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?
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