Profit Minded

Beat small biz bank loan odds: don’t commingle your credit

As small business owners know, chances of getting a bank loan these days are slim. Banks are rejecting as many as 90 percent of all small business applications. Is there a way to beat the odds? Lena Gjonaj says the best way to position yourself for financing is to avoid the mistake virtually all entrepreneurs make: starting a business with personal credit.

Everyone's heard a story of a successful startup that was financed with personal credit cards or a second mortgage. But today when those business owners want to expand, they can be in for a shock at the bank, says Gjonaj, a business funding consultant in Easton, Conn. Even if sales are rocketing, a business owner who hasn't taken the steps to establish business credit will likely find out that she's not in compliance with lender requirements.Loan officers look for proof of business credit

One bank Gjonaj spoke with recently had denied a loan to a company that had plenty of customers but hadn't documented a corporate credit profile. "They couldn't prove any good corporate behaviors like paying bills on time or having credit; everything revolved around the owner's personal history," Gjonaj says.

Building your business on personal credit can not only make you unfundable to a loan officer, but can wind up damaging your personal credit score. "Unfortunately the application process and the turn down can make matters worse when credit inquiries and denials stick to your personal credit record," Gjonaj says. "Having business credit means you can go to the bank for a business loan that doesn't depend on your personal credit rating or personal debt."

How can you structure your startup at the beginning so that you'll be eligible for funding later? What if you're already personally invested in your business? Is there anything you can you do now? We asked Gjonaj how she advises her clients.

Yahoo Small Business: Let's say I have an idea for a small business, and I could cover all my startup costs myself, without even maxing out my credit card?

Gjonaj: You'll be building your personal credit identity, but you're not building a business identity or creating company value and assets. Instead, set aside your personal money, and apply for business credit cards based on what you need. Getting company credit cards and paying them off on time is a good way to develop a company identity—it lets the company establish an Experian record and a credit rating.

YSB: Is it ever okay to start a business with personal credit?

Gjonaj: In many case you have to. A strong personal credit score and standing is a point of entry for starting a business, but you need a plan over time for how you'll separate business from personal credit. Many people start a business with personal credit and that's where they stop, because no one teaches entrepreneurs otherwise.

YSB: What do you say to someone who has been running a sole-proprietorship for a decade entirely on personal credit?

Gjonaj: I'm a consultant with an organization called Business Fundability that has a relationship with Experian and works with entrepreneurs, banks, SCORE, the Small Business Administration, and small business development centers around the country. So I tell my clients to go online and take our fundability test, which shows how loan officers will view their strengths and weaknesses. It's free and it doesn't hit your credit. Then you can meet with a financial advisor and put a plan in place to disengage your personal credit from the business, and get your company registered with the three credit bureaus. Besides fundability, any lawyer will tell you there are strong arguments for keeping a business and person separate. If they're comingled and there's ever litigation against your business, your personal assets could be targeted.

YSB: What are the steps to creating a divide between personal and business finances?

Gjonaj: I walk my clients through 20 compliance items that need to be addressed. Every business owner can do these things on their own, but it's a lot of work and many don't have the time, resources, or relationships to secure business credit at competitive rates or register with credit bureaus.

The goal is to obtain tier-1 financing. If you need a new piece of equipment, for example, find a credit card that specializes in that equipment. Get a secured line of credit in your company name by putting up a business asset against that loan. Or, if you need to print marketing materials, you can apply for a line of credit with the printer in your company name and pay that back over time. As you pay it off on time, you're building credit for your company.

It can take a year to establish a business credit identity, but once you do, you'll be in a much better position to go the local bank and get a small business loan.

YSB: What if my business is in good shape and I don't foresee needing a loan to grow. Is it still important to separate my personal finances from my business credit?

Gjonaj: Beyond the legal reasons I mentioned, separating personal from business is important because a strong business credit rating is an asset that makes your company more valuable to a buyer. Business owners often overlook all kinds of intellectual property that the bank would consider to be business assets, such as a client database or a mailing list. An open line of credit is just such an asset. If you qualified for a $200,000 line of credit in your business name, that doesn't stay with you, it goes with your business when you sell it. The buyer benefits from your smart planning. When you're thinking of buying a business, it's good to consider these things too.

Questions about your business fundability? Reach Lena Gjonaj at Coaching Sisters.

Is your business commingled with your personal credit? Have you been denied a small business loan for being out of compliance with lending requirements? Tell us in the comments or Tweet us @YSmallBusiness.

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