Finance Your Own Business. Garrett Sutton

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СКАЧАТЬ credit score requirement? If the lender will tell you what the minimum credit score needed is in order to qualify, you’ll at least know whether you are in the ballpark. Understand, though, that you don’t have a single credit score; you have many. There is a good chance that if you checked your credit scores, you won’t have seen the same exact credit score the lender is using. That’s true even if you order your credit score from the same bureau the lender uses. Lenders may use custom scores, or scores that aren’t generally available to consumers.

      If you are turned down for a personal loan, the lender is required to disclose your actual credit score, based on the credit scoring model they used, and give you information about how to order a free copy of your credit report from the reporting agency that supplied your report. Take advantage of this opportunity to learn more about your credit score for free.

      Is there a maximum debt-to-income ratio you’ll accept? A debt-to-income ratio typically compares the borrower’s gross (before tax) monthly income to monthly debt payments. A typical requirement for many lenders is that debt payments excluding any mortgage payment don’t exceed 28 – 30% of gross income, and that total debt payments including a mortgage total no more than 38 – 40% of gross income. Be sure to count the new loan when calculating your debt-to-income ratio.

      What are my payment options? Will you have a fixed monthly payment, or will you be able to make minimum monthly payments if cash flow is tight?

      Is this a revolving or installment loan? With a revolving loan, you can borrow up to a certain limit (your credit line), while an installment loan will allow you to borrow a specific amount of money and pay it back over a specific period of time. These two types of loans are very different in terms of how they affect your personal credit scores.

      Let’s say you need a $10,000 loan to start your business. If you get a revolving line of credit and use $8000 right away, you are using 80% of your available credit. In credit scoring terms, that ratio of available credit to balance is called the “utilization” or “debt usage” ratio. And when it comes to your credit scores, that high utilization ratio is likely to hurt your credit scores. There’s no ideal utilization ratio, but consumers with the highest credit scores tend to use about 10% of their available credit.

      But if you get that same loan as an installment loan, then it will be viewed differently. If your loan is reported as “installment” rather than “revolving” credit, the amount of debt is part of the credit score calculation, but utilization is less likely to be a problem. You can shop for a personal loan to start your business by finding out what your current bank or credit union has to offer. One type of personal loan that is growing in popularity is the peer to peer, or P2P loan.

      Peer to Peer Loans

      The original premise behind peer to peer or “P2P” loans was to cut out the middleman—banks—and to match individuals who have money to lend (lenders/investors) with individuals who need to borrow money. The premise was that lender/investors can earn a better return on their money by lending directly. In addition, these companies sold lenders on the idea that they could spread out their risk by lending small amounts of money to many different borrowers. LendingClub.com and Prosper.com are two of the earliest major players in this space, and they have both been very successful with this model. So successful in fact, that it’s no longer just individual lenders providing the funds for these loans. Large investors such as pension funds and institutional investors are major lenders for these platforms now, too.

      Borrowers who qualify typically get a loan with a fixed interest rate and fixed monthly payments. Often these loans are used by individuals who are starting, or growing a business. If you are looking for a personal loan and have a good credit score, you may want to check out a P2P lender. It is expected that more lenders will get into this business as it grows in popularity. For more information on these lenders visit the Resource Section. We will talk a bit more about these companies in Chapter 15, Crowdfunding.

      But in chapter 2, let’s investigate business plastic…

Chapter 2

      Business Credit Cards

      Grayson Bell comes from an entrepreneurial family, and after seeing his parents and brother succeed in their ventures, he decided to launch his own business while still in college. He already had two personal credit cards, and had started to fall into the trap of paying only the minimum payment after an expensive car repair had left him owing more than he could repay in a month. His hope was that his business could help him pay down his credit card debt.

      After some careful research, he decided to start an online electronics store. And to fund it he turned to credit cards. As he describes it on his website, DebtRoundUp.com:

      “One factor of marketing that I learned really quick is that it costs money to do quality marketing. I took a lot of time to create free marketing buzz, but in order to get the customers that I needed to succeed, I needed to spend money on marketing. Since I didn’t have any money, my credit card became my business loan. Soon, I found out that I would need another credit card to continue with my marketing plan. Another credit card added to the bunch put my total to three; two of which were close to being maxed out.”

      Four years into his business, Grayson decided to close it. At that point he had nearly $50,000 in credit card debt. Eventually, he was able to pay that all back without filing for bankruptcy or ruining his credit rating, and he shares how he did that on his blog. But he warns others about going down the road he went down. “The main thing I learned was to never, ever use a credit card to start and run a business,” he says.

      Not all stories end like Grayson’s. Some businesses funded with plastic succeed. Others fail, and their owners wind up in bankruptcy. His is a cautionary tale, though, for those who might be tempted to just charge their start-up expenses and worry about how to pay them later.

      When the US General Accounting Office submitted a report to Congress on the use of small business credit cards, it said that “the vast majority of small businesses use personal or small business credit cards.” At the time the GAO conducted its research (the end of 2009), it found that 83 percent of small businesses used credit cards. Of that number 64 percent used small business cards, and 41 percent used personal cards.

      Starting out, entrepreneurs usually have two choices: to use personal credit cards for business purposes, or to get a small business credit card. Whichever route you decide to go, one of the most important things you can do is to make sure you have a credit card that you use strictly for business purposes. That means you should not put any personal purchases on this card.

      There are three good reasons for this:

      • It can make your life much simpler come tax time. Your accountant will be able to easily identify your business purchases, and be able to make sure that you get the appropriate deductions.

      • It may save you money at tax time. If you use your card strictly for business purposes, you may be able to deduct the interest, annual fee, and other fees. This is much harder to do if you mix business and personal purchases on the same card.

      • It can make it easier if you need to shut down. If you must unwind your business, and heaven forbid consider bankruptcy, then having separated your purchases onto separate cards will make it easier to identify which ones were for business purposes and which ones weren’t.

      Of course, you have a choice of whether to use a business or a personal credit card for the purchases you make for your business. While, technically, you aren’t supposed to use a personal credit card for your business, it’s not that hard to do. It’s not like your card issuer is looking over your shoulder and questioning СКАЧАТЬ