Loans and Lines of Credit

Is There Life After Bankruptcy?

SBOCTeam — Mon, 19 Nov 2007 22:59:00 GMT

How to rebuild business credit and get loans after declaring bankruptcy

By Morin Bishop

Declaring bankruptcy is no picnic, and recovering your credit rating after bankruptcy isn't easy either. But it can be done. Just ask Mike Palladino. The 35 year-old electrician from Quincy, Massachusetts, filed for Chapter 7 bankruptcy in 2002, well before the 2005 bankruptcy law kicked in making it harder for people to discharge debts. Palladino, who ran his own business as a general contractor, was injured when a power tool mangled his hand. Several surgeries and months of recuperation saved the hand, but his business went south, and he ended up maxing out his credit cards to pay for living expenses. "I didn't want to declare bankruptcy," he says, "but I really had no choice. There was a long period when just I wasn't making any money and was up to my neck in bills."

The bankruptcy discharged Palladino's credit card balances and many of the debts that he'd run up trying to keep his struggling business afloat, though he still had to pay the IRS for taxes he'd been unable to pay during his illness. But his credit was in tatters and his prospects for rebuilding his contracting business looked bleak. "A contractor works on credit," he explains. "You need it to buy materials and pay workers and subcontractors it's hard to do that when no one is willing to let you borrow from them."

Palladino's problem was one familiar to anyone who has declared bankruptcy. In a time when one's credit rating is almost a public validation and the gateway to coveted possessions like credit cards, car loans and mortgages a bankruptcy can be like a ghost haunting your credit history and depriving you of the financial means to improve your life.

But even a bankruptcy the ultimate black mark on your credit isn't an insurmountable obstacle to financial recovery. With apologies to F. Scott Fitzgerald, there are second acts in American life, and most definitely in credit ratings.

Small Steps First:

Pay Every Bill On Time
"You really don't have any leeway here," says Jim Shea, a Baltimore based CPA and financial planner. "You are trying to show that your prior financial missteps are firmly behind you and the best way to do that is to meet every obligation utility, cable, cell phone, rent bill, etc. on time." Not every utility or cable company reports late payments to credit reporting companies, Shea notes, but some do. So there's no reason to risk anything negative ending up on your credit report.

Shea says that by paying your bills on time you demonstrate a renewed image of responsibility and trustworthiness. Letting bills slide, on the other hand, tells potential lenders that you aren't serious about financial responsibility or that you may still have financial problems you haven't addressed. "If you are trying to rebuild your credit, anything that makes you seem still unreliable works against you," Shea says. "And nothing works harder against you than repeated late payments on your credit report, especially in the wake of a bankruptcy."

Obtain a Secured Credit Card
You might think that after a bankruptcy particularly one caused by credit debts it would be a good idea to avoid credit altogether. But that would be exactly wrong. In fact, to repair a damaged credit history, you need to replace it with a good credit history. Of course, lenders are naturally wary of extending credit to someone whose credit history suggests the possibility that they won't be repaid. In order to rebuild your credit, you may have to convince lenders that you can be trusted, and that may require handing over a deposit before credit will be granted.

A secured credit card is a credit account whose limit is backed up by a deposit. That is, you deposit, say $500, at your bank and they provide you with a credit card with a spending limit of $500. In almost all other respects, a secured credit card functions like a normal, unsecured credit card; you can make charges on the card up to the maximum spending limit (usually the amount of the deposit) and you repay the balance, which is subject to interest charges, with periodic (usually monthly) payments. The deposit protects the bank in the event you cannot repay the money charged on the card. In many cases, a secured credit card may be the only line of credit obtainable in the wake of bankruptcy, but if used wisely keeping spending in check and making payments on the card's balance on time it can help generate a new track record of financial responsibility.

Secured credit cards are good way of creating a new, post bankruptcy history of good creditworthiness, says Gerri Detweiler, author of The Ultimate Credit Handbook, but they often come with strings. "Even though the line of credit is secured by a deposit, you're still a bad risk in the eyes of the bank, and so secured cards usually come with higher interest rates," she explains. "So you have to be careful about not incurring penalties like late payments, because the fees and interest payments can eat up a portion of the available credit."

Detweiler advises shopping around to get the lowest fees and rates on secured cards. It's also important to make certain that the bank reports the secured credit card's usage to the major credit reporting bureaus. "Using the card is useless if it doesn't reflect positively on your credit score," she says. Since not every bank reports secured card usage, it's worth asking.

A secured line of credit can be a major step on your path back to creditworthiness. "Generally, people who have a secured credit card say that within seven or eight months they start receiving new offers for unsecured credit cards," Detweiler says.

Check Your Credit Report
Just because the bankruptcy court cleared your debts doesn't necessarily mean that they have been expunged from your credit report. According to a recent article in BusinessWeek, in a number of cases some financial institutions failed to report debts that had been discharged by bankruptcy courts to the credit rating firms, even though they are legally required to do so. If the debt is not reported as cancelled by the lending institution, it will remain delinquent on your credit report, potentially sabotaging your efforts to build new credit or obtain life insurance or even employment.

In order to make sure that the bankruptcy court's orders have been accurately carried out, you should examine your credit report on at least an annual basis. You can obtain a copy of your credit report without charge once every twelve months from each of the three nationwide consumer credit reporting firms (TransUnion, Equifax and Experian). Copies of your credit report can also be requested online (at annualcreditreport.com) or by contacting the credit reporting firms directly.

Credit information (late or missed payments, delinquencies, etc.) remains on your credit report for seven years; a bankruptcy will linger there for ten. Note that the three major firms do not always compare information, meaning that the information on one report may differ from that compiled by a different firm. In order to ensure that all the information in your reports is accurate, you should obtain a report from each of the three firms.

Of course, making sure that bankruptcy debts have been discharged isn't the only good reason to look at your credit report. Errors in reporting by financial institutions can lead to inaccurate and potentially damaging inaccuracies that can drag your credit down. Taken with the threat of identity theft, checking your credit report periodically is a good idea, regardless of your credit status.

Landing a Loan
Once, a bankruptcy was a nearly insurmountable obstacle to obtaining a loan. Many banks would not even consider lending money to someone until the bankruptcy had cleared from their credit report a ten year wait. "That's not true anymore," says Jim Shea. "Banks are much more eager to lend money today and more willing to work around difficulties." Also, she notes, bankruptcy simply isn't the damning black mark it once was. "That said, most lenders will want to wait at least a year after the bankruptcy and see some evidence that you've put your financial house in order before they even consider a loan," Shea says. Hence, rebuilding a credit history using secured credit cards will go a long way to helping you get a bank loan.

Even if banks are willing to lend you money after your bankruptcy, those loans will likely come with higher interest rates and fees a reflection of your damaged credit rating. Many banks may request the loan be secured either by collateral a physical asset you own or by a co-signer, someone with good credit who will agree to pay off the loan in the event you default. "Many people find it embarrassing to ask a friend or relative to co-sign a loan for them and it's a big thing to ask anyone to do but for a lot of people who've gone through a bankruptcy, and don't have many assets left it's the only way they are going to get a loan," Shea says.

Building On Success
Once you have begun rebuilding your credit, the best course of action is to stick to it. "It's really pretty simple," says Detweiler. "If you have a couple of credit cards and pay them on time along with all your other bills then your credit will recover in time." Detweiler notes that paying bills early has no effect on credit since only late or missing payments get reported to the credit bureaus. She also recommends keeping purchases small and avoiding carrying balances on the cards while rebuilding credit. "High balances lower your overall credit rating. The goal is to keep the cards active and create a history of on time payment," she advises. "Just make sure the payment arrives by the due date."

Massachusetts contractor Mike Palladino followed this advice. He obtained a secured credit card and convinced his brother to co-sign for several loans. "It wasn't easy and money was really tight for awhile, but within two years, I had my business back up and running," he says.

Morin Bishop is editor -in- chief of Priority magazine

Loans That Fit

SBOCTeam — Fri, 19 Oct 2007 23:46:00 GMT

Make sure you know all the options before you decide which loan is right for your business.
by Chris Freeburn

All businesses find themselves facing a variety of different circumstances under which they need more money than they have on hand. There are a variety of financing options available to small business owners to address these situations, ranging from credit cards to term loans and lines of credit, business home equity lines of credit, and traditional business loans. So, which option is right for your business?

CREDIT CARDS
Many small business owners use business credit cards to pay for everyday purchases, office supplies, and small equipment. In addition to their obvious convenience, many cards offer rebates, discounts, and extended warranties on specific purchases, which can result in significant savings for your business. There are also cards that offer cash back or rewards points on all your purchases which could result in your business receiving cash at the end or the year or points to use to purchase additional items.

BUSINESS LINES OF CREDIT
If your business experiences seasonal fluctuations or at times you need an occasional influx of capital, a business line of credit may be the right highly flexible product for you. Funds can typically be made available in cash or on a credit card. Also, with a line of credit, you only pay interest on what you use, so for instance if your company receives a $50,000 line of credit and you utilize $25,000, interest is only charged on the $25,000 used. You have the ability to borrow up to your maximum line of credit limit and continue to borrow more as you pay back the loan amount.

TERM LOANS
Banks will provide term loans, often presented as "working capital loans" or "accounts receivable loans," to small businesses to cover new vehicle purchases, new equipment purchases, and office expansion. Term loans are also a good debt consolidation tool should your business find the need to consolidate higher rate loans from other sources. Term loans can extend anywhere from three months to five years and, depending on your bank, your loan rate will likely be fixed. In order to obtain a term loan your bank will want to know the reason for the loan and will want to see reasonable financial projections to demonstrate that you will be able to repay it. "Your own credit history may be taken into consideration along with that of your business," says Skip Honigstein, chairman of the Orlando chapter of the Service Corps of Retired Executives (SCORE). Honigstein says that term loans are best suited for capital equipment purchases that will generate increased revenue within a relatively short period of time. Many term loans offer the option of extending the loan if a certain percentage of principal is repaid at the end of the loan. For example, a payment of $2,000 on a $10,000 loan might allow you to extend the loan for three or four months.

THE TRADITIONAL BUSINESS LOAN
For a large expense that you expect to pay off over a number of years, such as the purchase of commercial real estate or a new business, traditional business loans make the most sense. Traditional business loans usually require some form of collateral - a personal or business asset - to secure the debt. Business loans feature a variable or fixed interest rate and have terms ranging from several years to a decade or more. Many banks are placing increased emphasis on serving small businesses and are willing to work with small business owners to grant traditional business loans to even very small companies. Additionally, the Small Business Administration (SBA) offers a loan program which guarantees loans from participating third party lenders. The SBA prefers business owners who have an equity interest in their company, as well as sufficient collateral to secure the loan.

BUSINESS HOME EQUITY LINES OF CREDIT
Many business owners and those who are starting new businesses find that tapping into the frequently skyrocketing equity of real estate they own is a convenient way to get the funding they need to grow or start a business. What's extremely attractive to many new small businesses or businesses with little to no business credit history is that your payment record is applied to your business credit rating, allowing your company to establish a credit history that will be beneficial when applying for additional business credit in the future. However it is important to note that funds for a business home equity line of credit must be used for your business.

Chis Freeburn is an associate writer for Business 24/7 magazine.

The Money Chase

SBOCTeam — Wed, 17 Oct 2007 21:09:00 GMT

Finding the money to start your small business, or grow it, can prove an intimidating challenge for aspiring small business owners.
by Reed Richardson

The money you need for your business doesn't grow on trees; it belongs to other people, and deciding whose money to ask for, under what terms, and persuading them to trust you with it is a huge task for any entrepreneur.

Most small business owners start with their local bank, hoping to get a business loan to fund their company. The Small Business Administration (SBA) notes that 80 percent of credit line lending and 50 percent of mortgage, vehicle, and equipment loans are provided by traditional business bank loans. Given that interest rates remain relatively low, by historical standards, such loans are still an attractive option for many small business owners. Obtaining a traditional business loan requires you to demonstrate in detail your business's ability to repay it, or to convince the banker that your startup's business plan is solid enough to survive the rough and tumble of the market. But if your business is still too young, or if you need a larger infusion of capital to get your business off the ground, you may find that a traditional business loan is either not available to you, or not large enough to meet your needs. Fortunately, there are a host of alternatives for you to consider.

Personal Loans & Credit Cards
According to research conducted by William Bygrave at Babson College, 87 percent of small business entrepreneurs turn to family or friends for funds to launch their startups. But such financing can come with a heavy price. Failure to repay family members or friends can ruin those relationships, bringing an even higher emotional cost in the event your business runs into trouble. Worse may be the feeling of being "in their debt" every time you encounter them.

If you wish to avoid the emotional strings attached to loans from family or friends, borrowing against yourself may be an attractive option. Many small business people have funded their startups, or kept their businesses going, by using their personal credit cards to pay for needed supplies and other business expenses. Many credit cards have relatively high spending limits and there is no shortage of financial institutions willing to give out credit cards to individuals.

But there is a downside to financing your business using a personal credit card. Interest rates on credit cards are higher than for bank loans in general-and those rates become even higher in the event you are late with or miss a payment. "An awful lot of people open new businesses by running up their credit cards," says Skip Honigstein, chairman of the Orlando chapter of the Service Corps of Retired Professionals (SCORE). "Many people start there before they ever ask a family member or friend for money. But the interest rates come back to bite them later." The interest rates on credit cards can snowball the amount of debt you owe, sometimes making repayment difficult. If your business suffers a slowdown or other problems, high levels of credit card debt could hurt your credit report, making it hard for you to obtain credit at lower interest rates in the future. Honigstein suggests looking for less expensive sources of cash, especially when your business is just taking off and not generating sufficient revenues.

A better alternative to maxing out one's credit cards is the personal bank loan. Personal bank loans are typically unsecured, which means no property or asset is put up as collateral. While this makes it an attractive option for those lacking a home or other substantial property, it increases the bank's overall risk, resulting in higher interest rates than would be applicable on other types of loans. Better still, personal loans have a fixed term in which they must be repaid, compelling you to be disciplined and repay the loan on time. This avoids the credit card temptation to continue amassing debt without attempting to repay it.

Home Equity Loans and Lines of Credit
Homeowners who wish to start a business can tap into the equity value in their homes through a home equity loan or line of credit. A home equity loan is simply a loan secured by the value of the property that collateralizes it. The amount that can be borrowed through a home equity loan depends on the fair market value of the home, minus any outstanding debt against the property (a mortgage, for instance). Some states have placed restrictions on the amount of home equity that can be borrowed. Texas, for example, limits the borrower to 80 percent of the home's value. Interest rates for home equity loans tend to be lower than for other types of loans and are determined by the borrower's credit history and market rates.

A home equity line of credit functions as a revolving credit account secured by your home's value. You may borrow money up to the amount of your credit limit. Once repaid, the money becomes available for you to use again. Interest rates for home equity lines tend to be slightly higher than for traditional home equity loans, and are usually variable, but are still lower than conventional credit card or personal loan rates. Interest is paid only against the amount of funds actually used. Many banks offer home equity lines for business. Under a business home equity line, funds from the line of credit must be used for your business and are usually dispensed in the form of checks or electronic transfers. Your payment history is then applied to your business's credit rating, instead of your own. Provided that you maintain a good payment record, this can help establish a solid credit history for your business, boosting your chances of obtaining business lines of credit and business loans in the future.

Rising real estate prices over the last decade have made home equity loans and lines very popular. Moreover, because they are backed by tangible assets, home equity loans are generally easy to obtain from banks and lending institutions. Interest payments on both home equity loans and lines can be tax deductible.

Business Lines of Credit
If your business is already up and running and has produced a track record of solid finances, you may be able to obtain a business line of credit from your local bank. A business line of credit differs from a loan in that you may borrow as much money as you need, up to a certain limit, and borrow more as you pay back the amount without applying for a new loan each time. Depending on your company's finances, the bank may require that the line of credit be secured (collateralized by assets or a personal guarantee) or not. Most banks require an annual fee for business lines of credit. A line of credit gives you great flexibility, providing cash to cover emergency situations, seasonal revenue fluctuations, or purchases that are too expensive to charge on a credit card, but not costly enough to justify taking out a traditional loan.

Reed Richardson is an associate writer/editor for Business 24/7 magazine.