Credit markets have tightened over the past year, and personal credit has become increasingly elusive. Now, more than ever, we are beginning to see a tightening of commercial credit and the loans offered by banks. Banks are tightening their standards and also eliminating more liberal commercial lending programs.
Just a few months ago, BofA offered an express business line of credit program that even entrepreneurs in business for only a month or two could qualify for with the right credit scores. They pulled the show last term. American Express has for years offered a business line of credit program that business owners can apply for in addition to their American Express credit cards. The line of credit was industry competitive with interest rates and most small business owners with an American Express credit card were being approved. The program was withdrawn in the last quarter.
The closure of large programs like the BofA Express Line of Credit and the Amex Business Line of Credit is 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 generate access to the capital that they will need from time to time. Some of these methods include: business account cash advance programs, equipment leasing, equipment sale with leaseback, A/R factoring, and trade credit (also known as corporate credit or trade credit).
Business credit is the largest source of loans in the world. It is when a company sells services or products to another company on credit terms. For example, when Dell Computers sells a laptop to a small business owner, the business owner has the option to 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 a small business owner chooses to apply for a Dell line of credit or credit card, they are using business credit. Dell will then offer terms to qualified applicants. Terms can include no interest for 30 days if paid in full, or an interest rate charged each month a balance accumulates and a small monthly payment due to the credit card.
If the business owner has structured his business correctly before applying for credit, he will likely receive an approval based solely on the business credit profile, business credit score, and the degree of compliance of the business with the credit market business. If the business is prepared and built initial business credit before applying with Dell, it will likely get approved regardless of what the owner’s personal credit score looks like. This is true trade credit (corporate credit), when you have complete confidence in the business’s ability to obtain the credit, and not just the individual owner or officer of the business. Every entrepreneur should have a business credit profile and score. That also includes meeting the loan market.
A business credit score and profile should be created with all major business credit bureaus, not just one. D&B (Dun and Bradstreet) is the oldest commercial credit bureau, although Experian Business and Equifax Business have created very competitive products and services to compete directly with D&B in recent years. Most credit bureaus create a business credit profile and qualify when businesses report their customers’ payment history to the bureaus. The more companies reporting to a business credit profile, the better. Businesses that purchase a business credit report to review and determine credit approvals like to see when others have already extended credit. They would prefer to see multiple credit accounts with the business whereas with an individual it may be more difficult to get credit when they have many credit accounts.
Most small business owners seeking financing are looking for the money to purchase a product or service. Most of the time, the product or service can be found through a company that offers credit terms. Trade credit is used by home improvement stores, marketing companies, printers, graphic designers, Internet marketing companies, gas stations, equipment companies, car dealerships, shipping companies, office supply companies, shipping companies, furniture and many more.
In addition to business credit as an alternative financing option, there are business 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 that collects more than $10,000 per month into the account. Many commercial cash advance companies will advance charges of up to three months on a business account with very little personal credit information required to obtain the loan. The loan is then repaid with future business account activity as a percentage of the total amount collected that month.
Another alternative source of financing is A/R Factoring. If a company has receivables with other companies with decent credit scores and histories, a factoring company will come in and buy the receivables at a discount to future value. The business receives money now, and the factoring company waits for the invoices to be paid. When they are paid by the company’s customers, the factoring company gets its share and a refund of the advance.
A company can also use leasing as an option to finance its business. Lots of equipment and even software can be leased. It is extremely beneficial for start-ups and those looking for large equipment purchases. The business does not have to pay upfront for a high-value item, allowing cash to be conserved for growth and day-to-day business operations.
Small business owners need to be creative when it comes to building a business and finding the financing they need. Using trade credit and other alternative financing options can help your business avoid the pitfalls and traps many have fallen into and lost. For creative solutions to your business financing needs, visit http://www.bcscredit.com and get a free eBook on Building Business Credit for Business Owners.
