As told by Dennis Zink: Obtaining a small-business loan or establishing
a credit line is not always easy these days.
In my podcast series - "Been There, Done That, with Dennis Zink"
- I interviewed Ty Kiisel with OnDeck. OnDeck is an online lender providing
business loans to small businesses that have been in business for at least
one year. They have loaned over $5 billion dollars since 2007. Our interview
discusses some challenges that an owner might confront when trying to
use debt financing as an option to grow their business.
Zink: Ty, what is the greatest misconception that most small business owners
have regarding business credit?
Kiisel: The greatest misconception owners have about business credit is
that it actually exists. They are surprised to learn that their business
has a business credit profile.
Zink: What do lenders want to see in terms of credit scores?
Kiisel: A traditional bank, for example, wants to see a credit score of
700-ish. However, in some instances, they may drop to 680. If your credit
score is below 680, you probably won't find success at a bank. The
SBA (U.S. Small Business Administration), however, has a different threshold.
If you've got a credit score of 650 or better, you'd probably
have success at the SBA. With a credit score below 650, you probably will
not find success with the SBA.
Online lenders like OnDeck will work with a borrower who has a slightly
lower credit score than that, provided they have a healthy business and
can demonstrate that their business is able to repay the loan. Some lenders
go as low as a credit score of 500, depending upon the circumstances.
Realistically, if you're a borrower with a credit score of 600, you
will likely pay more in interest than you would if you had a credit score
of 700. You can't go to the Bank and get a low-interest loan from
the SBA or from the bank. Depending upon your credit worthiness, the interest
you pay is likely going to be greater.
Zink: In recent years, lenders have been conservative regarding opening
the purse-strings to small business loans. Do you think the environment
is changing?
Kiisel: From traditional sources, I don't think it has rebounded. However,
I think that online lenders and others have made it possible for small
business owners to access capital to fuel growth and build healthy businesses.
It's a good time for small business owners right now.
Zink: Is it a good idea to establish a line of credit while you can?
Kiisel: If you never access borrowed funds and a situation comes up where
this is necessary, you have absolutely no credit profile for a lender
to evaluate. Let's say you've been in business for seven years.
You have an opportunity to expand to a new location, but you need a million
dollars to do it. If you've never borrowed, there's no way for
a lender to evaluate whether-or-not they're going to loan to you.
They pull up your credit profile and see no history. Lenders are looking
at your past performance to make a judgment about what you'll do in
the future.
I'm not advocating that you should just borrow to borrow. However,
I think it makes sense to get a line of credit, use it and pay it back.
Lenders want to see that you're able to use credit appropriately and
repay in a timely fashion.
Zink: What about vendor relationships?
Kiisel: You can build a credit profile with your vendors. Most vendors
and suppliers offer credit to their best customers. Using 30 or 60-day
terms paid in a timely fashion helps build your credit, provided that
supplier or vendor reports to the credit bureaus.
Zink: There are times when a lack of capital is the biggest constraint
to growth.
Kiisel: You need to understand your credit situation and how easily it's
going to be for you to access capital. Results of a recent survey indicate
if you pay attention to your credit profile, the odds of getting a loan
are exponentially better. Human nature dictates that we improve what we
pay attention to. It's relatively straightforward to improve your
business credit profile. Just like your credit score, paying your bills
on time is probably the single biggest impact to whether your score is
going up or down.
Zink: What credit advice can you give to a new business?
Kiisel: Build a business credit profile. Take advantage of suppliers who
give you terms. Go to Home Depot or Staples and establish a business credit
account. Purchase your supplies and make timely payments. When you need
capital to fuel growth in your business, you'll have a better chance
of getting it because you have established a track record.
Zink: Is there ever an instance where the business owner won't have
to personally guarantee a loan?
Kiisel: No.
Zink: What is OnDeck's response time for a loan approval?
Kiisel: You can get an approval within an hour or so, and sometimes as
quickly as a few minutes. You can have money in your bank account within
a couple of days, often as soon as 24 hours. Getting an answer in an hour
or two may sound insanely fast, but we use technology to help make those
decisions, so it's definitely possible.
To sum it up, borrowing can be expensive, but not borrowing can stunt your
company's growth. The key is to prepare ahead of time by developing
and maintaining a strong credit profile. As you grow your business, determine
how much money you need-and why. More important, make sure you will be
able to pay it back.
Dennis Zink, "Use small business credit to fuel your growth"
Herald Tribune, December 6, 2016. Accessed via: http://www.heraldtribune.com/news/20161206/use-small-business-credit-to-fuel-your-growth