The small business loan crisis. When will it end?
There is crisis of epidemic proportions hitting small business. This epidemic is stifling small business owner’s ability to employ individuals and crippling the financial security of the US.
This is due to our banking system’s inability to look at a small business as a separate entity and not as an individual entity. Virtually all small businesses owners are forced to use their personal credit for the business’ financing and their ability to get a small business loan is driven by personal credit. This myopic and narrow focused view by banks is literally crushing millions of small business and putting them at risk for failure!
The problem is that the banks force the business owners to live with one credit source, and that is personal credit (FICO). Making the business owner dependent on their personal credit score clearly undermines the true reason for establishing a business with it’s own Tax ID or EIN. This lack of the banking systems willingness to help the business owner understand the merits of creating business credit actually creates an over usage of personal credit, that results in declining credit scores and limited credit and at a much higher cost to the business owner.
Personal credit unlike business credit is not an unlimited credit resource. In fact, the more you use it (credit inquires, new revolving credit accounts, increase use of credit cards) the lower your credit score goes. Unfortunately, most business owners do not understand that the opposite is true with business credit. The more you get, the more you get. The sad truth is that the banking system and personal credit bureaus do not want the backbone of America to know that when you try to leverage your personal credit to obtain working capital you damage your personal credit score and actually reduce your credit availability. And this happens at the most inopportune time, just when you need more money for your business cash needs.
How did small business owners get into this situation? Three reasons:
- The BIG banks are only interested in their self interests and minimizing risk. The easiest way to minimize risk is to tie small business loans to personal credit and existing assets, and unfortunately for most small business owners, your personal asset are obvious low hanging fruit.
- For some unknown reason Business owners have not been educated to the opportunity to build additional credit assets in their business that is totally separate from their personal credit. A staggering 90% of small businesses have not developed business credit, whether it is with the business credit bureaus, vendors and or with business credit cards. On top of that if business owners only knew that they could very easily build business credit with a little time and effort and that this will increase their access to vendor credit, business credit cards strictly in the businesses name or more importantly access to small business loans, equipment leasing loans, working capital or lines of credit. The flip side of this is that this same small business owner reduces his or her personal exposure to business liability. The question is, “Who wouldn’t do that?”
- Last but not least, Small business owners don’t use trade or vendor credit to increase cash flow and use it to fund their business. A whopping 95% of all US business funding is based on trade or vendor credit. To put that into perspective, less than 5% of all financing is cash financing including credit cards, lines of credit, loans etc. That means there is over $1 Trillion dollars of trade credit available to small businesses. That’s incredible! However less than 30% of the small business owners actually use vendor credit. Sometimes the problem is your vendors are not reporting your good timely payments and this becomes a big missed opportunity on both sides of the coin. If your business is not taking advantage of this strategy to maximize vendor trade credit, you are leaving untold dollars on the table.
Understand the Rules to Change the Rules
The first thing all business owners must do is reduce their dependence on their personal credit – Simply using your personal credit as the main source of cash or credit for your business is a disaster waiting to happen. Please stop using your personal credit for your business. My best advice is if you need to guarantee a business loan or line of credit, can you at least make sure that you are building your business credit in the process?
Building Business Credit takes time and effort. So Invest your time and energy in building business credit – Look, it’s not that difficult. You can start here (http://sunwisecapital.com/so-how-do-i-get-started/) and this will get you going. Over the years we’ve spoken to thousands of business owners and the bottom line is that most business owner do not understand that business credit is not automatically created when you formed your business. This is the critical difference between business and personal credit. Building personal credit happens automatically. Not so on the business side. Business Credit must be created in a systematic way, and before you can create and build a credit file, your company must be have your business house in order. Start here(http://sunwisecapital.com/does-your-cpa-know-these-20-steps/) and work on these 20 items.
Leverage your business credit and get small business loans that build your business credit. Did you know that there are tens of thousands of vendor and trade credit providers? If you did I bet you that you didn’t know that only five percent of these vendors actually report to the business credit bureaus? It’s worth it to work with vendors or small business lenders that will help you build that business credit asset.
Leverage your growing business credit and get bigger business loans. As mentioned earlier, the more credit you acquire and pay in a timely basis (if not early) through your business, the more vendors and lenders will want to offer to your business. Make it your goal is to create Business Credit for your Business that’s independent of your FICO score. The end result will be the separation of your personal credit and building credit in your business will only increase the value of that business.
Can you reduce your dependency on cash credit? Small business owners are far too dependent on using cash or cash credit. Best estimates suggest that the average small business in the US has over $200,000 in cash equivalent trade credit. This is a huge untapped source that the small business owner can use to finance the growth of their business.
Sunwise Capital provides unsecured small business loans up to $2M with no assets or collateral and with no traditional personal guarantees. We do not report to the personal credit bureaus. We DO report to the business credit bureaus thereby helping business owners avoid over leveraging their personal credit and building a Business Credit for their Business.