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Credit & Lending

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While most of us understand personal credit – pay on time, don’t rack up too much debt – business credit tends to be somewhat of a mystery, especially for newer entrepreneurs.

 

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For instance, one mistake that many make is that they co-mingle their personal and business credit. When someone starts a business, they likely have no business credit and so their personal credit is used for business purposes. While that may be a simpler way to start out, it is also dangerous.

 

Here’s why:

 

When you take on a lot of debt to start a business, as many entrepreneurs do, even if you pay the debt back regularly it affects your personal debt-to-income ratio and may damage your personal credit score. So it is vital for both the health of your business and your own personal financial well-being that, as soon as is feasible, you establish business credit and separate your personal and business credit lines and scores.

 

Understanding business credit

 

Business credit is similar but still distinct from personal credit. Typically, a business establishes unique and separate business credit by

 

  • Incorporating
  • Getting an Employee Identification Number (EIN)
  • Establishing trade credit with other companies.

 

Establishing trade credit is not unlike how you established personal credit when you were young. Start small, open a few accounts, and work your way up from there.

 

The value of establishing trade credit and then working to have a good business credit rating is that it will make your future business life much easier. Credit begets more credit; by establishing business credit and maintaining a good business credit score, it will be easier to get loans to grow your business down the road.

 

Clearing up your business credit

 

So yes, good credit is vital to small business success; it allows you to get loans at affordable rates, grow, and handle business. Negative credit hampers your ability to run your business properly. And that begs the question: How do you clean up your business credit if yours has suffered?

 

Here are three ways:

 

1. Check for accuracy: It is estimated that a billion pieces of new information is reported on personal and business credit reports every month. Given that volume, mistakes are made. For example:

 

    • It may be that a creditor mistakenly reported your business negatively to credit bureaus
    • Or they misspelled another company’s business name, a name very similar to yours, and the ding ends up on your report by mistake
    • Or an old debt that was paid off is still showing up on your business credit report

 

Whatever the case, the thing here is that you have to pull your credit report, check it for accuracy, and then challenge those pieces that are inaccurate.

 

2. Negotiate: OK, let’s say that all of the entries on your report are accurate and you do owe some money or have some past due debts or whatever the case may be. In that case, your best bet for cleaning up your credit report is to negotiate with the creditor(s) in question. Work out a deal and make sure they agree to report your debt as paid once it is paid.

 

3. Pay in full and on time: Going forward, the best thing you can do to clean up your business credit is to pay your debts in full and on time. Now, that may not seem like a quick solution, but actually, it is. Within a year you will see an improved credit score. And within a few years, your business credit score will be such that you too will be able to get affordable loans, lines of credit, and more.

 

And when that happens, your business will have grown so much that paying debts late because you don’t have enough cash flow will be a thing of the past.

 

Related Links:

 

 

About Steve Strauss

 

Steve Strauss Headshot New.pngSteven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice. Bank of America, N.A. Member FDIC.  ©2019 Bank of America Corporation

SBA loan application

  • 7(a) loan program: Borrower Information Form — SBA Form 1919
  • SBA Express: Please see your Bank of America business banker for the most current form.
  • Microloan program:
  • CDC/504 loan program: Application for Business Loan —
  • Disaster loans: 

After a presidential disaster declaration, submit a Disaster Loan Application and IRS Form 4506-T directly to the SBA.  The following information will be required:

      1. Contact information
      2. Social Security number          
      3. FEMA registration number
      4. Deed or lease information
      5. Insurance information
      6. Income, account balance, monthly expenses and other financial information
      7. Employer identification number (EIN) for business applicants

 

Business certificate or license

Be ready to present your original business license or certificate. If your business is a corporation, you can simply stamp your seal on your SBA application form.

 

Income tax returns

Submit your returns for the previous three years, including personal and business returns for each of your company’s principals.

 

Business overview and history

Here is where you tell your company’s story. It can be brief but should include what challenges you’ve faced, how you’ve overcome them, why you need an SBA loan and how it will benefit your business.

 

Personal background and financial history

 

Business financial statements

  • Profit and loss (P&L) statement: Summarize your revenues, costs and expenses to within 90 days of your application, including supplementary schedules from the past three fiscal years.
  • Projected financial statement: Predict your income and finances for the coming year in detail, including a written strategy for how you plan to get there.

 

Ownership and affiliations

Do you have subsidiaries or affiliates? List them all here, including all controlling interests, stock ownership, franchises, proposed mergers and all other such concerns.

 

Loan application history

 

Résumés

Submit a résumé for every principal involved in your business.

 

Business lease

 

If you’re purchasing an existing business, please provide:

  • Current balance sheet of prospective business
  • Profit and loss statement of prospective business
  • Two years of federal income tax returns of prospective business
  • Proposed bill of sale (including terms of sale)
  • Complete schedule of inventory, machinery and equipment, and furniture and fixtures
  • Confirmed asking price

 

All programs subject to credit approval and loan amounts are subject to creditworthiness. Some restrictions may apply. The term, amount, interest rate and repayment schedule for your loan, and any product features, including interest rate locks, may vary depending on your creditworthiness and on the type, amount and collateral for your loan. Bank of America may prohibit use of an account to pay off or pay down another Bank of America account. Repayment structure, prepayment options and early payoff are all subject to product availability and credit approval. Other restrictions may apply.

The Small Business Administration (SBA) is a government agency dedicated to small business growth. The organization offers several loan programs for a wide variety of needs and company types, but the SBA does not directly lend money; they partner with banks, community development organizations and micro-lending institutions and set guidelines for how those lenders can structure loans. Each type of SBA loan is unique and involves parameters and stipulations not necessarily offered in other SBA loans. These conditions often revolve around how the money can be used and the terms under which it should be repaid.

 

Ready to apply? – Now it’s time to get ready to complete and present all the necessary paperwork.  Follow the five steps to a successful SBA loan application1:

 

Step 1. Know exactly what your business needs are.

Know the answers to these questions:

  • Why do you need the money?
  • How much do you need?
  • How long will it take you to pay it back?
  • What is the current financial health of your business?
  • Do you have collateral to put up?
  • How fast do you need the money?

 

The answers you give may help determine your best course of action. Once you know how much you need and how it will be used, the better equipped you’ll be to determine the best loan option for your business needs.

 

Step 2. Know what lenders are looking for.

The 5 C’s of Credit:

  1. Capacity – Can your business absorb unexpected expenses or a downturn in the economy?
  2. Capital – Do your assets outweigh your liabilities? How much capital have you and others invested?
  3. Collateral – This includes accounts receivable, inventory, cash, equipment, and commercial real estate.
  4. Conditions – Certain factors may affect your ability to make payments, such as the economy, industry trends, and pending legislation.
  5. Character – Personal integrity, industry experience, credit history, and good standing are critically important. 

 

Be prepared to detail what you plan to do with the borrowed funds. Back up your request with facts that support how much you are asking to borrow. Lenders appreciate the effort, and it will give them the confidence they need to trust in your ability to pay them back.

 

Step 3: Provide and overall financial snapshot of your small business.

Be prepared to present your small business in the best light possible.

Be ready to share details about the financial side of your business. Provide the lender with a comprehensive background on your company, future growth plans and your own personal information.

  • Maintain a good credit score
  • Borrow only what you know you can pay back
  • Present a repayment plan, complete with projections and a safety net
  • Show a history of paying bills on time
  • Provide collateral

 

Step 4: Choose the SBA loan that is right for your business

The 5 types of SBA Loans:

  1. SBA 7(a) Loan
  2. SBA Express Loan
  3. SBA Microloan
  4. SBA 504 Loan
  5. SBA Disaster Loan

 

Read more about the 5 types of SBA loans.

 

Step 5: Complete and present all the necessary paperwork.

  • Get a checklist here.

 

 

1All programs subject to credit approval and loan amounts are subject to creditworthiness. Some restrictions may apply. The term, amount, interest rate and repayment schedule for your loan, and any product features, including interest rate locks, may vary depending on your creditworthiness and on the type, amount and collateral for your loan. Bank of America may prohibit use of an account to pay off or pay down another Bank of America account. Repayment structure, prepayment options and early payoff are all subject to product availability and credit approval. Other restrictions may apply.

More business owners are looking to borrow capital today than in recent years. There are many reasons for this: to provide better training and development for employees; to invest in new equipment or to expand operations; and to enhance health benefits and improve salaries, among others.

 

What is a Small Business Administration (SBA) loan?

 

The SBA is a government agency dedicated to small business growth. The organization offers several loan programs for a wide variety of needs and company types, but the SBA does not directly lend money; they partner with banks, community development organizations and micro-lending institutions and set guidelines for how those lenders can structure loans. Each type of SBA loan is unique and involves parameters and stipulations not necessarily offered in other SBA loans. These conditions often revolve around how the money can be used and the terms under which it should be repaid. The details of the program are constantly changing, so the more familiar your banker is with SBA loans, the simpler the process could be for you.

 

There are two types of lenders that handle SBA loans:

  1. SBA standard lender – this qualified lender must submit transactions for review and receive a guarantee upon approval for every loan.
  2. SBA preferred lender – this lender is the more qualified of the two types. Loan approval times can be reduced because the SBA checks only the lender’s justification of eligibility for the borrower, not their underwriting. Bank of America is an SBA Preferred Lender.

 

SBA Loan Advantages:

  1. Guaranteed by the government. If the loan is defaulted or unpaid, the lender can ask the government to honor the loan. This reduces the risk to the lender, allowing it to extend credit to borrowers it might otherwise decline.
  2. Favorable terms. Because of the government guarantee, lenders may be able to provide loans with more favorable terms than a conventional loan.
  3. More time to pay. Repayment terms are longer than traditional loans, extended to up to 10 and even up to 25 years in some cases. Plus, on loan terms of less than 15 years, there is no prepayment penalty.
  4. Affordability. SBA loans often require lower down payments, which allows the borrower to preserve the cash they need to operate the business.

 

Things to be aware of:

  1. Complex Process. Due to the government’s involvement, the application process may be more document-intensive and could possibly include extra fees not found in traditional loans.
  2. Lengthier Approval. The time it takes to get approved or denied can be much longer than with a conventional loan.
    • Applying for an SBA loan can be time consuming. Fortunately, the SBA has a Preferred Lenders Program (PLP) that’s designed to simplify and expedite the loan-approval process.

 

Learn more about Small Business Administration Loans from Bank of America.1

 

1All programs subject to credit approval and loan amounts are subject to creditworthiness. Some restrictions may apply. The term, amount, interest rate and repayment schedule for your loan, and any product features, including interest rate locks, may vary depending on your creditworthiness and on the type, amount and collateral for your loan. Bank of America may prohibit use of an account to pay off or pay down another Bank of America account. Repayment structure, prepayment options and early payoff are all subject to product availability and credit approval. Other restrictions may apply.

If you’ve read our previous post, “Need a loan? The Small Business Administration can help." you’re familiar with some of the reasons why the United States government guarantees loans to small businesses. The next step is to decide which of the SBA’s five loan types that best fit your needs.

 

SBA 7(a) loan

  • The 7(a) loan is the basic SBA loan; designed to finance established small businesses.
  • It can offer access to more capital with longer terms and, in many cases, improved cash flow.
  • Flexible and ideal for general business purposes and operational expenses, such as:
    • Purchasing or expanding a business
    • Working capital, improvements, or refinancing
    • Equipment, including machinery and vehicles
    • Furniture and other office essentials such as printers, fixtures, and more
    • Purchase, refinancing, build, or renovate commercial property
  • Advantages:
    • Longer maturity and easier qualification than conventional loans
    • Lower down payments
  • Loan Maturity:
    • Up to seven years for working capital
    • Up to 10 years for equipment and business acquisition
    • Up to 25 years for real estate
  • Maximum loan amount: 
    • $5 million

 

SBA Express loan

  • This loan is generally used for equipment and working capital. Connect with your business banker or loan specialist to learn more.
  • Ideal for:
    • Working capital
    • Purchasing equipment
    • Financing vehicles or inventory
  • Advantages:
    • Longer maturity than some conventional loans
    • Easier qualifications than a conventional loan
  • Loan Maturity:
    • Up to seven year-term with first-year revolving option and balance amortized across the remainder of the term for working capital
    • Up to 10 year term for equipment
  • Maximum loan amount:
    • $350,000

 

SBA Microloan

  • This is a very small, short-term loan, typically offered to new and growing small businesses and to certain types of not-for-profit child care centers.
  • For microloans, you may need to fulfill training or planning requirements designed to help you launch or expand your business in order to be considered eligible.
  • Ideal for:
    • Working capital
    • Supply and inventory purchases
    • Equipment, including machinery and vehicles
    • Furniture and other office essentials such as printers and fixtures
    • Partner buyouts
  • Cannot be used for:
    • Debt repayment
    • Real estate
  • Maximum repayment term is six years and varies based on:
    • Amount
    • Plans for the funds
    • Needs of the borrower
    • Specific lender requirements
  • Maximum loan amount:
    • $50,000
    • Average loan: $13,000

 

SBA 504 loan

  • Primarily used for real estate and equipment, this loan offers long-term, fixed-rate financing for major assets, including land and buildings.
  • To qualify:
    • Net worth of your small business should be less than $15 million
    • Net income cannot exceed $5 million after taxes for each of the previous two years
    • SBA covers 40% of total cost, lender covers up to 50%, and borrower puts up the remainder
  • Ideal for:
    • Buying land
    • Financing long-term machinery
    • Purchasing existing buildings
    • Building or renovating facilities
    • Refinancing debt (must be connected to business expansion)
  • Cannot be used for:
    • Working capital or inventory
  • Advantages:
    • Longer maturity and easier qualification than conventional loans
    • Lower down payments or fixed assets
  • Loan maturity:
    • Up to two years on interim construction period
    • 7 to 10 years on equipment
    • 10 to 20 years on real estate
  • Maximum loan amount:
    • $350,000 minimum, no maximum

 

SBA Disaster loan

  • Designed to help businesses damaged, destroyed or affected in a declared disaster, a disaster loan offers low interest rates.
  • Can be used for repairing or replacing business assets such as:
    • Real estate
    • Machinery
    • Equipment
    • Inventory
  • Maximum loan amount:
    • $2 million
  • Following a presidential disaster declaration, a Disaster Loan Application and IRS Form 4506-T must be submitted directly to the SBA. The following information will be required:
    • Contact information
    • Social Security number
    • Federal Emergency Management Agency(FEMA) registration number
    • Deed or lease information
    • Insurance information
    • Income, account balance, monthly expenses, and other financial information
    • Employer identification number (EIN) for business applicants

 

Learn more about Small Business Administration Loans through Bank of America.1

 

 

1All programs subject to credit approval and loan amounts are subject to creditworthiness. Some restrictions may apply. The term, amount, interest rate and repayment schedule for your loan, and any product features, including interest rate locks, may vary depending on your creditworthiness and on the type, amount and collateral for your loan. Bank of America may prohibit use of an account to pay off or pay down another Bank of America account. Repayment structure, prepayment options and early payoff are all subject to product availability and credit approval. Other restrictions may apply.

When unexpected things happen, will your small business be ready?

 

No matter how prepared you might be, sometimes financial emergencies happen. The good news is that there is help when you need capital fast.

 

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In fact, small business owners today have access to more financing options than ever before; any one of several different types of emergency loans could be right for your business. Here are some of the best options for you to inject money back into your company in the short-term.

 

Working capital loans: A working capital loan is one that is used to finance a company’s everyday operations on a short-term basis. This can be one of the best options when you are experiencing a cash crunch. With shorter terms and lower amounts, working capital loans are typically used for maintaining day-to-day operations.

 

The 5 most popular working capital loans are:

 

  • Short-term loans: Short-term business capital loans can be some of the best for your business, as they give you an opportunity to inject money into your business fast. Usually, these types of loans give your business a lump-sum loan that’s paid back over a shorter period of time.

 

  • Lines of credit: A line of credit, or LOC, is a type of loan that banks can provide, allowing you to borrow money for your business and giving you access to funds that you can use whenever needed. As such, business lines of credit are a great and flexible option for small business owners.

 

  • Merchant cash advances: Merchant cash advance companies provide quick money, but usually at a higher price. With a merchant cash advance or MCA, a financing company provides you cash in exchange for a percentage of your daily credit card sales, plus a fee. While this is an easy and quick way to introduce capital back into your business, it tends to be more of a pricey solution.

 

  • Invoice financing: Also known as factoring, invoice financing is a short-term loan that can help monetize your accounts receivable in order to get quick capital. Through invoice factoring, a company sells an accounts receivable to a “factor” at a discounted rate. The upside is that the factor will pay you that sum immediately, as opposed to the company who owes you the money and who may take months to pay. 

 

  • SBA 7(a) loans: The U.S. Small Business Administration’s (SBA) primary loan vehicle is known as the 7(a) program. It helps businesses by providing working capital. With low interest rates and high potential capital loaned, these tend to be one of the more sought-after loan options.

 

Learn more about SBA loans from Bank of America

 

Family and Friends loan: In many cases, small business owners use this as their first option for a short-term loan, rather than a financial institution. Friends and family can offer very flexible repayment terms and often zero interest.

 

Although it may be tempting to go this route, you must consider the downside: If it takes you longer than expected to repay, you will create some strained personal relationships. As such, if you do choose to go this route, draw up a formal contract (or another type of written agreement) that outlines the terms of the loan. This can help make the transition from purely personal relationships to working ones smoother and will give your lender some peace of mind.

 

Related content: Small Business Guide to Raising Capital, Part 2:  How Much is Family Worth to You?

 

Finally, if something really bad happens…

 

Disaster loans: Offered by the U.S. Small Business Administration, disaster loans can be tricky and difficult to get. However, if you qualify, you will be rewarded. According to the Federal Emergency Management Agency (FEMA), disaster loans are “the primary source of federal long-term disaster-recovery funds for loss and damage” provided to businesses. When a federal disaster is declared, the SBA is authorized to offer low-interest loans to businesses of all sizes that have sustained damage in a disaster. In a time of crisis, the SBA can provide up to $2 million to help you rebuild your business.

 

The good news is that when capital starts to run dry, you don’t need to panic; there are many loan options out there for you to help your business weather the storm!

 

Find the right business loan for you and your business. Get a recommendation from Bank of America.

 

Learn more about SBA Loans

 

About Steve Strauss

 

Steve Strauss Headshot New.pngSteven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice. Bank of America, N.A. Member FDIC.  ©2019 Bank of America Corporation

 

Watch the video above to see a brief comparison of the different lending products and features, to help you understand how credit options can support every stage of your business journey.

 

Video transcript:

 

[Visual title: Borrowing options for small businesses]

 

Most small businesses use credit—like a loan or a credit card—at some point.

 

[Visual of a small business owner accepting a delivery of soil and seeds]

 

Let’s take a quick look at some borrowing options that can help you cover anything

 

[Visual of a flower truck expanding into a larger truck]

 

from the day-to-day to a big expansion.

 

[Visual showing Business credit card, Grace period and Next billing cycle]

 

If you haven’t established your business’s credit yet, getting a business credit card could be a good place to start. It’s great for everyday purchases, and business cards may come with a grace period—where you won’t be charged interest on your purchases until the next billing cycle.

 

[Visual of Cash back and Travel rewards cards]

 

And many credit cards have rewards programs—like cash back or travel rewards.

 

[Visual title: Unsecured lines of credit]

 

Now, an unsecured line of credit works like a credit card, but it gives you a lot more flexibility. The main difference is that you can use your entire credit line as cash—

 

[Visual of a hand looking over Invoices and Payroll]

 

which means you can use it for any of your business's operational expenses.

 

[Visual showing higher credit line and lower interest rate on unsecured line of credit vs. a credit card]

In addition, the amount you can borrow using an unsecured line of credit is often more than you can with a credit card. And the interest rates on an unsecured line of credit are often lower than those on a credit card.

 

Like a credit card, the interest rate is variable, and your minimum monthly payments are based on how much you’ve borrowed. However, there's no grace period—meaning interest will start to accrue on what you borrow as soon as you borrow it.

 

But, because of the lower interest rate, an unsecured line of credit can be a cost-effective way of covering the gaps between your payables and receivables—if you need the access to credit.

 

[Visual title: Secured term loan]

 

Now, you might choose a secured term loan if you're looking to cover a large expense like new equipment or a renovation.

 

The loan is secured by the item you're purchasing. This works like an auto loan, where you offer the asset you're purchasing, your car, as collateral.

 

[Visual of types of secured term loans: Equipment loan, Commercial vehicle loan, Real estate loan]

 

Unlike a line of credit, secured term loans are more structured: you’ll receive the money for your purchase all at once, and you'll make fixed monthly payments over a predetermined amount of time. For example, you might get a 5-year loan. That means your loan should be paid off within 5 years.

 

There are different types of secured loans that serve different purposes.

Some have specific lending requirements. But these loans generally have lower interest rates than you'd get from an unsecured line of credit,

 

[Visual of a flower truck transforming into a flower storefront]

 

which may help if you're planning on a major upgrade for your business that you'll need a few years to pay off.

 

Different borrowing options will have different pros and cons for you and your business.

 

[Visual weighing hypothetical pros and cons of a Business credit card, Lines of credit and a Secured term loan]

 

Get in touch with your small business specialist to learn more about your options and how Bank of America can help your business grow.

 

[Visual: Bank of America logo]

 

Banking products and services provided by Bank of America, N.A. Credit cards issued and administered by Bank of America, N.A. Credit cards, credit lines and loans are subject to credit approval and creditworthiness. Some restrictions may apply. Bank of America is a trademark of Bank of America Corporation. Bank of America, N.A. Member FDIC © 2019 Bank of America Corporation.

Are credit cards great, or what?

 

You can use them easily, anytime, for home or office, for whatever you need, and there is no paperwork to fill out, no pre-purchase approval required. For the busy entrepreneur, credit cards make business life easier.

 

adult-advice-analysis-1050297.jpg

Having at least one credit card is often an essential part of starting and growing a small business. After all, if you consider that the most common funding methods for new ventures are 1) friends, family, and 2) credit cards, having one makes a lot of sense.

 

There are plenty of other benefits to having a credit card, the most notable of which is ease. Having a credit card means that you do not need to apply for a loan, you do not need to make your case over and over to investors, and you do not need to put yourself out there in front of your friends and family. You can use your credit card whenever and however you’d like.

 

That said, there are some risks when it comes to relying on credit cards for funding your small business. Avoiding those issues is a matter of using your credit card wisely and carefully.

 

Having spent a decade as a practicing attorney who specialized in financial law, I have seen it all when it comes to credit cards. The good, the bad, and yes, the ugly. Here are then are some of the best tips I have for using credit cards the right way in business.

 

1. Avoid the credit card trap: The credit card trap is when you charge things you cannot afford and have no way to pay the cards off. It’s a trap because you can get yourself stuck in a cycle of high balances yet paying minimum payments that last a long time.

 

You’ve got to have a plan.

 

Before you make purchases, you must come up with a plan for exactly how and when you will pay off your balance. By getting yourself into a forward-thinking mentality early on, you will save yourself from feeling stuck and stressed later.

 

Added bonus: By paying the cards off on time per your plan, you will establish even better credit.

 

2. Use cards with a lower interest rate first: You should be making your biggest purchases on whichever card has the lowest interest rate. You will end up paying less in the long run by doing things this way. A lot of people overlook this strategy, but it will save you big bucks over time.

 

3. Know your credit card benefits: If you can, find a credit card with benefits that are useful to you and your business, such as travel miles if you travel for business. This will help you cut a few expenses here and there.

 

4. Be prudent and mindful: The best rule of thumb for having one or more credit cards is to simply be prudent, mindful, and to think rationally. Things can be very exciting when you are starting up your business, which means it can be easy to get carried away. One of the most important things to remember is to never think emotionally; do your best to always think rationally. Otherwise, you may have a hard time distinguishing between things that you want versus things that you need.

 

Remember, there is good debt and bad debt. Using a credit card to help you launch a business, and with a solid plan to pay off the balances in fairly short order is good debt. Charging a trip to Hawaii on a card with 18 percent interest because you are burned out is bad debt.

 

We like good debt. It helps us grow our businesses.

 

We don’t like bad debt because bad debt is, well, bad.

 

 

About Steve Strauss

 

Steve Strauss Headshot New.pngSteven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice. Bank of America, N.A. Member FDIC.  ©2019 Bank of America Corporation

This is the final post of a three-part series on capital raising mistakes you can easily avoid.  For the first post, click here and for the second part, click here.

 

Mistake #9:  Not Being Scrappy

 

Scrappiness is one of the hallmarks of being an entrepreneur.  It is the ability to take lemons and make lemonade, get the max for the minimum and generally beg and barter to make things happen.  It’s about trying to find a way to make things happen in alternate ways.  Think of it as being the MacGyver of entrepreneurship. How can you extend payment terms with vendors or get paid upfront for your goods and services?  Both of those efforts will decrease the amount of capital you require.

 

Perhaps you can trade your products or services for legal, accounting or other help? Can you get your website done for less money by using a company located in a less expensive area of the country?  Can you outsource any of your tasks to a virtual assistant, maybe even one overseas?

 

While you certainly can’t cut out all of the expenses of your business, if you can be scrappy in the early stages of your company, you may be able to achieve critical milestones with less capital, making it easier to do a formal capital raise down the line.

 

How to avoid this mistake:

 

  • Review your plans to see if there are ways to extend payment terms (without incurring penalties)
  • Review expenses to see if there is anything you can beg, borrow or barter for
  • Creatively think about ways you can get paid upfront (in part or whole) for your products and services
  • Continue to think outside of the box

 

 

Mistake #10: Not Understanding Debt

 

Someone along the way must have sent out a memo that was grossly misunderstood because there are lots of misconceptions about debt (loans) for businesses.  From the government giving away money for free (it doesn’t), to the government making loans through the SBA (it doesn’t - it provides “insurance” to lending institutions in the SBA program to lessen the institutions’ risk when making small business loans), there are lots of myths and misunderstandings on the subject.  42201048_s.jpg

 

Lenders take the business of making small business loans pretty seriously. Getting a loan requires one or more of: (I) a good personal credit history, (ii) personal assets/collateral, (iii) business history and/or (iv) business assets/collateral. If your new business doesn’t have major assets, most lenders will want you to personally guarantee the loan with your personal assets, like your house, which adds to your personal financial risk.

 

If you don’t have appropriate collateral, you may find it nearly impossible to get a loan for the business. Basically, you have to be somewhat successful and have proven your financial abilities to save towards your business in order to get a loan to start a business.

 

Plus, if you fall behind on payments for your debt or if your business is struggling in certain areas and if you aren’t complying with the specifics of your lending agreement (called covenants), the lender may step in and take all kinds of actions that will irritate you but are fully within its right as a lender.

 

Also, many businesses are financed by another type of debt: personal credit card debt.  Credit card debt is very costly and can contain double-digit lending rates. This makes credit card debt a very expensive option, one that may not be able to be made up by the rate of return you produce from your business.

 

How to avoid this mistake:

 

  • Connect with a business banker early to help guide you through the process

Related: Schedule an appointment with a Small Business Specialist

  • Make sure you ask a lot of questions about what is required of you if you take on debt
  • Don’t sign anything that you do not 100% understand
  • Make sure to keep bank covenants in the front of your mind – even if your business is not in trouble, breaking a covenant can wreak havoc on the business
  • Don’t take out any debt (including credit card debt) at a rate of interest higher (or even anywhere near) the potential rate of return you expect from your business
  • Don’t use debt to bet (or fully mortgage) the farm
  • Remember that your name (and perhaps your assets) is on the dotted line – you are accountable!
  • Look to peer-to-peer lending as a lending alternative

 

Mistake #11: Not Getting Help 

 

So, capital raising can be complicated.  You have to figure out how much money you need (which we have already established is usually more than you think) by putting together financial projections.  Then, you have to think through the pros and cons of each source of capital.  You may also have to put together and review various documents, whether they be loan documents from the bank or a term sheet from angel investors or even just an agreement amongst friends and family. Plus, you may have to set a valuation and potentially file paperwork with various governmental authorities.

 

If you have never done any of this before, it is complicated!  Yet, it is incredibly important and you need to make sure that it is done right and that you understand fully what you are signing up for.

 

The mistake here is not being willing to get help (which often costs money).  You need to hire advisors who have experience with capital raising (not just Uncle Ira, who happens to be a lawyer) to make sure that you are getting the best advice and so that they can educate you as well – ignorance is not bliss in business.  You may pay a little more up front, but you get what you pay for. Also, sometimes a bargain on very important items ends up being more costly in the end if the work takes more of your time or needs to be redone.

 

How to avoid this mistake:

 

  • Be willing to ask for help
  • Again, use resources like your business banker to assist
  • Review credentials to make sure that the firm or people helping you have experience working with your size company and have capital raising experience too
  • Make sure that you clearly outline expectations and understand exactly what you receiving in terms of advice and help
  • Ask for explanations so you can become educated too – your name is on the dotted line, you will want to “sanity check” all work done for you by any advisors

 

 

Mistake #12: Raising Money to Replace Your Old Salary

 

Before you started your business, you may have had a good salary that helped you pay for nice things, like your home, car and annual trips to Disney World. Once you leave that job to start a business, you may figure (as so many aspiring entrepreneurs do) that you need to replace that salary to maintain your lifestyle.  You decide that since you could find another job that pays that much, you are obviously worth that much and that investors should be willing to pay you that kind of salary for working in your new business.  Plus, if you are raising equity, you also figure that you deserve the lion’s share of the equity stake.

 

Yeah, that’s not how things work in the real world.

 

Nobody wants to invest in your salary.  They want to invest in a business that will grow and make them a hefty return.  If you think the idea is so great and you want to keep all of the equity, you better be able to either support that with your own capital or be willing to put in “sweat," the hard work you get in exchange for the equity. That is your payment.

 

If you want a large salary, that makes you a hired gun, not an owner.

 

You can expect some small amount of money to live on, but start-ups usually pay below-market salaries to keep costs down.  Asking for a premium salary throws up all kinds of red flags for investors (and they may, in turn, throw-up on your business plan).  It says you care more about sustaining your lifestyle than doing everything possible to make the business work.

 

How to avoid this mistake:

 

  • If you want to make the business a success and have a meaningful stake in it, forget the big salary for a while
  • If you want a big salary, keep your day job

 

 

Mistake #13: Assuming Raising Capital is a One-time Event

 

So, you have written the plan, given your pitch, waited for months (longer than you expected) and finally, the checks have been written and you raised capital. Thank goodness, you never want to go through that again. Yet the capital raising process is rarely a one-time event. As your business evolves and growth prospects present themselves, you have to have funding to grow the business. The more growth you have, the more money is needed to cover working capital items like inventory and accounts receivable. If you have visions of growing, you are going to need to consider capital-raising, whether through equity or debt, on an ongoing basis. Having no capital needs often means you are not growing, which is not a great prospect either.

 

How to avoid this mistake:

 

  • Get comfortable with the notion that you will have to raise capital over the long-haul

 

Related Content

What is working capital – and why is it important?

Lending options for small business owners

Find the right financing for your business

 

 

About Carol Roth

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Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

TRANSCRIPT:

If you’re a small business owner and you’re opening a bank account or applying for credit, you’re probably prepared for questions about your revenue and credit history. But you may also be asked detailed questions about your company’s ownership.

 

Due to a federal regulation designed to prevent money laundering and fraud, lenders may ask you to supply specific information about who owns or runs your company. The regulation doesn’t apply to everyone.

 

If you operate a business with no partners or controlling managers, lenders aren’t going to ask you for this extra information. If you do have partners—considered to be those with a 25% equity stake—or controlling managers—those with significant decision-making authority, like a CEO or COO—then you are affected and will want to be prepared.

 

If the rule applies to you, lenders will ask for certain information about your partners or controlling managers. They’ll need basic identifying information for U.S. citizens. Or in the case of non-U.S. citizens, they’ll ask for foreign passport details and an identity document.

 

To make the process easier and quicker, gather this information to take with you when you meet with your small business specialist. If you have questions, schedule an appointment with a small business specialist, which you can do by phone or in person.

 

Speak with a Small Business Specialist today.  bankofamerica.com/Appointment

 

Visit our Credit & Lending Resource Center to learn more.

 

Bank of America, the Bank of America logo and Life / Better Connected are registered trademarks of Bank of America Corporation.

 

2018 Bank of America Corporation

Now that you’ve gotten familiar with the loan choices the SBA offers, you may be ready to apply. Here, we give you a step-by-step checklist of everything you need to do to complete and present the necessary paperwork and cover all your bases.

How to Apply for an SBA Loan− SBA Loans Guide Part 3

 

You can also read Part 1: "Overview" here and Part 2: "Types of Loans" here.

 

Click here to download the SBA Loans Overview guide (PDF).

 

 

Learn more about Small Business Administration Loans
& Financing through Bank of America.

There are several types of loans available from the Small Business Administration (SBA).

 

What is a Small Business Administration loan?

In part 2 of our 3 part series, discover all the loan choices at your fingertips, so you can do your due diligence, compare your choices, and select the one loan that’s perfect for your business.

 

You can also read Part 1: "An Overview of SBA Loans" by clicking here and How to Apply for an SBA Loan− SBA Loans Guide Part 3.

 

Click here to download the Types of SBA Loans guide (PDF).

 

 

Learn more about Small Business Administration Loans
& Financing through Bank of America.

Does your business need a loan? Consider one from the Small Business Administration (SBA). In our three-part series, you can explore all your SBA loan options to make a more informed decision and get the loan that fits your business needs best.

What is a Small Business Administration loan?

 

Part 1 provides an overview of what SBA loans are and how they can benefit your business. You can read about the different types of SBA loans in Part 2 by clicking here.

 

Click here to download the SBA Loans Overview guide (PDF).

 

 

Learn more about Small Business Administration Loans
& Financing through Bank of America.

Back in 2005, Chancey Peake was a housekeeper and nanny in Greenville, S. C. It was there she began to make what would become her soon-to-be-acclaimed, almost world-famous, banana bread.

 

As fate would have it, not long after perfecting her recipe and launching a side business selling the bread, the family for whom Chancey worked decided to move to Texas, leaving Chancey without a job or income. But what she did have was a great recipe for banana bread that people went, well, bananas over, so she and her husband stared to sell it at the local Farmer’s Market.

 

The bread was a hit from the start, and the legend of Chancey's “Banana Manna” grew. And, while she loved the attention, what Chancey really wanted was her own storefront.

 

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And that is where the magic of microfinance came into play.

 

With the help of Kiva.org, Chancey got a $2,000 microfinance loan and, even with that little amount of startup capital, was able to rent and launch her own brick-and-mortar bakery. Chancey now sells 15 varieties of banana bread and recently brought on two part-time employees.

 

In the world of microfinance, as the story of Banana Manna proves, a little money can go a long way.

 

Traditionally, when it comes to lending and investing, banks and other lenders look for bigger, more established businesses. But the problem with this is two-fold:

 

      • First, a lot of businesses, startups especially, do not need five, six, and seven figure loans. They need something smaller.
      • Second, many of the solopreneurs who start small enterprises do not have the credit to secure a big loan or investment, even if they needed one.

 

That’s where microfinance comes in. Microfinance is a way for small businesses to get microloans, even if they have poor or no credit. The very size of microloans makes any individual loan a small risk.

 

Microfinance began in the developing world. Specifically, it was the Grameen Bank in Bangladesh that created this model, lending millions of dollars in loans as small as $100 to would-be entrepreneurs. Farmers were able to buy a cow, seamstresses could buy cloth. And it worked. Millions of solopreneurs were launched, and, maybe even more remarkably, these unsecured loans had a 97% pay back rate.

 

A good idea like this spreads, and as such, microfinance came to the U.S. about a decade ago, but with a twist. Typically, the loans are a little bigger (in the thousands, not hundreds), but even here, guidelines are relaxed and the loans are easier to get than traditional business loans.

Another great aspect of microfinance is that lending decisions are made based on reasons beyond one’s FICO score, bank balance, and collateralization ability. Microlenders look at a bigger picture, including:

 

      • Experience
      • Passion
      • Opportunity

 

So, where can you find a microloan? Here are your best bets:


CDFIs: Community Development Financial Institutions – or CDFIs – specialize in offering affordable microloans for individuals, small businesses, nonprofits, and other moderate- to low-income organizations. You will want to start this process by finding a CDFI near you.

 

And, I am happy to note, our friends at Bank of America are big financial supporters of CDFIs nationwide[GK1] .[BE2]

 

              RELATED CONTENT: Need Capital? Consider a CDFI

 

Accion: Accion is one of the pioneers of microlending in America. They offer loans from $500 up to $1 million, though, for example, the average microloan size in their Chicago office is $9,000. 

 

The Small Business Administration: The SBA does not directly offer microloans, but is a major funder of microloans for third-party lenders. Typically, the average SBA microloan sits at around $13,000. Learn more here. 

 

               RELATED CONTENT:  An Overview of SBA Loans - SBA Loans Guide Part 1

               RELATED CONTENT:  Types of SBA Loans - SBA Loans Guide Part 2

               RELATED CONTENT:  How to Apply for an SBA Loan - SBA Loans Guide Part 3

 

Grameen America: As you now know, Grameen Bank started out in Bangladesh. It came to the U.S. a few years back. Grameen America’s maximum first-time loan is $1,500.

 

Kiva: This is the group that helped Chancey. Kiva came to the U.S. in 2010 and is one of the major microlenders today. All loans are funded by user donations. American borrowers can be lent up to $10,000.

 

Microloans: a great idea whose time has come.

About Steve Strauss

 

Steve Strauss Headshot New.png

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss.

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2018 Bank of America Corporation

Many years ago, a friend of mine came to me with an intriguing business problem. He had long wanted to start his own business. He decided he wanted to buy either an existing business or a franchise, the thinking being that he didn’t want to have to start a business from scratch.

 

When we looked at franchises, it became apparent that a franchise wasn’t going to work for him for two reasons. First, he really wasn’t the type to take direction well, a requirement for being a franchise. Second, most franchises were beyond his financial capacity.

 

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Buying an existing business

 

So he decided to buy an existing business. Generally speaking, buying an established business is a  good idea for several reasons:

  • First, there is less risk. You can review the books of the business and get a pretty good idea as to how much money you can expect to make
  • Second, there is the built-in clientele
  • Third, you do not have to spend years creating a brand; goodwill is already established
  • Finally, it is sometimes possible to get the present owner to stick around for a while (six months or so) in order to teach you the business.

 

Seller financing

 

My suggested solution was that, beyond finding an existing business, that he specifically look for one where the owner was willing to help finance the purchase. This sort of financing is well known in the real estate industry where the owner agrees to “carry the paper” for the buyer. The homeowner’s note is usually recorded as a second mortgage and is paid off in due time. The same idea is at play with owner financing in the sale of a business. The owner carries the paper and is paid off over time.

 

Why would a seller help finance the purchase of his business?

 

Usually, a business owner will finance the sale of his or her business for one of several reasons:

 

First, it might be a slow market or bad economy. Seller financing can help expedite a sale in those circumstances.

 

Second, it could be that it is not a great business. If the seller cannot sell the business the old-fashioned way – via a broker and getting the buyer to pay 100 percent – it may be because the business is sort of like a car that is a lemon. The owner figures that financing the business will at least make it someone else’s lemon.

 

Finally, and this is what we looked for, there are times when a seller is, as they say, “highly motivated,” and so helping out the buyer financially with the sale helps move the business faster. It may be that he’s getting divorced and needs cash or, or that she is ready to retire and move to the Bahamas and wants to cash out. Whatever. The seller needs cash now.

 

How it works

 

In my friend’s case, we found a good business that was listed for $65,000. The owner had been given the chance to teach overseas and wanted to sell the business pronto. The problem was that my friend only had $25,000 and didn’t qualify for a $40,000 business loan.

 

But we convinced the seller to carry a $25,000 note and that carried the day. My friend was able to put $25,000 down, the owner carried a note for another $25,000, and then we were able to get him a $15,000 bank loan to cover the balance.

 

By offering a motivated owner a way out, a chance to sell the business if they carry some paper, you become a solution to their problem.

 

Are there risks? Of course, this is business after all.

 

The main risk is that the buyer will default on the loan and the owner will be forced to repossess a business he no longer wants. But a business owner can reduce the likelihood of that happening by doing some due diligence. The seller must check out the buyer as much as the buyer must check out the seller and the business.

 

But the good news is that once everyone agrees that the other party and the business are on the up-and-up, then seller financing is a creative way to solve everyone’s problems. In the case of my friend, he still owns that business to this day and makes a very good living with it.

 

And the previous owner? She made 12 percent on her $25,000 over three years. Not a bad deal for all concerned.

 

About Steve Strauss

Steve Strauss Headshot New.png

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss.

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2018 Bank of America Corporation

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