The need for financing is a major concern for owners of small businesses. You may have launched your small business by using your personal resources but now you need to look to the credit market for financial help to expand operations. Before you begin seeking credit, you should know that applying for commercial credit is a more customized process than obtaining consumer credit and requires a great deal of preparation.

Personal and Commercial Credit

Banks and other financial institutions can assist you by providing funds through personal or commercial credit. Examples of personal credit include automobile loans, credit cards and home mortgages. Commercial credit includes business credit cards, lines of credit and business loans.

A dedicated business credit card is an indispensable tool for handling the operating expenses of your small business. A good one gives you a convenient way to make purchases for your business and provides a ready source of short-term credit. The records generated by credit purchases also provide a convenient source of tracking expense data. Card issuers offer an extensive array of credit and debit cards designed specifically for small businesses. A good business credit card can:

  • Give you immediate buying power
  • Be a source of interest-free short-term loans if you pay off your bills each month
  • Help you track business expenses, including those of employees if you give them cards
  • Provide rewards, perks or points on purchases

A line of credit offers you the ability to borrow money repeatedly, up to your credit limit, without having to reapply. A line of credit is particularly important to businesses that experience seasonal fluctuations. The lender generally will perform a review once a year, at which time the borrower is asked to provide updated financial statements.

Short-term loans are one of the most common types of business loans and are usually for less than one year. They can provide interim working capital for a business temporarily in need of cash and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.

Intermediate-term loans are often used for a business start-up, the purchase of new equipment, expansion or an increase in working capital. The maturity dates range from one to three years.

Long-term loans generally are made for major capital improvements, acquiring fixed assets or business start-ups. The term of the loan runs for periods of three to five years and is usually based in part on the life of the asset financed. Repayment is usually made in monthly or quarterly installments.

Applying for Commercial Credit

Applying for commercial credit can be tedious. It calls for a lot more documentation than when you apply for consumer credit. For lenders, extending credit to an entrepreneur usually means customizing the loan to suit the credit needs of that business. So be prepared for lots of paperwork.

You will need a business proposal, stating the purpose of the loan, the amount of funds needed and for how long, and a repayment schedule. Lenders will carefully examine your financial statements and business projections. You must be prepared to answer questions about them.

Personal guarantees of the owners or other principals usually are required, even from an established business. The lender may even request another party's guarantee such as a cosigner or a surety, or may request a government guarantee from the U.S. Small Business Administration or other government agency.

In addition to the personal guarantee that you give, under the Equal Credit Opportunity Act the lender is allowed to require another person's guarantee should your application fail to meet the lender's standards of creditworthiness. If all or most of the assets listed on your personal financial statement are owned jointly with your spouse, or with someone else, the lender is likely to require such a guarantee. But the lender may not require that your spouse be the guarantor.

In the case of secured credit, the lender is allowed to obtain a spouse's or other co-owner's signature on certain documents when the applicant offers, as security for the loan, property that the two own jointly.

If Credit Application is Not Approved

If your application for credit is not approved, find out the reasons why. Obtaining credit can be a difficult process for any business owner and especially for first-time borrowers. But different lenders have different standards so just because you did not meet the standards of a particular institution doesn't meant that you won't qualify somewhere else. If you understand why the initial lender didn't approve your application, you can improve your proposal so that you might succeed the next time you apply.

Some of the reasons that lenders deny a business loan include:

  • Lack of equity in the business
  • Lack of an established earnings record
  • A history of slow or past-due trade or loan payments
  • Insufficient collateral

Application Status

The lender will keep you informed about the status of your application. If you are considered a "small business" (your business revenues are $1 million or less or you are applying to start up a business), a lender has 30 days to let you know, either orally or in writing, whether or not you get the loan. The 30-day period begins after the lender has received all of the information needed to evaluate your credit request.

If your application is denied, the lender must give you one of the following:

  • A written statement of the reasons for denial
  • A written notice telling you of your right to obtain the reasons in writing

This notice may be given to you during the application process or at the time of the denial.

Equal Credit Opportunity Act

All business applicants have certain protections against unlawful discrimination under the Equal Credit Opportunity Act (ECOA). The Act makes it illegal for lenders to deny your loan application, discourage you from applying for a loan or give you less favorable terms than another applicant because you are a woman or a minority group member. Under the law, a lender may not take factors such as sex, race, national origin or marital status into account.

In addition, the lender may not ask for information about your spouse unless your spouse has some connection to the business, or unless you are relying on your spouse's income to support your credit application or relying on alimony, child support or separate maintenance payments to establish creditworthiness.

Alternative Sources of Funds

You may want to try the following sources of capital in addition to banks:

  • Savings and loan associations
  • Insurance companies
  • Finance companies
  • Mortgage companies
  • Small business investment companies
  • Venture capital firms
  • State government financing sources
  • Pension funds
  • Government agencies
  • Private foundations