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. 

Starting Your Business - Options for Incorporating

When you are ready to start your own business, you may initially have questions about what the best way to legally structure it would be. The most common business structures within the U.S. are sole proprietorships, LLC’s, S Corporations and C Corporations. Understanding each of theses structures will help you to select the best option for your business goals and needs.

Sole Proprietorship
To establish your business as a sole proprietor requires no legal paperwork and is most often created when an individual wants to do business in their own name. When you are running a business as a sole proprietor, there is not a distinction between you and a legal entity; in this instance they are one and the same.

One of the advantages of establishing a business as a sole proprietorship is that is it a simple process that does not require legal paperwork and there aren’t any annual corporate taxes to be filed. There are several disadvantages to working as a sole proprietor:

• No legal protection for your personal assets in the event of a business default or a lawsuit
• The business and personal risks will expand as the business expands
• There can be substantial challenges to raise capital when you are a sole proprietor.

Limited Liability Company (LLC)
An LLC is a formation that is often a popular alternative for business owners who are not interested in establishing a corporation. LLC stands for limited liability corporation and it offers some liability protection for the owner, although the legal barrier is considered to be thin between the business and the business owner. An LLC is generally the most suitable for smaller companies who have either one owner or a very small number of owners.

The advantages of an LLC are that they have much less administrative paperwork than a corporation and they offer a pass through taxation to the owners. The disadvantages of establishing an LLC are that in some states there is an imposed franchise tax and also that it can often be very challenging to raise capital as an LLC.

S Corporation
An S Corporation falls under the subchapter S of the IRS tax code and is the most common structure for small business owners to develop. An S Corporation does not pay income taxes but passes its taxes through to its shareholders who have to claim them on their own personal income tax returns. A corporation must request after being formed to become an S class and a request must be sent to the IRS to receive the designation. S Corporations cannot have more than 100 shareholders, spouses being counted as one. S Corporations can only issue one class of stock.

C Corporation
C Corporations are similar to an S Corporation in most ways with the most notable differences being in the form of taxation and the number of allotted shareholders. A C Corporation may have an unlimited numbers of shareholders and the corporation in this instance must file and pay its own income taxes. C Corporations can have multiple classes of stock.

Incorporating Your Business
Now that you have information to help you to decide which structure is most suitable for your personal needs, you need to actually create the paperwork and file it with your state. The legal paperwork can be created by you, by an attorney or by an incorporation firm. In my personal experience it is worth hiring an attorney to complete, as you may make mistakes if you do it on you own. Also, incorporation companies are typically less personal than an attorney and are generally more expensive.

The Cost of Incorporating
When you work with an attorney, most LLC paperwork will cost between $250-500 for each formed with Corporation paperwork having a cost between $1000-4000+ to establish.

If you are on a budget and prefer to have a lawyer complete and file it for you, there are many attorneys that are new who will work at a much lower hourly rate than an experienced attorney. While you can print forms off the internet to fill in, if there are mistakes or they are improperly filed, you could run into substantial problems in the long run.

Whichever approach you decide to take, establishing the business structure is one of the first steps that a new business owner must complete.