THE CATCH-22 OF BUSINESS START-UP FUNDING

02 Sep 2014

The catch-22 of business start-up funding:

Business funding and loans present a “catch-22” to start up companies. Here are a few ideas to consider and potential solutions to the tightening lending practices of today’s banks.

There is a sense in which companies and young adults are very similar, especially in terms of credit with respect to establishing it. For example, a young adult in college likely has no credit whatsoever. In the same vein, a young entity – such as a start-up company – has no credit and suffers the same difficulty as the young adult when trying to obtain it. However, there is a silver lining to this issue.

Interestingly, the same credit enhancement technique a young adult could utilize can also be used to establish business credit.

Difference between a young adult and a young entity.

To end the analogy between a young adult and a business in terms of credit, please note that there is likely a difference between the income of a young adult and a business; a business usually has more income than a young adult.

Switching gears, and speaking only to business funding efforts, I want to discuss two things with you:

  1. Increasing your personal credit score using authorized user trade lines, and
  2. Applying for and obtaining unsecured business lines of credit rather than conventional business loans.

Using tradelines to get tradelines:

Despite its relatively limited use, the concept of adding authorized user tradelines has been used for years – quite successfully, I might add – to boost the credit scores of an individual’s personal credit scores.

Banks rarely lend to an entity (especially a start-up company) based on the entities PayDex or Dun & Bradstreet scores. Almost always, a bank will require that loan to a start-up is personally guaranteed. In other words, the bank will secure the business line of credit with personal credit scores. Those looking to secure business funding can also benefit from authorized user tradelines.

That is to say, in terms of unsecured business lines of credit, the higher your personal credit score (among other factors), the higher the chance a lender will lend to you. In fact, better personal credit scores may open access to better terms and rates (not just mere approvals).

Therefore, there is an incentive to increase your personal credit score.  And, authorized user tradelines can help you do just that.

You’re not getting a business loan these days.

The threshold for business loans from a bank upon conventional terms is so high that I’ve often remarked: “the only person who can get a business loan is the person who doesn’t need one”. For example,  most major banks require extremely high business credit scores, positive cash flow for the last 36 months, and at least 5 million dollars in business assets for collateral. If you met that criteria, you probably wouldn’t be reading this page right now and you probably would not need a business loan in the first place. Since that’s likely not the case, what options do you have in terms of business funding?

Unsecured business lines of credit.

One of the main alternative forms of business funding is an unsecured business line of credit. In fact, as banks continue to lend to less and fewer companies, an unsecured business line of credit is becoming almost mainstream. An unsecured business line of credit is simply a credit card under the business’s name. in many ways, this method is preferable to a conventional business loan since you only repay and pay interest on the amount you use from the line of credit.

A line of credit a click away.

If you’re interested in an unsecured line of credit for your business, as opposed to the undesirable alternatives, contact us.

 

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