December 13th, 2010 19:24 EST
Three Things You Should Never Do to Get a Business Loan
If you are one of the many entrepreneurs who desperately want to get a business loan, you might be making a few mistakes that are getting in your way. But a business credit expert recently told me how to increase my chances of securing a business loan by avoiding three pitfalls.
Want to Get a Business Loan? Don`t Do These Three Things.
Don`t apply in the wrong name.
If you, Joe Jones, walk into the bank and apply for a business loan, the bank will laugh at you--you will never get a business loan this way.
But if you--a representative of an S-Corp, a C-Corp, or an LLC--walk into a bank and apply for a loan in your business`s name, the bank will bend over backward to help you get a business loan.
Unfair, but true, says Tom Kish, author of Shortcuts to Money. Businesses offer banks more profit than individuals, so they work harder to secure business loans than they do personal loans.
Beyond that, sole proprietors are not eligible for business loans. A business must be registered properly before it can start applying for credit. And this means that you will be turned down if you are a sole proprietorship-even if you have a Fictitious Business name or a "DBA."
The only kind of credit available to a sole proprietor is personal credit. Any loan or credit card that a sole proprietor applies for will be reported to his or her personal credit report. And this causes a whole new set of problems.
Don`t comingle personal and business debt.
If you apply for a loan or credit card in your personal name, and then you use this loan for business reasons, you might hurt your personal credit score. In turn, you will lower your chances of being able to get a business loan down the road.
Let me explain through an example.
Imagine that you are Joe Jones, an entrepreneur with a new graphic design company. You find a bunch of freelance artists to help you design logos and websites for businesses. You quickly learn that starting a business takes money. You need to buy software programs, pay your contractors, and get new hardware.
So you apply for a credit card in your own name. The credit card arrives with a $5,000 limit-not much, but it will help. You use the credit card for the basic needs of your business: You buy a new printer, print your own business cards, and create a portfolio showcasing your designs. You realize that you need a new laptop and a projector so you can show presentations to your clients. Pretty soon, the limit on that credit card is $4,750.
Of course, these are all business expenses, but because the credit card is in your personal name, it is affecting your credit score. In fact, it is causing your credit score to drop.
The credit-scoring bureaus place a lot of weight on your balance-to-limit ratio. The more debt you have as a percentage of your limit, the lower your score. In this case, you are using 95 percent of your limit. Credit-scoring bureaus frown on balances that are more than 30 percent of the limit, so your credit score plunges.
Eventually, you register your business and march into the bank looking for a business loan. Unbeknownst to you, the banker wants to see your personal credit.
That`s right. A lot of banks require an owner or principal to have a great personal credit score before extending a line of credit to a business. The loan will be in the business`s name, so it will not be reported to the consumer credit -reporting bureaus. But to get the loan, you will need to have a good credit score.
Unfortunately, a lot of entrepreneurs start off by comingling personal debt and business debt. The good news is that they can take a few simple steps to build credit.
Don`t apply for just one loan.
Imagine that you have registered your business appropriately and cleaned up your credit score. Still, your business is relatively new and you have little assets. You have never applied for a loan in your business`s name, so your business has no history of making payments on a debt.
But you desperately need a loan to hire a few employees and expand your business.
Do you think there is a bank on Earth that is going to help you get a business loan for $100,000?
I doubt it.
Kish suggests that you apply for several smaller loans, with the goal of securing multiple loans that total $100,000.
The first loan is often the hardest to get, so even qualifying for a $3,000 loan can get the ball rolling. Be sure, also, to do your due diligence. You will find it much easier to get a business loan if you apply at banks that offer unsecured lines of credit based on stated income applications.
Kish says such loans are perfect for entrepreneurs with little history or assets because they do not require a business plan, tax returns, or collateral.
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 about new strategies for reaching their financial goals, like how to get 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.