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Business Credit Lines: How to Qualify in 2010
For small business owners, gaining access to capital continues to be a concern as we start off the New Year. The majority of my clients prefer business credit lines because it allows them to establish a significant amount of cash on demand to make purchases that are too large for a credit card and too small for a loan. However, when it comes to qualifying there are specific steps that I advise my clients to establish in order to improve their chances of approval.
First of all, the best time to apply for business credit lines is during times of growth and cash flow. Banks are more likely to approve a credit line to a business when it doesn’t need the funds than when it’s financially strapped. I would strongly encourage you to adopt a “dig your well before you get thirsty” philosophy.
If you think your business is doing just fine despite the current economic times and you don’t need a credit line, think again. The reality is that your business will at one point require an influx of cash in order to cover unforeseen operating expenses, development, expansion, legal fees, inventory, or a range of other issues that a business may face in order to grow.
So when you apply for a credit line and your business is coming from a position of financial strength — if you have a strong bank rating, business credit scores, good cash flow, and so on — your chance of getting approved is much greater than if you apply from a position of weakness.
Second, keep in mind that it’s much easier to get approved for, say, a $50,000 line of credit than a $100,000 line, simply because of the documentation and number of financials required for larger credit lines. Most banks only require a low 5 bank rating, a favorable business credit rating, and personal credit scores of 680 or greater to approve a $50,000 line of credit.
If you’re applying for a credit line greater than $50,000, you’ll also be asked to provide two years of personal and business tax returns, profit and loss statements, and financial statements. The difference in documentation is substantial when it comes to the amount of credit you apply for.
These are the five steps that I review with my clients in order to qualify for a business credit line:
- Bank balance rating: This is the average minimum balance maintained in your account over a three-month period. A $10,000 balance will rate as low 5, a $5,000 rate is mid 4, $999 is high 3 and so on. You should maintain a minimum low 5 for at least three months. If you don’t have at least a low 5, most banks will assume your business has little ability to repay.
- Bank rating cycle: You’ll want to maintain at least a low 5 for the three months prior to applying for a line of credit or larger loan.
- Account management: NSF (bounced) checks destroy your bank rating. From this point forward, NSF checks are something you can’t let happen. I suggest you add overdraft protection to your account as soon as possible.
- Business credit reports: Dun & Bradstreet reports, Small Business Equifax, and Corporate Experian should reflect your solid business credit history and scores.
- Personal credit score: Your score should be 680 or higher.
Maximize these five factors and you can greatly improve your chance of getting approved for a business credit line. The important point to remember is that banks are in business to lend money and they make money from the interest they charge. But when they extend a line of credit they want to minimize the risk as much as possible.
To access business credit insider secrets, premium vendors, leasing companies, business credit cards, and lenders that report to all the major business credit bureaus become a member of my Business Credit Insider’s Circle. Submit your name and email below for details and receive a free audio seminar ($597 value) =>
To Your Success!
Marco Carbajo
About the Author
Marco Carbajo is a business credit specialist, author, speaker, and founder of the Business Credit Insider’s Circle. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in The Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.
Credit Repair Companies: Consumer Credit Repair
Credit Repair Companies
I felt it was extremely important to write about this because of the many people who may have seen their good credit fall to the wayside as a result of a recent job loss, cut back, family emergency or many other unforeseen circumstances who are desperately seeking for help with their personal credit. 
All across the country I have heard stories like Joanna Fridinger, owner of a limo company in Baltimore, who had the credit limit on her American Express card cut to $1,400 from $19,500 after getting just a single late fee on another credit card.
You’ve probably seen headlines like…
‘U.S. Consumer Credit Card Debt May Crash Economy’ ~ Fox News
‘Credit card hike fright: Banks raising rates, even if you’ve paid on time’ ~ Daily News
‘Some Credit Card Companies Profiling Customers’ ~ ABC News
‘Consumers’ Credit Card Limits Slashed as Companies Try to Reduce Risk’ ~ the Washington Post
With all this circulating the media it’s easy for some people to be influenced to believe that there is no hope and no way to get their credit back on track.
Not true!
When it comes to personal credit challenges there are several alternative solutions that each and every individual should consider.
In this particular post I am going to cover one of the many viable solutions for individuals undergoing personal credit challenges.
First, let me say that this is my personal opinion and after working with thousands of consumers on personal credit issues over 21 years one of the most commonly asked questions I hear is ‘ How can I get my personal credit restored?’
Before I get into this highly misunderstood service called ‘credit restoration’ or ‘credit repair‘ let me be the first to tell you that if you are an entrepreneur or small business owner that has experienced personal credit issues don’t be alarmed when it comes to obtaining business financing.
One of the major benefits for entrepreneurs and small business owners is the ability to build a business credit profile separate from your personal credit profile.
This post is intended to fully educate you on answering two main questions:
Is Personal Credit Repair Legal?
Are Credit Repair Companies Legal?
Let’s get started shall we?
Personal Credit Repair
The Federal Trade Commission which is a federal agency created to investigate and eliminate unfair and deceptive trade practices in business, initiated a specific body of legislation which was put in place to regulate the credit reporting agencies and protect YOU the consumer from unfair credit reporting. This legislation is called the Fair Credit Reporting Act.
Take a look at the FCRA
Now look at section 611 of the FCRA which outlines the procedures in case of disputed accuracy on your credit reports. The FCRA empowers YOU the consumer the right to dispute and verify the accuracy of questionable items on your personal credit reports.
So, this means you can in fact repair your own credit in accordance with the Fair Credit Reporting Act.
But here’ the catch!
The underlying problem for the consumer is that this is a self policing law. It’s completely up to you the consumer to police your own personal credit reports. It’s up to you to find any errors and it’s up to you to monitor any and all activity on your personal credit files with all three main credit reporting agencies.
In the justice system you are innocent until proven guilty but in the credit reporting system you are guilty until you proof yourself innocent.
If you haven’t seen your personal credit reports recently keep in mind that you are entitled to one free credit report per year which can be accessed at http://www.annualcreditreport.com
Now don’t worry this won’t count as an inquiry when you order your free annual reports.
Credit Repair Companies
Despite the massive efforts of the credit reporting agencies (which are privately held companies) to convince you otherwise, there are many credit restoration companies that are no different than most other services. Like all industries, less-than-honest companies do exist and are damaging to their clients and to the credit repair industry as a whole.
For example, you may have 20 car mechanics in your hometown. Most likely, 17-18 of these mechanics are honest, hardworking people who want to earn a living and give you the best service possible. The other 2 or 3 mechanics may not be so honest and will take your money while not giving you the quality or quantity of service you pay for… or, they may be out-and-out crooks who take your money and lie to you.
This doesn’t mean that your town is a bad place to get your car fixed; it just means that, like any industry anywhere, there are good companies, mediocre companies, and really bad companies.
Let me take you back a little bit first because the credit restoration industry was completely unregulated in the mid to late 1970s, hundreds of credit repair companies sprung up all over the place. Most of them were dishonest and were interested only in stealing money from gullible consumers. As a consequence, thousands of consumers were milked out of millions of dollars while receiving little, if any, of what was promised to them.
As a result the FTC initiated another legislation called the Credit Repair Organizations Act (CROA) that outlines how these companies may legally operate.
Take a look at CROA
This Federal regulation is proof that the industry as a whole is legal and not a scam. I think the reason why there has been this general negativity about credit restoration companies is because of the few bad companies that have given the industry as a whole a bad name.
The Federal Trade Commission regulates credit bureaus and credit repair organizations.
Take a look at the definition of a Credit Repair Organization (look at Sec. 403 Definitions)
(3) Credit repair organization. — The term ‘credit repair organization’–
(A) means any person who uses any instrumentality of interstate commerce or the mails to sell, provide, or perform any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of
(i) improving any consumer’s credit record, credit history, or credit rating; or
(ii) providing advice or assistance to any consumer with regard to any activity or service described in clause (i); and
Now let’s look at Section 404 Prohibited Practices.
Specifically look at definition (b) payment in advance.
(b) Payment in Advance–No credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.
Basically, a credit restoration company cannot charge you for credit restoration upfront unless they are exempt from CROA.
The specific organizations and institutions that DO NOT fall under the definition of a credit restoration organization and are therefore exempt from prohibited practices are non profit companies, credit unions and affiliates of credit unions.
This means that there are a very select few credit restoration companies out there that can charge for credit restoration upfront.
Take a look at Sec 403 definitions under description (B) does not include-
These organizations and institutions include any nonprofit organization which is exempt from taxation under section 501(c) of the internal revenue code and any depository institution (as that term is defined in section 3 of the Federal Deposit Insurance Act) or any Federal or State credit union (as those terms are defined in section 101 of the Federal Credit Union Act), or any affiliate or subsidiary of such a depository institution or credit union.
So if you decide to enroll in a credit restoration service review the company’s track record and BBB rating and make sure they are either a non profit or credit union (affiliate).
Ready to reclaim your excellent credit scores? Submit your name and email below to receive my FREE course ‘7 Steps To Superior Credit’ ($497 value) =>
About the Author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for AllBusiness, Dun and Bradstreet Credibility Corp, the SBA Community, and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in American Express Small Business, Business Week, The Washington Post, The San Francisco Tribune, Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.
Instant Business Credit: Is it a Risk you’re willing to take?
Instant Business Credit
As business owners we always strive to make it as easy as possible for our customers to purchase our products or services. Other than accepting credit cards we find our businesses extending instant business credit to customers as a way to increase sales and build customer loyalty.
It’s the largest use of capital from business to business and remains the #1 alternative to personal and small business loans. The SBA even reports that businesses extending credit is the single largest source of small business lending in America today.
While extending credit by as little as 30 or 60 day is just like offering instant business loans it’s a credit risk most of us are willing to take. We’re simply providing goods or services in return for a promise to pay.
But as many business owners have learned during these tough economic times, promises are easily broken.
Before you decide to extend instant business credit to your customer here is a checklist that you may find helpful:
Extending Credit Do’s
- Do establish a credit policy that will determine who you will extend credit to, how much credit you will extend and how you will monitor that credit once it has been extended.
- Do establish a thorough credit application including trade references, banking information, credit check authorization, terms and conditions, and disclaimers.
- Do have the ability to pull a consumer credit report from one of the major credit reporting agencies in order to determine the creditworthiness of your customer.
- Do have the ability to pull a business credit report from one of the major business credit bureaus in order to determine the creditworthiness of your business customer.
- Do exchange payment data with consumer and business credit bureaus so you can reduce customer late payments, defaults, and improve collections.
- Do offer several options for your customers to pay such as online bill pay, mail-in-payments, and pay by phone.
In addition be sure to look at the amount of business a particular customer gives you. Giving a customer a credit limit because they bring in large volumes of revenue for your business is a smart move. If they also have a long history of supporting your business, then they will be more likely to pay their invoices.
Extending Credit Do Not’s
- Do not extend instant business credit without having your credit terms in writing.
- Do not extend credit if your business does not have a significant amount of cash flow.
- Do not extend credit until you become fully aware with the laws governing consumer credit.
- Do not extend credit limits to customers greater than the risk your business is willing to take.
- Do not extend credit to every customer that your business acquires.
- Do not extend credit unless you have a collection policy in place that can manage and protect your accounts receivable.
The success of any business largely depends on the acquisition of customers. Once you have become established enough to generate solid cash flow you can begin to extend credit to some customers.
While cash is king providing credit like a commercial credit company can benefit your business in several ways including greater customer loyalty and increased sales by as much as fifty percent. Before you make a decision you may also want to consider asking customers for additional requirements like down payments and personal guarantees. Despite the risks involved the benefits far outweigh the disadvantages.
Looking to access instant business credit sources, premium vendors and business credit cards? Become a member of my Business Credit Insiders Circle. Submit your name and email below for details and receive a free audio seminar ($597 value) =>
To Your Success!
About the Author
Marco Carbajo is a business credit specialist, author, speaker, and founder of the Business Credit Insider’s Circle. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in The Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.
Business Credit Lines: Are You Protecting Yours?
We all know that banks are in caution mode right now and suspending business credit lines is obviously an effective way to reduce the risk on a bank’s balance sheet. As they continue to cut small business credit lines what can you do to protect yours?
Not too long ago a close friend of mine who own a digital imaging company based here in Michigan had his line of credit frozen and the explanation from the bank was that his house had lost over 30% of its value. It didn’t matter that he was never late on payments and was a long standing customer for over 10 years.
Rather than continuing to talk about the negative impact it’s had on thousands of business owners I would prefer to share with you specific factors that flag and trigger a bank to change the terms of your business credit lines. To prevent a bank from cutting yours, you need to reduce your risk level.
Avoiding the following red flags will reduce your risk level and keep your business off the radar screen. Keep in mind that while these are not the only factors they are the most common ones.
Missed Payments
Missing payments can easily raise a red flag so at all costs catch up on overdue payments and pay more than the minimum.
Poor Financials
Banks re-evaluate their business customers using their tax returns and projected income statements to determine their creditworthiness. Weak earnings for the year can trigger an adjustment to the terms of your line of credit.
Reduced Bank Rating
For example – If your balance rating was a “Low 5” ($10k for 3 month period) and drops below to a “Mid 4” ($5k for 3 month period)
Depreciated Value
If you have secured your credit line using collateral that has depreciated in value or business receivables that have reduced significantly then in order to stay off the radar add additional collateral to offset the depreciation.
Lower Credit Scores
A drop in credit scores and new derogatory items showing up on personal credit files are a major contributor to credit lines being cut across the country. Avoid making large purchases on credit cards that could put your debt to credit limit ratio above 30%. In addition be sure to monitor your credit on a regular basis and avoid inquiries.
One of the best ways to protect your business credit lines is by NOT putting all your banking and lines of credit in one basket. It scares me to think of how many business owners across the country have put total dependence on one bank to handle all their deposits, withdrawals, checks, savings, credit lines, loans, credit cards and so on. It’s important to diversify your business banking relationships and credit lines.
By establishing multiple business credit lines with several banks will put you and your business in a much safer and stronger position. So if one of your banks happens to reduce or even cancel your business credit line you still have several other credit lines readily available.
You can protect your business credit line during these tough economic times but it requires you to be proactive and diligent in reducing your overall risk level.
To access business credit insider secrets, premium vendors, leasing companies, business credit cards, and lenders that report to all the major business credit bureaus become a member of my Business Credit Insider’s Circle. Submit your name and email below for details and receive a free audio seminar ($597 value) =>
To Your Success!
Marco Carbajo
About the Author
Marco Carbajo is a business credit specialist, author, speaker, and founder of the Business Credit Insider’s Circle. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in The Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.
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