X-Banker

Archive for the 'Unsecured Lines of Credit' Category

What's Your Hurdle Rate?

July 9th, 2008

By The XBanker

My mother always taught me that “beggars can’t be choosers” and my father preferred the “don’t be penny-wise, but pound foolish” – either expression is fitting for this topic. In the last week, I’ve had three experiences that made me think about being wise when you need money for your business and understanding the concept of a hurdle rate.

My first experience was a discussion with a consultant to a portfolio of companies in various stages of their business – all with immediate capital needs. We were exploring potential solutions for these people. Most simply needed $50-100k to purchase inventory or to invest in new opportunities – getting the money is critical to their success. Yet, as I started asking questions, I was being shot down with every possible financing option. It was apparent that these business owners were looking for $100k for 2-3 years at less than 5% interest with no colateral and no personal guarantee and they wanted it now, despite their less than stellar credit.

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What Is The Difference Between A Term Loan And An Unsecured Line Of Credit?

February 26th, 2008

By The XBanker

You will find that some banks offer two options to small business borrowers: term loans or unsecured lines of credit – it’s important to understand the difference between a term loans and unsecured lines of credit. The easiest way to think about an unsecured line of credit is to consider it as “access to capital.” If you get approved for a $50,000 line money doesn’t change hands, you simply have access to this money – you don’t pay any interest until you actually use it. With a term loan, you receive the money upfront and begin paying principle and interest for the term of the note.

My bias is towards unsecured lines of credit, because you can build a healthy reserve without increasing your monthly debt burden – until you actually use them. However, a term loan may make the most sense if you know that your cash flow will cover the payment and that you will immediately use every penny from the loan.

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Boo! Ghost Guarantees

February 11th, 2008

By The XBanker

Entrepreneurs routinely leverage their personal assets and credit cards to fund and grow their businesses, only to leave their personal credit circling the bowl as their lending options dwindle away. FOOLS!

Alas, personal credit scores are heavily-weighted against revolving debt (credit cards) and inquiries—two common bi-products of being an entrepreneur. If you’re not careful, it’s easy to over-leverage your personal credit and push your revolving debt ratios (current debt divided by available credit) beyond the acceptable limit.

How far is too far? At 40%, expect bank doors to start slamming shut. What can you do?

Separate yourself from your business

Unsecured business lines of credit are the entrepreneur’s best friend. Why? Because unlike a personal credit card or a home equity loan, most offer something called a ghost guarantee.

Most banks, and certainly all of the banks I work with, permit a ghost guarantee for their unsecured business lines of credit. What this means is that while you are personally guaranteeing the line of credit, it does not show up on our personal credit report! The only time a ghost guarantee will impact your personal credit is if you go into default—in which case you deserve to be outed.

Used wisely, an unsecured line of credit can enable you to keep your personal credit personal, and put your business debt where it belongs—on your business’ credit.

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