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2019

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.

 

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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.

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