Secured Vs. Unsecured Business Line of Credit

The primary difference between a secured and an unsecured business LOC is that a secured credit facility has underlying collateral of which a bank or finance company can claim if you default on your credit line. As we have seen in previous articles, the collateral that can be used to secure a line of credit can vary greatly. Collateral can include but is not limited to:

 

Property owned by your business or personally
Equipment owned by the business
Accounts receivables
The general cash flow of your company (although this is semi-secured).

 

With an unsecured line of credit, there is no collateral involved. Again, this type of business LOC is highly akin to a credit card. Your income and your personal/business credit are the factors considered when applying for this type of credit line.

 

The primary benefit of using a secured line of credit is that the interest rate is typically far lower than that of an unsecured credit facility. Again, in the event of default, a secured line provides the bank/finance company with a great deal of security as you have pledged a tangible (and saleable) asset that the bank can use to recoup their debt investment. With an unsecured business line of credit, the granting financial institution has far less flexibility when attempting to require the funds that they originally lent to you.

 

As such, and if it is possible, you should try to obtain a secured business LOC. This will ensure that should something go wrong with your business – you have spelled out exactly what you stand to lose to the bank. However, it should be noted that if the collateral that you have pledged depreciates in value during the duration of the revolving credit facility then you will still owe the balance of what was recouped versus what was borrowed.

 

It should be noted that while obtaining an unsecured credit line is certainly possible, the current lending environment has caused almost all banks to now require substantial collateral for obtaining a business line of credit.

Unique Business Line of Credit Types

As an alternative to obtaining a traditional business line of credit, there are two types of facilities that use your future earnings or current receivables. A credit card receivables LOC is linked to your merchant account. This type of lender typically refers to this type of credit facility as a “credit card receivables advance.” Typically, this lender provides an advance of up to 2 months of income based on your merchant account usage history. Each time a sale is made, a certain percentage of the sale is deducted from your balance owed to the lender. However, this type of lending is very expense. The interest rates for this type of business loc can range anywhere from 15% to 29% depending on the state’s lending laws.

 

An accounts receivable business loc is secured by the individuals or businesses that owe you money. In this scenario a lender will look at your receivables, who your customers are, and how long they have owed you money. Based on these factors, these lenders (often called factoring companies) will provide you with a capped line of credit. However, it should be noted that even if your client does not pay – you will still be liable for the money drawn down on the business loc.

 

As an alternative to this, some lenders will “purchase” your receivables for a discounted rate. For instance, if John Doe owes you $1,000 then the lender will buy that receivable from you for $850 to $900. If you decide to sell your receivables to a third party – you need to carefully consider whether or not you can afford to sell your receivables for a substantial discount.

The Importance of Personal Credit When Obtaining a Business LOC

Unlike a business investment from a private investor, obtaining a business LOC requires that you have a good personal credit score. If you do not have a great personal credit score then it is still possible to obtain a business line of credit, but it will be more difficult. In the event that you credit is not “up-to-par” then there are a number of lenders available that can provide you with alternative forms of debt financing that are not wholly dependant on personal credit. However, these lines of credit often have very difficult terms and high interest rates.

 

As any good accountant will tell you, it is imperative that you have a good credit before applying for a business line of credit, business LOC, or any other type of credit facility. Contrary to popular belief, your credit score is not directly tied to your income. Your credit score is based on the number of accounts that you have open, your outstanding balances, and your history of making payments to your creditors in a timely manner. As such, any bank or finance company that may be providing you with a credit facility will want to know this type of information. If you have large outstanding balances, delinquencies, or if the amount of debt you owe is far above normal than a bank or finance company will be less inclined to provide you with a business LOC.

 

As was discussed in our of our main articles, it is important that you are well aware of your credit profile among the three major credit bureaus that monitor personal credit profiles (Experian, Equifax, and Trans Union). Each of these companies can provide you with a full credit report that showcases your entire credit history over the past seven years. If there are any errors on your credit report, you have the right to have them fixed or reviewed by the credit bureau. Additionally, you have the right to obtain a free credit report once a year.

Securing a Business Line of Credit

In most instances, you will be required to put up significant collateral in order to obtain a business loc. This is because banks, finance companies, and private lenders do not want to take the risk of losing money. In the event that you do not repay the credit facility, the lender can take the collateral and sell it in order to recoup their investment. This is almost identical to the recoupment principles of taking out a mortgage.

 

If you are a startup business, you can acquire a business loc by using property that you already own to secure the credit line. This would be similar to a home equity line of credit. In many startup situations, the primary residence is used as the securing collateral. The alternative to this is method is if you have substantial assets or credit. In this case you can apply for an unsecured business loc. Again, you will need substantial assets and an extensive credit history to acquire an unsecured credit line.

 

In the event that you are an established small or medium sized business, you can use the assets held by the business to secure the credit facility. These assets can include accounts receivable, owned real estate, equipment, or the predictable income from your credit card acceptances. In lieu of tangible assets, you can use the highly predictable cash flows generated by your business to secure a business loc. However, in order to accomplish this – you must have an extensive business history that shows continued profitability and a positive cash flow over a number of years (usually the minimum is three years for this type of credit line).

Bad Credit and Business Loans

LookingForBusinessLoan.com has been developed with the concept of providing entrepreneurs of all levels with insights into the lending industry. This includes business people, who for one reason or another, do not have the best credit. However, while credit is extremely important in the world of lending – it is not the be all and end all of the lending industry. It is certainly true that having good credit, if not great credit, is an extremely important part of the debt capital raising process. Banks, finance companies, and other lenders are now looking for extremely good credit scores as they make their lending decisions. However, if you have had past credit issues – this should not be a roadblock to your success. As discussed in our previous articles regarding alternative methods of financing and credit scores and business loans, there are a number of options still available to you if you are looking for business loan and other types of business credit facilities.

 

If you do have bad credit and are looking for a business loan then the first step is to speak to a credit counselor or your CPA. These individuals (or firms) can assist you greatly in removing issues that are hindering the advancement of your credit score. As lending has become a much more scientific process, it is imperative that your issues pertaining to previous lending issues are resolved prior to attempting to obtain credit.

 

These firms can advise you how to properly clean up your credit report prior to approaching a financial institution or bank. Additionally, there are many other options available to you in your search for capital. As we have discussed previously, angel investors, private investors, and venture capital firms are an excellent source of capital if you cannot raise capital through traditional lending methodologies.

Credit Scores and Looking for A Business Loan

As has been one of the topics discussed throughout these articles, credit scores are extremely important when applying for business loans. With lending standards tightening among all banks and financial institutions, it is imperative that you have a credit score that implies that you are a worthy credit risk. A credit score is calculated based on a number of factors including your past payment history, your current debts, how long you have had credit, and whether or not you have any delinquent accounts. Today, most lenders want to see a credit score above 680 if they are going to grant you a business loan.

 

When looking for business loan, you should pull all three of your credit reports from the three major credit bureaus (Equifax, Trans Union, and Experian). Each bureau maintains its own records so it is important to ensure that the information on each of your reports is correct. Most banks now look at all three different reports to make sure that there are no discrepancies.

 

If your current credit is not in a good state then you may want to talk to your accountant or a properly licensed credit counselor before applying for a business loan. They will be able to assist you in making appropriate decisions regarding how you can improve your credit score so that when you do apply for a business loan – you will have no issues pertaining to your credit.

 

As we have discussed earlier, if you have an outstanding business project that needs financing but you do not have an appropriate credit score then you may want to seek alternative methods of finance. This can include bootstrapping your business or seeking equity investments from private investors. You may also want to go to familiar sources such as family and friends as potential lenders/investors in your business venture.

Using a Small Bank to Obtain a Business Line of Credit

In today’s lending world, many people have flocked to smaller banks or community based credit unions when seeking to obtain a business LOC or business line of credit. This is because, while still very scientific and numbers driven, the people that are ultimately making credit decisions are people located within your area. Unlike large money center banks that have thousands of branches, the bankers in your community can see your success in person. Of course, this does not delineate from the fact that you must still have the appropriate collateral and credit in place in order to obtain a business line of credit. However, small banks tend to be more lenient in their credit decisions when determining whether or not to extend a business a line of credit.

 

Small banks, despite the news of major bank failures and bailouts over the past three years, have thrived in this environment. While many have dealt with the same issues as large sized banks, small banks typically did not make complicated investments that included credit default swaps, interest rate swaps, and use of other exotic financial instruments. As such, their capital levels and profitability did not take nearly the same hit as their major money center bank counterparts.

 

As such, if you have been turned down by a traditional large bank for a business line of credit then it may be in your best interest to give your small local bank a shot. Additionally, if this is the route that you want to take then you may want to offer to transfer all of your business banking operations to that bank. This will assist you in ensuring your bank that you want to have an ongoing and fruitful relationship with them over an extended period of time. Many small banks are very keen to have your business not only in a lending capacity, but also in regards to checking accounts, savings accounts, certificates of deposit, and money market funds. The more business you can offer your bank – the more credit they will be willing to extend to you over the long run.

Maximize Your Credit Card Services with Small Business Loans

Since June 15, 2009, the United States Small Business Administration has been processing deferred payment small business loans of as much as $35,000 to be given out to 10,000 small businesses. This is covered by the SBA’s America’s Recovery Capital (ARC) Loan Program.

To qualify, companies should be private enterprises that are for-profit. They should have up to five hundred employees only and should be at least two years old. Furthermore, they should be able to prove financial need with a twenty percent decrease in sales, revenue or working capital. On the other hand, they should be able to prove that one of their two years in business has been profitable, and that with the infusion of cash they will be able to meet their existing and future debt obligations. This means positive cash flow projections. The ARC small business loans are intended to be used to pay outstanding debt such as payables to vendors.

For this batch of small business loans, there are no fees or costs involved, except if the borrower defaults on the loan later. In that case the SBA-approved lender can charge costs for securing and liquidating collateral.

The ARC small business loans also do not charge interest. Actually, the SBA pays the interest for the borrowers. Disbursement of the loan can take as much as six months but payment of the principal is also deferred for the next 12 months. After that, the borrower has five years to repay the loan principal.

Each small business can only avail of one ARC loan. SBA-approved lenders will offer the loans until September 30, 2010 or until available funds run out, whichever comes first.

There are, however, an estimated 30 million small businesses in the United States and only 10,000 of them can avail of the government’s small business loans. What if you do not happen to be among the 10,000 lucky recipients? How will your small business survive?

There are even doubts being raised on whether as much as 10,000 businesses can indeed avail of the ARC loans. There are fears that there may not be enough lenders willing or able to participate in the program. Lenders will have to advance the full amount of the loan, will not receive payment on principal for a full year, and will not be able to charge any fees, thereby absorbing all administrative costs. This may be too steep for many lenders. They may not be able to afford to participate at all.

This is where you as a small business owner can and should maximize your credit card services. We are not talking about your personal credit card services here. Instead, we are referring to the merchant services that enable your small business to receive credit card  and debit card payments. Surely, any business these days avails of these types of credit card services. After all, more people pay by credit card or debit card rather than cash.

Most credit card services offer small business cash advances that can be as substantial as small business loans. These small business loans do not require any collateral because they are secured by your company’s future credit card receivables. This is even more convenient for your business because repayment is also built into those receivables. Credit card services automatically deduct a percentage from your income to go toward loan repayment. For as long as you have incoming sales, you can support your loan. Interest rates are often quite affordable considering how the loan can help your business.

Small businesses should therefore look into maximizing these credit card services for small business loans. The survival of your business could hinge on this.

Steps in Setting-Up a Home-Based Business and Using Small Business Loans from Credit Card Services

Setting up a home-based business may be a more cost-effective alternative to setting up a major company, but it may still drain the limited resources of a small business owner. To keep the business going, small business loans will definitely be necessary. These can be availed of through credit card services. This article will show you how.

First, you need to set up your home based business. Do your research on the type of business you want to establish. Find out what licensing and zoning requirements you need to meet and ensure that you meet them all. Do not attempt to cut corners here.

Get the services of an accountant, even if only on a consultancy basis, to help you set up your books and records correctly from the start. Ask for help in determining deductions so that you can plan on your business expenses. Establish a routine for keeping strict records of all income and expenses right from day one. Keep all business related receipts, invoices, client records, bank statements, bank deposit slips and canceled checks.

Being home-based, you need to set aside a particular place in your home just for your business. Make sure it can accommodate all the necessary equipment. Check that you have the appropriate electrical outlets and have them installed if needed to avoid overloading your system. Set up rules to keep the area insulated from household noise and disturbances.

Have a business phone installed that is separate from your residential line. Avoid having your children answer the business line. Install an answering machine to take calls when you are out or occupied.

Get a post office box so that you can use that address in your official stationery and other documents, keeping your business profile professional. Hold client meetings in rented conference rooms or set business meetings in good restaurants.

One of the most important steps in setting up your home-based business is to acquire credit card services that will enable you to accept credit card payments and debit card payments. These credit card services provide all the necessary software and hardware for you to be able to process payments in person, online or by phone. This step alone already expands the customer base that you can access.

Credit card services will also serve you well once your home-based business begins to feel the need for additional capital. When you need to get small business loans, you will not have to approach banks which are most likely not sympathetic to small home-based businesses.

The need for small business loans usually comes when the home-based business is already at least a year old. At such time, your home-based business would have created an average monthly credit card sales record with your credit card services company. You can refer to that when you approach your credit card services company for small business loans, sometimes called cash advances.

Credit card services do offer small business loans to their clients based on average monthly credit card sales, without the need for any collateral. The aforementioned average monthly credit card sales guarantee your company’s capability to pay the small business loans. Payments will be automatically deducted as a percentage of future credit card sales. This arrangement frees you from worrying about the amortization for your small business loans, too.

As soon as you pay up your small business loans completely, you are automatically eligible for new small business loans for as long as your home-based business is getting a good monthly average in credit card sales. With the help of credit card services, you can continue to expand and grow your home-based business.

What business credit cards are not attached to my personal credit?

Hello, I am trying to find out how to build my business credit without being attached to my personal credit score. I would like to know if anybody has information regarding what credit cards are available to do this. I would love any free information or links to sites that can tell me how to build my business credit. Thanks!!

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