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I have a friend who has started up his own business. Right now it's a one man operation. The problem is, as most businesses, he needs access to capital in order to purchase equipment for installations. Since he's usually on net 90 terms with clients, his cash flow can be a nightmare and sometimes he can't do a job because he can't buy the equipment prior to.

So he wants to get a business line of credit. Unfortunately everything he has looked at looks for a personal guarantee. His FICO is below 500.

He asked a friend about coming on, whose credit is 700+.

My question is, isn't the whole point of getting business credit so that it doesn't affect your personal account?

So... how do you get business credit if your personal credit isn't any good?

  • Does he have an LLC or is he just doing this without an additional legal framework in place? – Timo Geusch Oct 21 '10 at 19:02
  • I believe he's incorporated yes. – Jack Oct 21 '10 at 19:03
  • One solution to the cash flow problem is to change the terms with your clients. Instead of 100% net 90, ask for a deposit equal to the equipment cost and the balance due net 90. This means if a client backs out, you aren't stuck with the equipment. – Alex B Oct 22 '10 at 17:18
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I'm afraid the great myth of limited liability companies is that all such vehicles have instant access to credit. Limited liability on a company with few physical assets to underwrite the loan, or with insufficient revenue, will usually mean that the owners (or others) will be asked to stand surety on any credit.

However, there is a particular form of "credit" available to businesses on terms with their clients. It is called factoring.

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.

Recognise that this can be quite expensive. Most banks catering to small businesses will offer some form of factoring service, or will know of services that offer it. It isn't that different from cheque encashment services (pay-day services) where you offer a discount on future income for money now.

An alternative is simply to ask his clients if they'll pay him faster if he offers a discount (since either of interest payments or factoring would reduce profitability anyway).

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  • To add to this, whether you get financing through factoring depends on the creditworthiness of your customers and not on the creditworthiness of the business/business owner. So it works best when the customers have good credit. I assume he has already considered discounts for prompt payment and/or buying from suppliers on credit. – user11599 Dec 6 '15 at 1:09
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Banks will usually look at 2 years worth of tax returns for issuing business credit. If those aren't available (for instance, for recently formed businesses), they will look at the personal returns of the owners.

Unfortunately, it sounds like your friend is in the latter category.

Bringing in another partner isn't necessarily going to help, either; with only two partners / owners, the bank would probably look at both owners' personal tax returns and credit histories. It may be necessary to offer collateral.

I'm sorry I can't offer any better solutions, but alternative funding such as personal loans from family & friends could be necessary. Perhaps making them partners in exchange for capital.

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