The credit markets have been tightening for the last year and personal credit has become more and more elusive. Now, more than ever, we are starting to see a tightening on business credit and loans offered by banks. Banks are tightening their standards and dropping more liberal business loan programs as well.
Just a few months ago, BofA offered an express business line of credit program that even entrepreneurs in business just a month or two could qualify for with the right credit scores. They pulled the program in the last quarter. American Express for years has offered a Business Line of Credit program that entrepreneurs could apply for in addition to their American Express credit cards. The line of credit was competitive in the industry with interest rates and most small business owners with an American Express credit card were getting approved. The program was pulled in the last quarter.
The closing of great programs such as the BofA Express Line of Credit and Amex Business Line of Credit are signaling the need for small business owners to find alternative ways to finance their businesses. There are several unconventional methods that most entrepreneurs can use to build up access to capital they will need from time to time. Some of these methods include: merchant account cash advance programs, equipment leasing, equipment sale-lease back, A/R Factoring and trade credit (also known as corporate credit or business credit).
Trade credit is the single largest source of lending in the entire world. It is when one business sells services or products to another business on credit terms. For example, when Dell Computers sells a laptop to a small business owner, the business owner is given a choice: pay now with a Mastercard/Visa/Amex credit card, apply for a Dell Computer line of credit or apply for a Dell Computer Credit Card. When the small business owner chooses to apply for a Dell Credit Line or Credit Card they are using trade credit. Dell will then offer terms to the applicants who qualify. Terms may include no-interest for 30 days if paid in full, or an interest rate charged each month a balance is carried and a small monthly payment that must be made on the credit card.
If the business owner has structured their company properly before applying for the credit, they will likely receive an approval based solely on the business credit profile, business credit score and how compliant the company is with the business credit market. If the business is prepared and built some initial business credit before applying with Dell, they will likely get approved regardless of what the personal credit score of the owner looks like. This is True trade credit (corporate credit), when you rely completely on the business’ ability to obtain the credit and not just that of the individual owner or officer of the company. Every entrepreneur should have a business credit profile and score. That includes also being in compliant with the lending market.
A business credit profile and score need to be created with all the major business credit bureaus, not just one. D&B (Dun and Bradstreet) is the oldest business credit bureau, although Experian Business and Equifax Business have created very competitive products and services to compete directly with D&B over the last few years. Most credit bureaus create a business credit profile and score when companies report to the bureaus the payment history of their clients. The more companies reporting to a business credit profile, the better. Companies who purchase a business credit report for analysis to determine credit approvals, like to see when others have granted credit already. They would prefer to see several credit accounts with the business, whereas with an individual you may find it more difficult to obtain credit when you have a lot of credit accounts.
Most small business owners seeking financing are looking for the money to purchase a product or service. The majority of time the product or service can be found through a company offering credit terms. Trade credit is used by household supply stores, marketing companies, printers, graphic designers, internet marketing companies, gas stations, equipment companies, auto-dealers, shipping companies, office supply companies, furniture companies and many more.
In addition to trade credit as an alternative financing option there is merchant account cash advance programs. Although this type of financing can be expensive it is still a great option for some businesses. This type of financing is for businesses with a merchant account charging more than $10,000 per month on the account. Many merchant cash advance companies will advance up to three months charges on a merchant account with very little personal credit information required to obtain the loan. The loan is then paid back out of future merchant account activity as a percentage of the total amount charged that month.
Another alternative source of financing is A/R Factoring. If a company has accounts receivable with other businesses with decent history and credit scores, a factoring company will come in and buy the receivables for a discount on the future value. The business gets money now and the factoring company waits for the invoices to be paid. When they are paid by the customers of the business, the factoring company gets their share and repayment on the advance.
A company can also use leasing as an option to finance their business. A lot of equipment and even software can be leased. There is extremely beneficial to start-up companies and those looking for large equipment purchases. The company doesn’t have to pay up front for a large ticket item, which than conserves cash for the growth and day to day operations of the company.