What’s New With Business Credit and Lines of Credit

What’s New With Business Credit and Lines of Credit
What’s New With Business Credit and Lines of Credit

The financial world has changed dramatically over the past 12 months.  With the financial collapse and government bailout of banks, you would think all is fine and banks are ready to lend you money because, after all, that is how they make money! Not really.

Yes, banks need to lend to make more money, but they need more deposits first. Plus they need to put the breaks on losses.

Even after the subprime disaster, the banks are still having record foreclosures with people who did not get hit with an adjusted ARM, but simply lost their job or went out of business and are unable to pay the mortgage.

Now, consumer debt is at record levels and the banks worked hard this last year to jack up your interest rates and fees on your personal credit cards. Now that is coming to an end, so the bank loses on credit cards, at $28 Billion in 2008 is expected to be over $100 Billion in losses in 2009! That is an extraordinary loss for the banks.

The banks want to protect their downside just like they did with the HELOCs a couple of years ago when they started to cut limits on your open lines of credit because of declining home values. The same is happening to your personal credit cards. Even if you pay your bills on time, have a good credit history, the banks will show up and cut your limits. 

If you had a $10,000 credit card with only $3,000 of debt, which is a 30% revolving debt ratio on that card which is very good, now the bank cuts your limit to $3,500 and all of sudden your revolving debt ratio on that one card is 86%! This is happening every day without warning! The banks are attempting to limit massive losses on consumer debt. You should pay off your credit card debt and now.

What does this have to do with business credit? Everything! As you know a major component for your LLC or Corporation to secure cash lines of credit from the bank in the form of a business credit card or business line of credit is your personal credit and your personal revolving debt levels.

The next part is your personal credit score. The key with bank lines of credit is to find out which credit bureau the bank will pull your credit score from. Especially, when applying for a business credit card, 95% of the test is your personal credit score and your revolving debt. The fastest way to jack up your credit score in a 90 day period is to pay down your personal credit cards ideally to a 20% ratio on all of them. 

If you have five personal credit cards that means each card individually would be at 20% or less in debt to credit ratio. This will give you the biggest jump in your personal credit score over a 60-90 day period of time.

The problem with that is if you do not really need a big boost in your credit score and you take your extra personal cash to pay down your credit cards it is likely the credit card companies may cut off your limits as mentioned earlier and automatically jack up your revolving debt again. That is why it is very important to work on an emergency personal fund (ideally 8 months of your monthly personal expenses) saved up first. This is a balancing act unlike ever before.

You may have heard a lot about the SBA, the 7A loan, 504 and microloans, you still have to be an eligible borrower. You still have the bank as the first step (the microloan is through non-profit community-based lenders). Even if it appears you will meet the SBA’s criteria for a loan, the bank may have multiple other criteria that more than likely a struggling business will not qualify for. Since the banks are so tight their lending requirements are very high, even for an SBA backed program.

The bottom line is that this is not good news for you. The time to borrow money from the bank is when you do not need it. The same is to be said for building business credit. Do not wait until you have exhausted all financial resources before you plan to look at your choice of Perth IT support providers or new equipment. Today, you must improve your personal credit score, keep your personal revolving debt low, be on a comprehensive personal and business budget, and work on the profitability of your business. 

Even with a bankruptcy or foreclosure, a business credit builder program that works with D & B  and Corporate Experian will do a lot to get your business trade lines of credit and after about 4 months business credit cards under the EIN number only (with no personal credit checks)!

If your monthly credit card sales are consistent, and you average around $10,000 per month and you have been in business for 8-9 months then your business may qualify on a merchant account cash advance. It is 90% based upon your business sales and less on your personal credit and profitability. We have the best resource for this type of advance if needed. Keep in mind as you can imagine this type of advance is short-term, usually 6-8 months to pay back, and comes with the highest factor.

The key with any type of business credit support is what will you do differently once you get the money? How will you utilize your money and implement better marketing tools to grow your business. I find that most are missing this last piece. Let’s face it, a bad business model with more money will only delay the inevitable slightly longer unless there aren’t major changes.