Gone was the day when all you need to start a business is with the four C's (Character, Cash flow, Credit history, Collateral). Today, with the introduction of FICO and credit scores, chances in applying for bank financing is nil, particularly if you don't have a good business credit score which most starter entrepreneurs won't have.
Unless you are a holder of several good accounts, obtaining bank financing is very hard. Bankers have religiously followed the credit score trend. Who would? After all they are the ones that dictate the flow of cash and credit. That's why you should forget big banks as your fundamental source of funding and find your path somewhere else.
Factors for Determining Business Credit Score
Your business credit score is determined by similar factors as your personal credit - outstanding debt balance on credit accounts, bill payment history, - but is associated with your business's tax ID number, not your Social Security number.
Establishing a separate business credit history is a key to a successful business. If your credit is damaged and you have not already secured a separate tax ID number from the IRS, get one as soon as possible. You can apply for a tax ID number without incorporating if your business is a sole proprietorship, an LLC, or a partnership.
Large banks should be more accommodating than smaller banks but reality it is otherwise. True, smaller banks are more accommodating than renowned banks so it's worthwhile to hunt for business seed and start-up capital on smaller banks.
They might get you a business loan regardless of your business credit score. Smaller banks are not so rigid in their financing requirements
Home Equity Loan
This is where home equity loan becomes real handy. Houses are the best business collateral since they allow huge sums of cash. Furthermore, applying for home equity plans aren't based on business credit score, they are more specific on the ability to pay and the value of the collateral since it is a secured deal.
Secured meaning the equity lender is secured with the collateral if the loan is not repaid, not the other way around.
Are you familiar with Adi Dassler's story, who founded the Shoe Giant adidas? If not, then you should know that Adi Dassler co-owned Dassler Shoes (forerunner of present day adidas) with his brother Rudolph Dassler. So asking immediate family for help do has its benefits.
If your business is big time, then one solid option is getting an investor(s) interested. Shares play a significant value to every big time business but it is not unheard of for starter business to have stocks and shares, particularly ambitious business.
SBA Backed Loan
Some institutions do offer services specialized to meet these requirements. Like the government agency SBA (Small Business Administration). They do not directly offer you the money; instead they will offer to back you up as you make a loan.
An SBA backed loan has more probability for success than without. In any event when the loan goes default, the SBA will pay up to 90% of the loan. Of course, by the name your business must qualify as a 'small business'.
As time goes by, in due course the need to establish a good business credit score would be optimal as it will eventually affect the operation. And since good business credit score allows more than just business loan, maintaining a good score is highly advantageous.
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