By Philip Tirone, author of 7 Steps to a 720 Credit Score
Getting a business loan is a lot easier than you might think. You just need to know a few secrets that will help you avoid some of the common mistakes most entrepreneurs make when applying for loans.
Three Secrets to Getting a Business Loan
Tom Kish, author of Shortcuts to Money, helps entrepreneurs get and use business credit to start and expand businesses. He says that the process starts by creating the right image.
Secret #1: Apply using an impressive name.
Whatever your personal name is, it should never go on a business application. Instead, your business’s name should go on the application.
Kish says that banks will all-but-laugh at a person who tries to secure a business loan in his or her name. For one thing, individuals simply are not as impressive as S-Corps, C-Corps, and LLCs. Individuals will apply for one or two loans at a bank over the course of their lives. Corporations will apply for many, many loans. They might also sign up for investment or retirement accounts, use the bank’s payroll service, and buy insurance.
In other words, banks stand to make a lot more money from businesses than they do from individuals.
Beyond that, individuals-even those who have a Fictitious Business name or DBA-simply are not eligible for business loans, so they will be turned down before they can even fill out the rest of the application.
Secret #2: Separate business and personal debt.
Instead of applying for business credit, many entrepreneurs apply for credit under their own name. They then use this personal loan or credit card for business uses.
This can cause a whole new set of problems because it lowers your personal credit score. In turn, it lessens the possibility of you getting a business loan down the road.
Let me try to illustrate this by using a scenario that happens all around the country, every single day.
Evan the Entrepreneur is a computer whiz and wants to start a consulting business, but he realizes that he needs a lot of cash. He’ll need the latest technology so he can properly serve his clients.
Evan has a great credit score, so he opens a credit card with a $20,000 limit. Fortunately, his business takes off. He has more clients than he can handle. In the meantime, he’s buying all sorts of hardware and software so that he can have troubleshoot remotely, test hard drives, and provide the best technical support available to his clients. Eventually, he decides to apply for a reseller’s certificate so he can sell hardware and software to his clients.
In just a month’s time, the balance on his credit card is $15,000.
He has a lot of money coming in, so he is able to pay this high balance.
But the following week, his limit is $15,000 again. He’s doing so much business that every time he pays off his card, he needs it for another purchase. He decides to apply for another credit card, again in his name.
Of course, Evan is using the card for business expenses only, but because the credit card is in his personal name, it is affecting his personal credit score.
You see, the credit-scoring models give higher scores to people with a low balance-to-limit ratio. The more debt you have as a percentage of your limit, the lower your score. If Evan’s debt on his credit cards is usually 75 percent of the limit, his score is going to drop, even if he pays his bills in full.
Businesses usually make a lot more transactions than individuals, so if you are using a personal credit card to pay for business expenses, you could likely be in Evan’s shoes.
Unfortunately, if you ever register your business and the process of getting a business loan, you might hit some roadblocks. A lot of banks require a business owner to have a great personal credit score before extending a line of credit to a business.
This might seem strange, but nowadays, banks have tight criteria for approving loan applications. The loan will be in the business’s name, so it will not be reflected on your credit report. But to get the loan, you will need to have a good credit score.
Fortunately, you can take a few simple steps to build credit.
Secret #3: Apply for lots of loans.
Kish’s final secret is this: Instead of trying to qualify for one large loan, break it up. If you need $200,000, try to qualify for five $40,000 loans. Getting a business loan will be hard at first, so qualifying for even a $5,000 loan is a major step in the right direction. But once you get the ball rolling, you will find it a lot easier to get a business loan, especially if you are applying at the right banks.
Kish says to look for banks offer unsecured lines of credit based on stated income applications. These loans do not require a business plan, tax returns, or collateral, so a business with few assets and a short history will have much more success.
Philip Tirone is the author of 7 Steps to a 720 Credit Score and the creator of the Credit and Debt Summit, where registrants can learn strategies for reaching their financial goals, like getting a business loan. To learn more about this strategy, read the transcripts from Tom Kish’s webinar by registering for the Credit and Debt Summit.