Frequently Asked Question
What is the difference between personal credit score and business credit profile?
A personal credit score is a reflection of how someone repays their mortgage, auto loans, or other personal obligations and is typically demonstrated in a score from 300 to 800. The higher the score the better. A business credit profile reflects how business owner meets their business financial obligations. It is obtained under the business’s EIN and since it’s not attached to SSN, It doesn’t affect the owner’s personal credit in case of default. While there is no universal business credit score, some of the bureaus score different business behaviors to represent creditworthiness. The three primary personal credit bureaus are: Experian, Equifax, and Transunion. The three primary business credit bureaus are: Dunn & Bradstreet, Experian, and Equifax.
Can I get a business loan after bankruptcy?
A bankruptcy in your past doesn’t necessarily preclude you from getting a small business loan, but it might make it more challenging. Not all lenders have the same requirements after bankruptcy, but it’s unlikely a borrower would qualify within the first two years. Many lenders will require two years of improving credit history following the disposition of a bankruptcy.
Do I need a business plan to get a loan?
That all depends upon the type of loan you’re looking for. To qualify for an SBA loan at the bank, for instance, you’ll need a business plan. While other lenders might not require a formal business plan, they will ask questions about loan purpose, how this loan might positively impact profitability, etc. Whether or not a lender requires a business plan, it’s a good idea to go through the exercise so you can articulate why you’re looking for a loan and the benefit you expect to gain from it.
Does the SBA (Small Business Administration) make loans?
No. The SBA does not make loans. They do offer a loan guarantee program available through participating banks, credit unions, and other lenders depending upon the loan program.
How do SBA loan guarantee programs work?
The SBA works with participating lenders in every state who follow SBA lending criteria for small business loans. SBA loans are often for approved purposes and demographics; and may include lower interest rates for qualifying borrowers. Unlike a traditional term loan from the bank, the SBA’s credit and collateral requirements are not as stringent and are a potentially a good choice for startups that qualify.
What is a line of credit?
A line of credit is a revolving loan that provides a pre-determined capital limit that can be accesses as needed. Unlike a traditional term loan, all or part of the line can be accesses at any time up to the pre-determined limit. Interest is only paid upon the amount actually used.
- Secured Business Line of Credit: With this type of LOC, a business must pledge assets as collateral to secure the loan. Since a Line of Credit is a short-term liability, lenders will typically ask for short-term assets, such as accounts receivable and inventory. Lenders typically won’t require capital assets, such as real property or equipment, to secure an LOC. If the borrower is unable to repay the loan, the lender will assume the ownership of any collateral and liquidate them to pay off the balance.
- Unsecured Business Line of Credit: This type of LOC does not require assets as collateral (meaning it’s sometimes a more attractive option to business owners). Still, the lack of collateral means a higher risk to lenders, so to get an unsecured LOC you’ll need stronger credit and a positive business track record. In addition, the interest rates are often slightly higher. Unsecured lines are usually smaller.
What is a personal guarantee on a small business loan or Business credit card?
It’s common practice for lenders to require a personal guarantee from the business owner(s) to protect the lender should the business default on the loan. Lenders do this to mitigate the risk of lending to small businesses, and the guarantee is often a requirement by the lender before offering a loan.
In the event of a default, a personal guarantee gives the lender additional options to collect the debt. This requirement is sometimes waived for businesses that have longer than five years in business and a good business credit rating.
What is an SBA 504 loan?
The SBA 504 loan program is designed to provide financing for major fixed assets like real estate and equipment. The maximum loan amounts vary depending upon how closely the business purpose supports things like community development initiatives like job creation. A 504 loan cannot be used for working capital or to purchase inventory, consolidating or repaying previous debt, speculation or investment in rental real estate.
What is an SBA 7(a) loan?
The SBA 7(a) loan program is the most common SBA Loan Program. The maximum loan amount is $5 million. The SBA does not set a minimum loan amount. A 7(a) loan can be used for most typical business purposes, but may not be used for refinancing existing debt, to buy out a partner, to reimburse funds invested by a business owner, to repay delinquent state or federal withholding taxes, or any other purpose not consistent with sound business practices.
What is collateral?
Collateral is any asset or assets, which can be offered by a borrower to secure a loan. Should a borrower default, the lender can take possession of the asset, or assets, to satisfy the loan.
What is Cash Fellow?
Cash flow is the money that is moving (flowing) in and out of your business in a month. Although it does seem sometimes that cash flow only goes one way – out of the business – it does flow both ways.
- Cash is coming in from customers or clients who are buying your products or services. If customers don’t pay at the time of purchase, some of your cash flow is coming from collections of Account receivables.
- Cash is going out of your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable.
Think of ‘cash flow’ as a picture of your business checking account. If more money is coming in that is going out, you are in a “positive cash flow” situation and you have enough to pay your bills. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdrafts. This is why new businesses typically need working capital ,in the form of a loan or line of credit, to cover shortages in cash flow.
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