X-Banker

Problems Building Business Credit Part Two

September 2nd, 2008

By The XBanker

In a previous post, I replied to a reader who is skeptical about building business credit. Here is some more correspondence on this topic:

I appreciate your response to my question. My business is two years old and I have perfect business credit with DNB and an intermediate score with Experian. Additionally, far as personal credit, I did all I could to increase the score.

I have a student loan that will not be paid off any time soon. In the beginning I believed that building perfect business credit would be the perfect solution to my problem. Of course, after I followed the steps I realize ultimately personal credit still plays a factor. I have several trade accounts with small credit lines nothing serious.

But I am looking to obtain a line of credit from $100-$200,000.00 dollars. That is the reason I formed (my corporation) to acquire an existing company. Technically my company is a start up, but through building credit I established creditability of paying on time and my company has matured to the time banks require businesses.

Ms. Detweiler, I’ve been at this for six years with no results. I hired every consultant I can think of. Should I give up? What would you do in this case?

This is a great conversation, because it illustrates some of the myths floating around about business credit. Building a strong business credit profile does not guarantee access to hundreds of thousands of dollars of unsecured credit lines, no matter what the so-called “experts” say. (Those claims remind me of the credit repair companies that say they can remove anything from credit reports, regardless of whether the information is accurate or not.)

A credit line of $100,000 – $200,000 is a good sized line for a bank to extend, unsecured, to a relatively new business or a business without the track record (including tax returns) to demonstrate the ability to pay it back. Unfortunately lenders are not going to just look at credit scores –personal or business — and write such a large blank check.

Realistically, in this environment, a business needs to be doing $750,000 – $1.5 million in revenue as documented by tax returns to get an unsecured line that size.

You mention that you are trying to acquire another business. Do you have the specific business in mind that you want to acquire? Does it have solid financials to back up the loan? If not, then the lenders may be more objectively evaluating the creditworthiness of that business than you are. In other words, you may see the potential but the lenders are looking at the numbers.

If you do not have a particular business in mind that you want to acquire, but are just hoping to get a $100K – $200K line of credit, then find the business you want, then again, I think the consultants you’ve hired have not been honest about the realities of business lending.

You ask whether you should give up. Absolutely not. I don’t like to see anyone give up their dreams of entrepreneurship! But I do think you need to start looking at other ways to make your business happen. They may include:

1. Finding a business you can buy with owner financing (or at least partial owner financing).

2. Getting a partner with good credit to help (this requires some caution and a solid legal agreement. And it doesn’t guarantee you the unsecured line of credit you want either.)

3. Getting investors, starting with friends and family.

Again, I don’t know enough of the specifics of your business, but something doesn’t seem to be clicking here. You’ve done a good job starting to build your business credit, now you’re going to have to look at other ways to take the next step.

And, by the way, I sat on a panel once where one of the most successful business owners in El Paso TX described how he was turned down for financing over 100 times by the banks before he succeeded. But he didn’t let it stop him. He found other ways to get the job done!

This entry was posted on Tuesday, September 2nd, 2008 at 11:04 am and is filed under Business Credit, Finance Strategy, Small Business Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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