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Dilemma of Financing a Startup Company

See Also:
Working Capital
Angel Investor
Venture Capitalists
Why Venture Capital
Mezzanine Debt Financing

The Dilemma of Financing a Startup Company

I had a meeting the other day with a prospect named Chris. Chris owns a distribution company he started fifteen months ago from his home. He has grown his company to annual revenues in excess of one million dollars and has opportunities to double the revenue over the next fifteen months. This article is all about the dilemma of financing a startup company and how to manage that startup growth.

Chris’ story is one I hear all the time… He got tried of working 50-60 hours a week for somebody else. So, he decided to start his own business. The business he started was the same as where he had been working for the past ten years. He started with the blessing of his wife and used their savings to get the business off the ground. After about six months, they no longer had sufficient savings to continue to invest. He did not want a partner, so they decided to take out some credit cards and use the money to fund the next level of growth for the business. Now, the credit cards are at the maximum credit limit. Chris and the company are experiencing real cash flow needs because of the rapid growth of the company.


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Finance a Startup Company

Chris had gone to several banks requesting assistance in the form of a line of credit. But, the story is the same around every corner. All the banks told him his company was doing great; however, his personal credit was not. His personal credit score was low because of the high credit card exposure, so they would not loan his company any money. One of the bankers told him to give me a call to discuss alternative financing of his company’s accounts receivable to help finance a startup company.

Needless to say, our first meeting did not start out great. Chris was very frustrated with the banks putting so much emphasis on his personal credit instead of just looking at his company. After listening to his story, he asked me “Why won’t they just loan the money to my business?”.

Not knowing what to tell him but the truth, I said “Chris, you are the business.

He then said “What do you mean?

I responded, “Without you, the business would probably fail”. I continued by telling him that his banker looks at him and his business as one entity.

We talked a lot about his personal credit and determined that it was not that he was not paying his bills… He just had so many credit cards. I told him banks just do not make consolidation loans for credit cards. Because, once you pay off your credit cards, there is no guarantee you won’t max them out to the credit limit again. He then decided what he needed was a way out. He asked me “How can I get out of this credit card debt circle?

Rebuild Personal Credit

I told him to create a plan to rebuild his personal credit, which would allow his personal credit score to improve. He said, “But if I take the money from my company to pay the credit cards, then I will not be able to take advantage of the growth opportunities I have with my company.

I showed him how his company would be able to meet it’s growth. He would have the money to pay down his credit cards over the next fifteen months by creating cash flow using alternative accounts receivable financing. Then I told him he should show the banker his plan and stay in contact with him to show him the improvements. I continued by saying “If you follow through with your plan, then the banker will decide when he can satisfy your company’s needs and be happy to loan the money you need for your business.

After twelve months of dealing with Summit, I am proud to say that Chris did follow his plan. The company took advantage of all its opportunities. He now has good personal credit, a loan from his bank, and his company is continuing to grow. Dilemma resolved. Download our three best tools to prepare yourself as a financial leader to improve cash flow, profitability, and your effectiveness.

Financing a Startup Company

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Financing a Startup Company

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Personal Credit for Commercial Loan

Personal Credit for Commercial Loan

Personal credit for commercial loan is generally more important in obtaining a loan when the size of the company is small and/or the owner(s) make most, if not all, significant business decisions. This is due to the potential for an individual’s approach to business to mirror how they conduct their personal financial affairs.

In addition, the personal credit history of the ownership of companies with less than $25 million in annual sales will be more important that that of the ownership of a larger firm.

Access our Personal Financial Statement template to start working on your personal credit. personal credit for commercial loan

personal credit for commercial loan

See Also:
5 Cs of Credit
What are the 7 Cs of banking
Line of Credit
Credit Rating Agencies
Improve Your Credit Score

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Improve Your Credit Score

See Also:
5 Cs of Credit
What are the 7 Cs of banking
Line of Credit
Credit Rating Agencies
How Important is Personal Credit in Negotiating a Commercial Loan?
Dilemma of Financing a Start Up Company

Improve Your Credit Score

In another article, I told you about Chris’ dilemma with his poor credit score in trying to get traditional bank financing. Had some inquiries from that article asking what a credit score is and what steps can be taken to improve a credit score. This may not seem related to cash flow, but if you can not borrow money for your business because of your personal credit, then your business will not survive.

This once secret process of credit scoring is now made available to us and that makes it easier to improve your credit. For those of you that have not been exposed to credit scores, they are three digit numbers that are used by lenders when evaluating your creditworthiness. Other companies, such as, insurance companies, employers, and landlords use these scores in evaluating credit applications.

Credit Scoring

There are three credit scoring companies: Equifax, Experian, and TransUnion. The information reported to them by your creditors goes into the calculation of your score. The scores these companies provide to interested parties range from 300 to 850. Understand, the higher the score the better credit risk you are. To give you an idea how Americans rate, only about 11% rank above 800; 29% rank between 750 and 799; 44% rank between 620 and 749; and 16% rank below 620. Below 620 indicates you have a serious, negative credit history, and obtaining financing with reasonable terms will be difficult.

Now that you have decided to review and or improve your credit score, how do you do that? The first step is to obtain your credit reports from the three credit bureaus. One way to obtain these reports is to purchase them from www.myfico.com. When you receive your reports, instruct the bureaus to remove any incorrect information. Once you correct the information, start the process of improving your score.

3 Ways to Improve Your Credit Score:

1. You should pay your bills on time. Payment history is the most important factor in determining your credit score. This accounts for 35% of your total score. Even just making those minimum payments will maximize this area. Understand delinquent payments will destroy your credit score. Missing just one payment can cost you up to 100 points.

2. You should pay down your debts and charge less. Lenders consider and like to see a large difference between the amounts of debt reported on your credit cards and your total credit limits. The larger the gap between these numbers the higher your credit score.

3. You should not close old, paid off accounts. Based upon the calculation of your credit score, closing accounts can never help your score, but often times it will hurt your score.

I know that dealing with your credit score is not something you are looking forward to. However, if you need to improve your cash flow, you must improve your credit scores. Access our Personal Financial Statement template to get started on seeing credit score improvement opportunities.

improve your credit score, credit scoring

improve your credit score, credit scoring

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Personal Credit: How Important For Business Loans?

Often business owners go to great lengths to pay the company’s bills on time. Often at the expense of their not taking a salary. When cash is tight which is more important; your company credit rating or your personal credit rating and why?

Personal Credit: How Important For Business Loans?

Bankers don’t like it but they understand when the economy goes south. Sometimes businesses can’t meet their financial obligations and need their banker to work with them. It is at these times that the banker resorts to the Five C’s of Credit for evaluating the risks.

When collateral is not there, nor the cash flow, the banker looks to the character of the borrower. The best indicator of a borrowers’ intent to repay is their personal credit history. If you keep your personal credit squeaky clean then you will probably do the same with your business credit once the economy returns.

So as you work with your companies to either maintain your business credit or obtain new credit sources make sure that the owners are maintaining their credit ratings.
Personal Credit: How Important For Business Loans?

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