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How do you establish a line of credit for business if you're just starting out?
I'm opening up my own business and have been using money that I've saved up to cover costs. However I understand it's important to establish a line of credit for your business. In a time where nobody is lending, how can a start up establish credit? Should I talk to local banks and credit unions before talking to a larger bank?
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7 Answers
I agree with Rick since he included the work "substantial" in his answer. Lines of credit are far more predicated on proven performance than the promises of a business plan. Initial lines of credit with little collateral will also come with a much higher interest than those backed by a guarantee in some form.
You might also consider Purchase Order financing through non traditional lending institutions. If you have a Purchase Order (no labor involved) from a solid customer, these institutions will fund the purchase of equipment with the customer paying an account you set up with them. Typically, If found rates range around 2 percent for each 15 days of outstanding balance.
If your sale can support the high interest, PO financing is a way to get started until your business establishes the performance the traditional lending institutions like to see. One disadvantage is that PO Financing Companies want ALL your revenues to flow through their accounts.
Banks virtually always require small business owners to co-sign on loans. Your best bet is to apply for a loan with financial statements that show the company is trustworthy and capable to repay. Most likely, the loan will be pegged against receivables; for example, you can borrow up to 50% of your current receivables up to some credit limit.
It is unlikely that a new business will get any sort of loan until you demonstrate credit history and revenue. Even then, expect to co-sign personally.
It's not easy to borrow for a new company, so look at credit cards as a way to finance things in the early days. However, be careful not to get in over your head on expensive credit card debt!
When planning to start a small business, be realistic about your cash flow requirements and the likely availability of money. Failure to plan this way can turn your big dream into a horrible nightmare.
You have to show the bank, or whatever lending source you're using, that you have income/receipts directly in front of you.
Most major Banks with a Branch in your area have a Branch Manager. Those managers have the discretion of lending up to $250,000.00 without having to push the decision up the chain of command. Your best bet is to get to know a Branch Manager extremely well, earn his trust, convince him his investment in your business is EXTREMELY safe and PERFECTLY secure, and you'll get a line of credit. Probably about half the amount you need. Unless you convince him you really NEED the money. Then you probably won't get any at all.
I think it is unrealistic to expect a line of credit in any substantial amount for a brand new business which has no revenues and only costs. Any lending will require you to provide collateral worth more than the loan which could very well be your house or other valuable assets that you have, such as investment accounts. You want to think two or three times before pledging this collateral.
I don't know what type of business you have or your cash flow situation. Are you a bill and collect etc. Do you have a long time between the purchashing of your goods and final payment.
The one option would be until you get some data to show is use an American Express card to build it up and use what you can afford to pay until you have established yourself.
I probably would go to the bank that carries your mortgage note, as you do have a relationship with them so that might help.
I think you could as any of your local banks in your area , maybey the can lend you the sum you want.
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