How to Fund Your Startup Using Business Credit and Loans
This is what you do when investors are not interested in funding your startup.
This is a general overview that anyone in the US can use (not sure how credit works in other countries) to obtain a quick $5-50k in funding. First let’s look at what that really means:
1) Higher limit credit cards – great for quick access to capital. If you apply for multiple cards in the same day the inquiries on your credit don’t show up that fast in the credit bureau’s database and you’ll have your best chance for multiple approvals. The general rule is that you don’t want more than 6 inquiries in 12-24 month’s time, so applying for 3-4 cards is acceptable in most situations.
Generally you can expect a credit card company to offer somewhere in the range of 10% in credit card limit of your gross annual income (which is stated, they don’t get documentation for this 99% of the time). So someone making $60k/year can expect $6k credit card limits. Times 4 cards that’s $24k. Get a couple of 0% balance transfer cards and now you have free money for 12-20 months (depending on how long the 0% offer is good for).
You apply for these over the phone or on the bank’s website directly. For list of current offers and searchable categories try here
Valuable database: for searching what banks pull what bureau (so you can apply to the banks who will pull your best looking credit bureau) use this tool Search by your state.
2) Lines of credit – these would be for single larger lines of credit, but will usually be secured by equity, namely real estate that you own.
3) Business loan – your best bet for these is a local credit union or possibly your bank. This is an installment loan where you borrow a set amount and pay it off in regular payments.
4) Venture capital, angels, private investor, etc. – this is a person or company that will loan you money in exchange for any number of terms, usually a percentage of the company or somewhat higher interest rate loan.
Avoid any company that offers “business funding” and is vague about what that means, because these are the 4 primary ways to get it and you don’t want to pay someone else to get it for you (technically they can’t get it for you as you have to be the one to supply a credit app and your info).
In most cases you will not be able to apply for funding in your business name or using “business credit” unless the business is doing $5mil/year in gross receipts and has a certain number of employees on the payroll. Until then you will be the personal guarantor and it’s like you are personally are qualifying for it, so they will run your personal credit. People do use “credit partners” to have someone with good credit be the guarantor for the loan. However it’s important to have your own good credit. This is where my expertise lies so feel free to AMA.
How to Get Credit
Generally here are the credit guidelines you should meet before thinking about applying for funding.
1) Credit score at least 680 – every website out there will give you a different score as they all do a soft pull and also use different models. The most accurate is probably myfico.com. For a free 3-bureau report try creditchecktotal.com or scoresense.com.
2) Use the 3-bureau report to pay especial attention to the 24-month payment history. You want to have as clean of a 6 month recent history as possible. 12 months is better. That means you don’t want to see the following marks in your recent history: lates of any kind, CO’s (charge-offs), C (collections), RF (foreclosure), RP (repo), or any other derogatory status reporting. Note that bankruptcy and collections can get listed in a separate section of the report. You want to note where it says “reported date” or “status date” and if it was in the last 6-12 months you may get denied and or keep your score from getting boosted to where it needs to go.
3) Boosting your score – credit scores are very volatile. A recent negative reporting can drop the score 40-60+ points! This is why it’s important to address this negative information. I’m not a credit repair specialist, however the basics are that you can dispute this information with the credit bureaus directly. There are options to do it right on the credit bureau’s website, however a credit repair specialist told me the best bet is to do the following:
-get the physical address for the bureaus (from their website experian.com, equifax.com, and transunion.com) -write a brief letter requesting that they remove the negative information associated with the account (including account holder name, account number, and specific status reporting i.e. 30 day late from July 2015) AND explain why you want that removed (it was in error or whatever) -include a copy of your driver’s license and SSN card and sign and date the letter
It takes about 30 days for them to investigate and either remove it or not. Getting rid of recent negative info can boost the score a lot, however it takes positive account information to really get a big boost.
This is where I make money, however I’m not here to sell anything in any way. I’m telling you what to do if you need to boost your score quickly. Have someone add you as an authorized user on their revolving account. Make sure the account is at least 24 months old and has never missed a payment. Also the balance should be less than 30% of the available limit. It will take about 30 days for that account information to then hit your credit report. You will piggyback off of that on-time payment history, and assuming you don’t have strong recent negative info reporting you will get a solid 30-40 points per tradeline. I’ve seen as high as 60-80 points.
You do not want more than 3 AUs on your credit as you can get your file flagged by the bureaus for AU abuse. The boost in score will last for approximately 90 days. So adding 2-3 tradelines can get you 100+ points in a short amount of time.
If your final score is 680+ and your income is decent then option #1 above (getting 3-4 higher limit cards) is a strong likelihood and easy way to get some quick startup or working capital. I don’t advocate this for people that will just rack up more debt. However for a lot of business owners this is a GREAT method to get quick funds.
TL;DR Getting 3-4 higher limit credit cards is the quickest and easiest way to get $5-50k in funding. Your credit score should be at least 680 and you can eliminate negative info from your report and add positive info to boost your score quickly.