternative lenders are simply any non-bank lender. These lenders can most often be found online, as they don’t have physical storefronts like the banks. They include well-known companies like Can Capital and Premier Business Lending, as well as hundreds of lesser-known companies. These alternative lenders are offering traditional term loans, invoice financing, short term loans, and more.
So, as you can see, there is hope. As these online lenders mature and their underwriting algorithms get smarter, online lending could very well become the “norm” and end up being able to compete with banks on price.
One of the many factors that a lender considers when evaluating the credit worthiness of a business is their track record. This means the longer the business age, the longer the track record. This can present a huge disadvantage for newer businesses and recent start-ups.
In fact, according to the SBA, as a potential loan applicant, an owner of a new business needs to show evidence that there is a track record of profitability and success in a similar business endeavor.
The business age impacts the business credit profile which a lender uses to make decisions about your business. In other words, the more years of credit history that demonstrate your business can properly use and repay its business loan obligations, the better.
“Thin” Credit Profiles
If you’ve ever been told that your business credit profile is too “thin,” this simply means there’s not enough credit history to accurately evaluate your business. A potential lender tries to predict what your business will do in the future based upon what it has done in the past.
Consequently, if your business has a lengthy track record of borrowing, making regular payments, and repaying debt in a timely manner, your business may be a better risk than a company with a very short history and business age.
This means that if you’ve only been in business for a year or two, you’ll need to take some time to build a strong credit profile. The downside is that there are no real shortcuts to building your profile. Although there are no quick fixes, there are steps you can take.
5 Tips for Building a Solid Credit Profile
Here are some things you can do now to build a profile despite a shorter business age when looking for a small business loan:
Realize it does take time: Be prepared to invest some time. The good news is that 12 to 24 months of effort and positive activity will be make a significance improvement in your credit profile.
>Know your credit profile: Your business profile is made up of your credit history and details about your business. It includes information such as your time in business, your industry, and other similar information. It is critically important to be sure your information is accurate.
Stay current with all your bills: The best way to build a strong profile is to pay all your business bills on time. Having a lengthy business age doesn’t matter if you make many late payments. Too many late payments will quickly hurt your business credit profile.
Don’t rely on personal credit: When starting a business, many entrepreneurs will use the equity in their home or personal credit cards to finance it. However, this does not build your business credit profile. Having a business credit card or credit from vendors and suppliers is a good way to establish business credit.
Be sure your credit history is being reported: If it’s not, you may be building a good credit relationship with card companies and vendors without building a strong credit profile. No matter your business age, no reporting won’t help you.
Also, check to see where your credit history is being reported. For example, many online lenders report to the bureaus while others like merchant cash advance providers typically do not.
Overcoming The Short Business Age Burden
Building a strong business credit profile is one of the most important things you can do to access borrowed capital with a shorter business age. And this can take time.
However, these five tips will help you build a business credit profile that will provide you options when it comes time to apply for a small business loan.
When you want to grow your business, obtaining a small business loan is a common approach for making it happen. However, there are a variety of loan types that can be considered, including “no collateral business loans.”
No collateral business loans can be defined as loans that utilize a borrower’s promise to pay as security, versus a physical or tangible instrument of value. In a collateralized loan, like a car loan, failure to pay means that a lender can repossess the item used as collateral. With no collateral business loans, however, no physical item is placed as security for the new loan.
As many small business owners have discovered the hard way, in order to get, sometimes you have to give. This is especially true when it comes to obtaining loans. Oftentimes lenders will require owners to pledge collateral against a loan. Lenders use secured loans as a way to cover their bases in case the borrower defaults.
This way, even if a business owner is unable to pay back their loan, the lender has some recourse in the form of selling whatever asset has been pledged to cover the costs. However, this isn’t always a viable option for business owners, which is why unsecured, or no collateral, business loans may be the ideal alternative.
The Versatility of No Collateral Business Loans
The benefits of both collateralized and no collateral business loans are distinct. Loans involving the use of collateral will typically have lower interest rates and longer terms, which can provide a low payment. No collateral loans are usually of a shorter term and have a higher interest rate. This can drive up the overall cost of the loan because of significantly higher risk business loan to the lender.
No collateral business loans, however, are versatile loan offerings that can be used for practically any purpose. An example is using a no collateral loan to pay outstanding business taxes. By taking out a small, no collateral business loan, taxes can be paid and any collection efforts stopped.
No collateral business loans are also great for small business owners looking for direct capital to expand or improve their businesses. This is because there is no chance that they will lose their personal assets in a worst case scenario.
The Downsides of Unsecured Business Loans
There are a few issues associated with unsecured loans that can make them less than ideal for many small business owners.
No collateral business loans are difficult to get from traditional banks. For one thing, loans with no collateral requirement are inherently higher risk for banks, which means there are exacting standards for applicants and they will often disqualify business owners due to “high risk loan” business models, bad credit, and other issues.
Additionally, unsecured funding will have higher interest than other programs and rigid payback structures that can put excessive strain on business cash flow.
Business owners may find that because of the difficulties getting approved for no collateral business loans, they may not even be eligible for the funding they require. Even if they are approved, they may be lumped into a generalized program that is not accommodating to the needs of their unique business.
Alternatives for Business owners
Premier Business Lending understands today’s small business owner and their financial needs. Our goal is to help navigate your business through today’s financial marketplace while providing long term financial solutions and support for the small business.
Everyday small business owners deal with the daily stresses of running their businesses. And because of unexpected economic challenges, or business opportunities, there are many times in which additional capital is a real need. We provide quick online lending along with loan terms as short as three months and as long as five years. Premier Business Lending has become a significant resource for today’s medium to small business owner.
If you’re starting a business or looking to grow your existing business, a small business loan may be a viable financial strategy. Keep in mind that when you repay a small business loan, however, you’ll end up paying more than the amount borrowed because of interest, amortization, and business loan fees.
All small business loans come with interest that the borrower pays to the lender and loan rates can be varied or fixed.
Variable rates change over time as market interest rates shift. If market rates are high, a variable rate can be a good idea since the loan rate will decrease if market interest rates drop.
Fixed rates lock in the market interest rate at the time a borrower takes out the loan. If market rates are low, it’s wise to get a fixed rate and maintain that low interest rate throughout the duration of the payment schedule.
The loan’s term, or how long it takes to pay off, affects the overall cost of the loan because it determines how long interest is paid. This is known as amortization which can be defined as the gradual repayment of a loan in equal (or nearly equal) installments which include portions of interest and principal amounts.
Although interest is not typically considered in the same category as business loan fees, it is still part of your cost for borrowing a sum of money. Calculating your amortized interest payments is done with a payment, or amortization schedule. This is a plan for paying back a loan in regular monthly increments.
Each payment consists of principal and interest. For example, assume you have taken out a $100,000 loan for five years with a 5% interest rate. Each month, you’ll repay $1,887.12 in principal and interest.
At the beginning of the term, the larger portion of your payment is interest. Consequently, $416.67 of your first payment is interest and $1,470.46 goes towards the principal.
With each payment, the interest portion decreases and the principal payment increases. In our example the interest amount has decreased by $6.13 on the second payment and the principal portion increased accordingly:
In the final month, you would only pay $7.83 in interest and $1,879.29 in principal to pay off the loan.
Looking at Other Typical Business Loan Fees
As a borrower you will also have to pay business loan fees. Most common are origination and guarantee fees, but some lenders will have additional costs. Often you will have to pay interest on any fees that are added to the loan rate. This increases not only the amount loaned, but the total interest charged as well.
Origination fee – An upfront fee that is charged for processing a new loan. Lenders charge borrowers this fee for processing a loan application and other administrative work involved. It’s taken as a percentage of the total loan, for example, 1% of a $100,000 loan.
Guarantee fee – For SBA-guaranteed loans, lenders pay the government a portion of the amount guaranteed. Many lenders pass on part of this cost to the borrower.
Underwriting fees – These are business loan fees collected by underwriters who verify and review all of the information you’ve provided.
Closing costs – These business loan fees can include other costs associated with servicing the loan such as a loan-packaging fee, a commercial real estate appraisal or a business valuation.
Unfortunately, business loan fees are unavoidable and can add a significant amount of money to your loan. Each lender should give you a list of what each fee includes and should explain any fees that you don’t understand.