Today’s Market: Securing Credit For Your Small Business

If there’s any doubt that small businesses and access to credit are still a very hot topic in this almost-post recession economy, just read the headlines.

Our very own Anita Campbell isn’t likely to stump for a jobs bill but she did something much better. Recently, Anita conducted a webinar for Verizon titled “How Can You Secure Credit For Your Small Business In Today’s Market?“ Joining her for the presentation was Tom Markel, Vice President of iBank.

The pair of them packed an incredible amount of information into a mere hour. Here are some highlights.

Commercial real estate: Research your options, check to see if there are liens or back taxes owing on the property, and have a lawyer look over the contract. TIP: Be aware that you’ll need a lot of skin in the game; banks now want you to put up about 40- 50% of the purchase price.

Bank lines of credit: Similar to credit cards and should only be used to cover cash flow emergencies. You need good cash flow and a good credit score, but not collateral (unless you have a poor credit history) to get a line of credit. You’ll make monthly payments and there are no penalties for paying off the entire balance. TIP: In the current climate, banks will look closely at the business owner.

SBA guaranteed loans: There are several different kinds of SBA loans designed to meet specific needs:

• 7(a) – flagship loan program, working capital, expansion, acquire business
• 504 – buy or refinance commercial real estate or buy capital equipment
• Patriot Express – type of 7(a) for vets, their spouses, widows or widowers
• Microloan – business loans of $35,000 or less, targeted for “underserved markets”
• Disaster Recovery Loans – for firms damaged by natural disaster

You must have a business plan to get an SBA-backed loan.  TIP: Because these loans are structure to serve otherwise deserving firms that almost-but-don’t-quite qualify for conventional business loans, it can be helpful to start out applying to a bank that is an approved SBA lender.

Credit cards: Use business credit cards with caution, this is expensive money (17% to 20% interest). Shop around for a card that works well for you (i.e., if you travel a lot, find a card that offers good travel rewards). Don’t mix business and personal credit card use.  TIP: Communicate with your card issuer if you anticipate a problem that will prevent timely payments.

Charge cards: Similar to credit cards except cardholder is not allowed to carry a balance. American Express is the most famous example; balance must be paid in full each month. You can’t get one of these cards unless you have a superlative credit score.  TIP: There are major consequences to late or missing payments, including possibly losing the card altogether.

ARC loans: Special SBA loans created by the American Recovery and Reinvestment Act, these are small loans with no interest for one year. They are meant for otherwise viable businesses that are struggling because of the recession, a bridge loan to get through tough times.

Trade credit: Markel was very excited about trade credit:  “One of the most fabulous things that was ever invented in the world.” Typical terms of net 30 (payment due 30 days after invoicing), with a 1% discount if the invoice is paid within 10 days. Can be very helpful for cash flow, so if your suppliers don’t offer it, ask about it. TIP: Negotiate, barter but get whatever you agreed to in writing.

Grants: Careful of the scams, because there’s not much for the typical small business here. Most grants are for high tech businesses, for research and development, and that’s a lengthy and paperwork-intensive process. Community Development Financial Institutions offer grants to economic and community development outfits. The occasional private organization gives grants, often as a contest prize (e.g., Intuit).  TIP: Grants are not tax free money!

How to deal with lenders: You need a solid business plan with up to date financials and reasonable financial projections, audited financials are better. Your bank application must be neatly and correctly filled out, so that it looks to the bank as if you really know your stuff and have your act together (making you look less risky). According to a 2004 iBank/Citicorp study, 60% of borrowers declined get turned down because their loan application is “a mess.”

The SBA web site has a lot of information about business plans and a template that banks will find familiar, so its a good template to use.  TIP: Ask your bank’s lender what they want on an application and/or have somebody (Small Business Development Center, SCORE, etc.) look over your application before you turn it in.

Manage your credit: Work on establishing your business credit from day one because having business credit makes your life easier in several ways. It protects your personal assets, it is sometimes easier to get because debt-to-income ratio is not as heavily weighted as it is in personal credit decisions.

However, you still have to be careful of your personal credit because your personal credit score will still effect your ability to access business credit, especial when your firm is still young. So, monitor your credit report and fight inaccuracies if you find them. Don’t max out your credit cards or other sources of credit.

In the end, both Anita and Tom agreed that business owners should treat their quest for financing and their business credit with as much care as anything else in their business. Actively manage your business credit, give it the time and attention it deserves.

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