Your Business Credit Card Application was Denied, Now What?

You’ve applied for a business credit card and the application hasn’t been approved, what do you do?  A good place to start is to investigate the reason behind the decision.

Credit History Factors
If your business is a sole proprietorship, you may be denied based on your personal credit history.  If your credit history is bad, you’ll need to work on improving it in order to qualify for a credit line, just as you would with your personal situation.  If you have a larger organization and you’ve incorporated it, the business has its own independent identity and therefore will apply for credit on its own.

Why Was I Denied Credit?
As with any credit card application, you’ll get a notice in the mail about why you’ve been denied credit.  Generally, this takes several weeks to go through.  If you are very anxious, you could call the company’s customer service line (usually provided in the Terms of Service on your application) to inquire about the reasons.  Most often, the reason is either you don’t make enough money through the business or your personal credit is not stable enough.

Improving Your Business Credit
The best way to get yourself out of this picture is to work on improving your business’s credit identity or improving your own.  Pay down debts you have, improving your long term credit history by using smaller lines of credit you may already have, and pay your bills on time.  If possible, secure a pre-paid business card using the business’s federal tax id number to begin building its credit if it is not yet established.

These factors show that you are a responsible borrower and help the company to insure you’re worth the risk.  If your personal credit is getting in the way, you may wish to contact a lawyer about incorporating your business which will give it its own identity, free from your own.  Talk to your attorney about the benefits of doing this for your business.

Ways to Raise Capital
If you are in need of capital for your business, you may not have months or longer to wait for improvements on your credit score to happen.  There are several options available to you. 

Borrow from a Local Bank
Get a loan from a local bank that you’ve done business with in the past.  Request a line of credit through them, but first outline a business plan to them, showing the executives exactly where your income comes from and how reliable it is.  While you can’t haggle with the internet companies, you can do so by picking up the phone, too. 

Apply for a Secured Credit Line
You may be able to get a credit line based on the value of assets you have in your business.  If you have expensive equipment that is bought free and clear, secure a loan on its value.  If you have property that is for the business that you own, you may be able to tap into the equity there.  Lines of credit like this are often affordable and they often give you the opportunity to prove your value to other lenders over time.

Apply for Another Business Card
Just because one credit card company turned you down doesn’t mean another will.  However, be cautious as you consider applying for other business credit cards.  Applying for too many will negatively affect your credit rating because it shows a pattern of being denied credit, which can raise a red flag.  Instead, apply for one or two, find out why you weren’t approved and look for another option for borrowing.

Equipment Leasing Program
If you are still having trouble obtaining capital and you have equipment that you own, you can consider an equipment leasing program. Depending on the type of equipment, the leasing company will purchase it from you, allowing you to keep it while you pay the lease payments.

Peer to Peer Lending
Another option if you need a short term loan is to try peer to peer lending using either Lending Club or Prosper. These companies allow you to post a profile requesting money. A pool of potential lenders will view your profile and potentially fund your loan request. If your loan request is funded, you will be told the interest rate and given the choice to accept the loan. If you choose to accept the loan, you will pay the site back directly on a month basis until the loan is repaid in full.

Factoring – Selling Your Invoices
If you have accounts receivable, you could consider factoring. Factoring involves selling your invoices at a discount so that you can obtain your company’s cash quicker. The factoring company will purchase your invoice from you, typically paying you 80% of the total up front.

From there, they will manage the collection of the invoice. Once the invoice has been paid, the factoring company will pay you the 20% remaining on the invoice minus their fees. Factoring companies charge anywhere from 1%-5% of the invoice total based on a variety of factors.

Starting a Business, How Much Money Will You Need to Launch Your Startup & Cover Your Costs?

Before you can launch your business and start seeing profits, take some time to estimate the startup costs.  You’ll need to know everything that goes into starting your business before you apply for a loan to cover those costs.  Since every business is unique, you’ll need to tailor your specific needs to your business.  Here’s are some steps to help you get started.

Step 1:  Consider the Costs

What costs are there to consider?  See how well these apply to your business.

• Sale Costs:  Your products, your materials, the equipment you’ll need, shipping costs, packaging, and a place to store everything…all factor into this category.  What products do you need to have on hand? What costs will it take to market your products? What budget will you need to provide to your sales team? How much will it cost to send out samples?

• Professional Service Costs:  Incorporating your business, copyrights, legal fees from your attorney, trademarking costs, professional consultations, getting an accountant, setting up contracts…are all included here.  Which professionals do you need? It will generally cost between $2000-6000 to set up a corporation and then you need to budget for annual fees to your attorney and for your accountant as these are typically on an ongoing basis.

• Administrative Fees:  You’ll need business insurance to cover liabilities and your property if you own or rent a workspace.  You may pay be required to pay rent on a facility or retail space as well, so it is important to factor in these costs within your business plan.  Be sure to also consider any deposits that will initially be required for your insurance or your workspace.

Other costs that could fall in this area include office supplies (including everyday costs and furniture) as well as parking costs, licenses, shipping costs, and utilities.  In this category, list anything that you’ll need to have access to on a daily basis to run your business. If you can get accurate estimates through research, this will help to ensure the overall accuracy of your business plan.

• Electronics/Technology Costs:  Will you need to invest in computers, IT professionals, website development, internet costs, and security needs. Should you lease or purchase? What cost cutting strategies might you be able to implement?

• Marketing Costs:  What type of marketing will you do?  You’ll need advertising budgets, trade association membership costs, public relations costs and material materials (don’t forget to have business cards done). With each of your marketing efforts, consider the actual cost of the marketing plus the graphic design, copy and printing.

• Employee Costs:  If you hire employees, you’ll need to consider their wages, benefits, payroll taxes as well as the costs of keeping them, such as workers compensation. Also, if you plan to use a payroll company, be sure to include these costs in your business plan.

Step 2:  Estimate the Startup Time

The amount of time it takes you from starting the development of your business until you begin selling products should be considered.  You’ll need funds to cover all expenses you have during this time of “no income” where you’ll be running at a deficit for sure. 

Determine how much money you’ll need during this start up time period and set it aside. Keep in mind that under capitalization (not having enough cash) is one of the top reasons for business failure. This is why it is essential to look at every aspect of your business financial plan before you get started.

Step 3:  Consider Initial Sales

No one knows about your business and therefore sales will be slow at first.  As you start building a clientele, the sales will increase, but you still may not make enough to truly draw a profit.  As you consider setting up your business, consider the money you’ll need to run your business during the first months when you aren’t making a significant income.  While it may be hard to get an accurate figure here, do your best to get as accurate as you can based off of the costs you estimate for the first months of no income.

As you consider the amount of money you need to have for start up, always look toward the projected income carefully.  It is often best to be ultra conservative, as you can always pay down the loan if you have more money in, but if you don’t have enough, you could jeopardize the entire foundation. 

Where to Find Startup Money for Your Small Business

One of the top reasons that new businesses fail is due to under-capitalization in the beginning years. So, being able to raise money in the early stages of a business as well as during its expansion phases are critical components to a small business’s long term success.

When you are looking for initial capital to start your business, there are several sources to consider, including: credit cards and self funding, the Small Business Administration, peer to peer lending and banks or commercial lenders.

Self Funding
Depending on the nature of your business and the amount of capital required to start it, you may be able to finance it using your own personal resources. You could consider leveraging your personal savings, a line of credit or your personal credit cards to get started.

The advantages of leveraging your own funds are that there is no interest charges involved, it is a quick process and it does not require any paperwork to get started. On the negative side, you are spending money that could potentially be yielding higher returns in current investments, and if you choose to leverage credit cards, you may be paying a much higher interest rate than through other lending options.

Commercial Lending/Banks
Another option for new small business owners is to apply for a small business start up loan through a commercial lending institution or a bank. There are more stringent requirements for this type of start up loan than other loan types, but the terms are similar.

How much will it cost to get one of these loans? The interest rates for commercial loans and bank loans are dependent upon the applicant’s personal credit scores and the current rates, typically offering loan rates several points above the prime rate.

Commercial lenders and banks will often require a substantial down payment and collateral from you as a personal guarantee on the loan amount. These lenders are often looking at your personal ability to re-pay the loan at the time of underwriting.

Peer to Peer Lending
Peer to peer lending is a relatively new concept offering the ability for potential new business owners to borrow money from other individuals to start their ventures. The 2 main sites that currently offer the highest volume of loans are Prosper and Lending Club.

A potential new business owner will put together their presentation and information by creating an online user profile. Potential peer lenders will be able to review this information and can loan you from $25 – $25,000 if they feel like your investment request has an appropriate risk/reward balance.

On Prosper the interest rate charged to the Borrower will be determined once the loan is funded based on the lowest bids from the various lenders. On Lending Club, the interest rate is determined up front depending on your credit history and financial situation. This process can be quick, offering the ability to fund smaller loan amounts in under a month. It is also a more flexible strategy for applicants with little to no financial assets.

Small Business Administration (SBA Loans)
The Small Business Association or the SBA is one of the most common lending sources both for business start up and for business expansion, with several options available.

The most widely used SBA loan is the 7(a) which offers new business owners a possibility to apply for up to $2 million in start up capital. The SBA does require down payments, typically 20% of the total requested loan amount and they also require the business owner to personally guarantee the funds in the event of a possible default.

The interest rates on SBA loans are dependent upon personal credit scores and the interest rates at the time of application, but they are typically several points above the current prime rates. The SBA also offers other loan types including micro loans. A loan officer will be able to explain the options, the requirements and the process to you so that you can decide if this is the best financing option for starting your new business.

When you are ready to apply for a loan, you will need to put together a detailed business plan, a resume demonstrating your business experience and all of your personal financial records. Business experience, a well thought out business plan and a solid personal credit score with personal assets to back up the loan will make the process much smoother.

How to Get Your Small Business Loan Faster & Cheaper than from the Bank

Did you know you could borrow up to $25,000 for your small business without going through a bank?  Not only that, if your credit is decent, you can even get the loan for a better interest rate than the bank would offer!  In addition you don’t even have to risk your home or any other asset as collateral; you can get an unsecured loan for up to $25,000 if you have good finances and a positive credit report.

Borrowing Startup Capital from Others

How is this possible?  How are entrepreneurs getting loans more quickly, with less paperwork, and for better rates than a bank or credit card would offer?  An innovative new method of funding called peer to peer lending provides platforms that allow individuals to lend money to other people in a formal/structured manner.

Peer to Peer Lending

The two largest peer lending sites are Prosper and Lending Club, both facilitate loans anywhere from $1K–25K. Can you get a business loan there? Sure thing, according to Prosper and Lending Club at least 20% of the loans funded on their sites are used for business purposes.  The Wall Street Journal and Entreprenuer.com recently took a look at some of the small business owners that have successfully borrowed money with peer to peer lending:

• Alex Kalempa needed $15,000 to expand his motorcycle racing component business.  After being offered only a $5,000 credit line and $500 credit line from two different banks, he was able to borrow $15,000 at a 9.6% interest rate from Lending Club.
• Patrick Kelley, was denied a small business loan for his eBay business three times by financial institutions, then he turned to Prosper and was able to borrow $18,500 at an interest rate of 10.97%.
• Michael & Amy DeFabio needed money to launch their newest product for their holistic health care company but were repeatedly refused funding by the banks.  After only a few weeks of listing a loan on Lending Club, they had $15,000 to take their new product to market.
• Madeline Smith was able to raise $5000 on Prosper to start her own business, Madeline Pet Clothier, in the booming pet industry.

Borrowing Money with Prosper or Lending Club

The peer lending model uses the micro-loan concept, many different people loan out small amounts, usually $25–100, and the p2p system aggregates them into one big loan for you. Of course people won’t just lend you money without convincing, you have to create a loan listing describing why you need the money and how you’ll use it to grow your business.  You also have to submit your financial information as shown below but the listings don’t include your name or address so you don’t have to worry about the whole world knowing your financial situation.

Here is an example of a business loan for $22,000 that was funded at an 11% interest rate:

Lenders were confident in lending this business owner money based on the borrowers financial profile, shown below:

As mentioned earlier, you should explain why you need the loan and how the money will be used.  Here is the detail provided for the above loan listing:

Purpose of loan:
This loan will be used to expand an already succesfull design and drafting business. We, as a company, have broke into the expanding energy and oil business in Western Colorado, designing and drafting blueprints for some very acknowledged companies. We have upcoming contracts to design and build for these companies. We plan to expand into another city closer to the “action”. We feel we can serve these companies better having an office closer to their main operations in Western Colorado.

My financial situation:
I am a good candidate for this loan because I have proven over and over again that I am trustworthy and honest. I started my business with very little money and created some great opportunities for exceptional people, and exceptional communities. I have never been late on a payment in my life. I have never defaulted on a loan, got in over my head, or made a late payment on a loan or credit account. NEVER! I have proven to budget very wisely and create positive situations for my company.

To show that I am serious about this opportunity for my company, I have already bought the land to build on. I have a large stake of my net worth in this opportunity, and I would not have jumped at the chance without extensive research and confidence in my company. I need another $22,000 to qualify for the rest of the financing for the construction project.

So if you’re in need of startup capital or some extra funding to give your small business a boost but have been avoiding it due to the paperwork and time involved, give Prosper or Lending Club a try. eBay business owner Patrick Kelley, who borrowed $18,500, confirmed that the peer lending process was much quicker and easier than going through a bank.

“He estimates that each bank-loan application he submitted took several months to prepare. There’s more paperwork, and banks want an updated business plan and tax returns, he says. By contrast, he says the loan-application process on Prosper took a couple of weeks, from the time he applied for a loan to the time the money was in his bank account.”

Thanks to technology and the innovation of entrepreneurs, now it’s possible for small business owners to get a loan faster & cheaper than from a bank.  Take advantage of this new funding alternative and grow your business today!

• Apply for New Business Loans on Prosper
• Apply for Small Business Loans on Prosper
• Apply for Business Loans on Lending Club Loans

References:

– Where Either a Borrower Or a Lender Can Be

– Business Loans Get Personal