Basics About Starting A Business Credit History For A New Business
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It would help if you had cash flow, credit, and collateral to secure a business loan. Startups often need these three essentials. Early-stage businesses generate little cash flow. While a new business owner might boast strong personal credit, the company might still need an established credit profile. For startups, offering collateral is the most effective way to obtain business loans.
Collateral
You can use any significant asset as collateral, but there are several options many business owners might need to learn about. For instance, you can fund your business using stocks, bonds, and retirement assets. Essential equipment for your business can be collateral to finance those items. You might qualify for SBA loans if you possess collateral and maintain a strong credit score.
Securities Financing
You can use stocks as collateral for business loans. You can borrow up to 90% of their value while still earning interest on them, even when they serve as collateral.
401K Financing
You can leverage an existing 401K or IRA account to fund your business through the Rollover for Business Startups (ROBS) option without incurring tax penalties. Your 401K savings continue to earn returns while supporting your business. This isn’t a loan against your 401K, so there’s no interest to pay, and it doesn’t use the 401K or stocks as collateral. It’s merely a change in custodianship. You can access the portion of your 401K that’s rollable for financing. Often, you can secure a low-interest credit line or loan equal to your current 401K balance.
How to Get a Startup Loan Without Collateral
Even if your business doesn’t have strong credit, cash flow, or collateral, you can explore other options. One such option is a guarantor loan, where the business owner guarantees payment to the lender in case of default. While you can obtain a standard guarantor loan from any bank, the Credit Line Hybrid is another better option. This unsecured business financing can offer your company up to $150,000 at 0% interest for as long as 18 months.
Credit Line Hybrid
A credit line hybrid offers a lower interest rate than a secured loan. With declared income, you can secure some of the largest business loans and credit lines, including 0% business credit cards. Additionally, the Credit Line Hybrid reports to business credit reporting agencies, enabling you to build your company’s credit in the process. This can pave the way for more funding without a personal guarantee in the future.
To qualify, either you need a high credit score or a guarantor with a strong credit record, specifically a FICO score of 680 or above. The credit line hybrid doesn’t demand financial statements. Often, you can secure a loan amounting to five times your highest existing revolving credit limit, up to a ceiling of $150,000.
Set Up Your Business the Correct Way
How you set up your business can significantly influence your ability to secure a business loan. It’s best to tackle these matters during your startup’s early stages. Ensure your business contact information remains consistent across all directories. Incorporate your business and obtain an EIN. For some entrepreneurs, utilizing a shelf company can be an expedited way to establish corporate history. Also, open a distinct corporate bank account for your business. While these elements contribute to what’s known as a fundable foundation, they only represent a fraction of what determines your overall fundability.
Work With a Business Credit Expert
Consulting a corporate credit expert offers various advantages for your business. Firstly, they can help you identify the business capital you qualify for. They can also assess your fundability and recommend ways to enhance it. Additionally, a corporate credit expert can guide you in establishing a business credit score and finding accounts that report to business credit bureaus.
