It used to be that even upstart businesses with no credit history could secure $50,000 lines of credit with no documentation. Bank of America began such a program in 2006. And since then, other banks followed suit offering $50,000 and $100,000 loans to new and un-proven businesses. In a press release at the time, Bank of America stated that even “a small business owner in business for only one day could qualify” for its $100,000 line of credit program.
Until recently, credit cards had always been a reliable source of financing for entrepreneurs as well. Ease of credit card access gave small business owners an important, cost effective, and highly flexible means for managing cash flow, purchasing inventory, and expanding operations. The cards did not require personal guarantees, and came bundled with a huge selection of incentives to encourage increased card use. Times were good for small business. And credit card options were plentiful.
Within the past few months, however, all this has changed. And now, credit card options for small businesses are much more limited.
Recently, the Federal Reserve released its January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices report. As one might expect, the banks have tightened lending criteria, reduced credit limits, and in many cases, eliminated rewards programs altogether. According to the report, 70 percent of domestic banks reported having tightened lending standards on commercial and industrial (C&I) loans (including business credit cards) to small firms; 90 percent reported having further tightened price terms; and 60 percent reported tightening non-price terms including – imposing more restrictive covenants and collateralization requirements.
It’s that last change – the change in collateralization requirements – that most affects small business owners. Previously, company assets were used to collateralize business credit cards. The entire underwriting process was automated, and even new businesses could secure $50,000 and $100,000 lines of credit without a personal guarantee from the business owner. Now, banks are approving new credit cards based solely on the individual business owner’s credit report, and the line of credit amounts are significantly lower. These days’ business owners are now required to personally guarantee business credit cards, almost without exception.
The big banks in particular, are leading the tightening trend. In December 2008, Chase, Citibank, Discover, and Wells Fargo all announced important changes in both distribution and underwriting guidelines.
If you are a business owner with exceptional credit, you still have options. But if your personal credit rating is less than stellar, your business credit card options are severely limited. Nevertheless, there is still hope.
Here are 5 tips to help you get the credit you need to build your business.
- Go Local: Go to your existing bank, smaller community banks, and credit unions. Do business with those who do business with you. If you already have a relationship with a bank, leverage that to get additional credit. As larger, national banks pull back and tighten their lending criteria, the smaller local and regional banks will be looking to gain market share. Credit unions and community banks in particular are increasing their efforts to win your business.
- Repair your Personal Credit: Small business owners will be required to personally guarantee their business credit lines with any bank in today’s lending environment. Making a personal guarantee will require that your personal credit history is clean. You can check your personal credit history with all 3 major credit bureaus for free on an annual basis using a number of online services. Review your credit report thoroughly at least once every year and correct any inaccuracies that you may find immediately. Letting even minor errors on your credit report slip through unabated can be very costly at precisely the wrong time.
- Pay Online: If you have already established good credit, be absolutely sure to make your payments on time each and every month. This point cannot be stressed enough. Better yet, setup an automatic bill pay online through your bank. That way, you’ll never miss a payment and you can keep your credit record clean as a whistle. Unless your are a well established business with a solid credit history, most banks are going to base credit decisions on your personal (rather than business) credit report, and are going to expect you to personally guarantee your credit limit in its entirety.
- Get Organized: Gone are the days of “no-doc” loan applications. You are going to need information at your fingertips to make applying for credit of any kind these days. Be prepared to provide both business and personal financial statements to back up the information you provide in your credit applications. At a minimum, card issuers will request to see tax returns from the previous 2 years to verify your income.
- Apply for a Few Cards at Once: The credit reporting agencies perceive applying for card after card over time as a sign of desperation. This is bad for your credit rating. Applying for several cards at one time within a 30 day window, however, is looked upon more favorably as simply rate shopping and will not negatively effect your credit as much as numerous credit card application inquiries made over a longer period of time. Applying for a few cards simultaneously also provides a relative margin of safety should one card issuer reject your application.
The terms of card agreements, approval guidelines, rewards programs, and credit limits are tightening across the board for both small businesses as well as consumers. While credit card options for small business owners are significantly limited compared to just six months ago, you do still have options, but only if you plan accordingly.
About The Guest Author: Steve Sildon has been a guest contributor on many of the leading personal financial blogs online, writing about topics on small business finance that include small business loans, credit cards, as well as equipment and commercial financing. This article was written on behalf of Credit Card Assist.