Lines of credit are one of the most flexible tools for financing a business. They can provide funds to buy inventory, pay vendors, and cover other expenses. However, lines of credit are hard to get, even for business owners who have assets and good credit.
Trying to get a business line of credit if you have limited assets and no credit is very difficult. And if you have bad credit, it may be nearly impossible. Fortunately, there are alternatives. From this article you will learn:
- What a business line of credit is
- Why your personal credit is important
- How to handle your bad credit
- Three options for business owners with bad credit
What is a business line of credit?
A business line of credit is a type of financing that allows you to withdraw funds up to a predetermined amount (the credit limit). You can withdraw funds in any amount and at any time, up to your limit. You make payments regularly, usually monthly, to bring down the balance. Your credit availability increases/decreases as you make payments and withdrawals. Because of this flexibility, business lines of credit are often referred to as “revolving lines of credit.”
Qualifying for a business line of credit is often difficult. Your company must have assets, sufficient cash flow to repay the line, and good financials. As part of the due diligence, lenders often look at the personal credit of the owners. If the owners’ credit is bad, the line of credit is usually denied. Learn more about business lines of credit.
Why is your personal credit important?
It’s common for business owners to question why their personal credit is important if they are asking for a business line of credit. If the business is incorporated (or is an LLC), it’s a separate entity. It should have a clean slate and be free of the owner’s personal issues. Right?
Well, yes and no – at least as far as lenders are concerned.
A new company does have a clean slate. This is true. But a clean slate also means that the company has no track record or history. And companies don’t manage themselves. They are managed and controlled by their owners.
Lenders assume that if the owners are not able to manage their personal finances, they won’t be able to manage the company’s finances. In other words, if an owner defaults on their personal bills, they are more likely to default on their business expenses as well. Unfortunately, this expectation is not unreasonable.
However, poor credit is not always simple. It’s true that some individuals have poor credit because they mismanaged their finances. But this is not always the case. Individuals can get bad credit due to circumstances beyond their control such as illnesses, emergencies, or a divorce. Therefore, bad credit doesn’t always indicate bad financial habits.
Tips if you have bad credit and need business funding
First and foremost, it’s best to set your expectations correctly. If your personal credit is poor, the chances of getting a business line of credit are slim. Not impossible, but very slim. Here are some tips to keep in mind.
Consider getting professional help
This is the most important advice we can give you. If you have poor credit and need funding, consider working with a CPA or specialized financial professional. It increases your chances of success and is well worth the expense.
Honesty works best
Owners with poor credit often try to omit or alter this fact from their financing applications. Some choose to avoid providing that information in the application, hoping the underwriter won’t notice. Other owners try to misrepresent facts on the application.
Neither strategy works, and both will get your application rejected. And misrepresenting facts usually gets you blacklisted by the lender permanently.
Here is a better strategy: be upfront and honest. Few business owners do it; however, it increases your chances of being heard by the lender. This approach allows you to present your business plan and gives you a chance to convince them to fund you.
However, there is a right way to be upfront about it. We suggest you write an executive briefing that explains why you have poor credit and how you are addressing the situation. If you or a family member were ill and flooded by medical bills, mention it. But also mention how you plan to pay the medical providers to the best of your ability. The same applies if you had a personal emergency or a divorce.
Does this strategy work? Sometimes it can. We have occasionally made exceptions when someone had a verifiable story and were fixing the situation. Again, there are no guarantees this will work. Many lenders will simply say no.
Don’t take it personally. Ask for options
Don’t make the mistake of taking a denial personally. Worse, don’t get upset at the lending officer. This reaction does not help. A better strategy is to ask them – politely – how to strengthen your application. Many will be happy to give you some pointers if you are professional about it.
Lastly, ask them if they know of any lenders that may help you. Lending officers often have connections at other institutions.
Consider realistic options
If your personal credit is very poor, it may not be worth your time to look for a business line of credit at this point. In many cases, it’s best to consider financing alternatives that will work with business owners who have poor credit. Use that to build some traction in your business, and then consider moving to a line of credit.
Options for owners with bad credit
Here are three options that can provide financing to business owners who have poor credit (to an extent). Some of these solutions provide benefits that are similar to those of a line of credit.
SBA Microloans are one of our favorite options for small business owners who have poor credit. Microloans provide up to $50,000 of funding to entrepreneurs looking to start small businesses. They often come bundled with training and counseling to help your business succeed.
Note that the SBA does not provide the loans. Rather, they work with agencies that provide the loans. Programs vary by state. You can find a list of providers here.
One of the reasons small business owners look for lines of credit is that they can’t afford to wait 30 to 60 days to get their invoices paid by commercial and government clients. Unfortunately, slow payments are very common in commercial transactions and can affect your cash flow.
You can solve this problem by financing your accounts receivable with an invoice factoring program. This solution provides you with funding for slow-paying invoices and improves your cash flow. Furthermore, it has some advantages over lines of credit. Most factoring lines are flexible and can increase as your business grows. Factoring lines can be set up quickly, often in a week or two.
Purchase order funding
Getting a large purchase order can be great for a business, unless you don’t have the funds to pay your suppliers and fulfill the order. If this scenario happens, you are left with few options. You could pass up the order and let a competitor take it. Or you could take the order and hope you don’t end up with cash flow problems.
Neither option is good.
A better alternative is to use purchase order funding. This specialized solution can help companies that resell finished goods. Basically, you have to buy goods from a supplier (or manufacturing company) and resell them without modification.
If you meet the qualification criteria, a purchase order financing line can cover your third-party supplier expenses. This funding enables you to fulfill the order. More importantly, it allows you to book the revenue and grow.
Need business financing?
We are a leading provider of factoring and purchase order funding. For a quote, fill out this form or call us toll-free at (877) 300 3258.
Note: This article is provided for information purposes only and does not provide financial advice. If you need advice, please consult a professional.