One of our clients contacted us recently. It was 4 years after we got him a $100,000 unsecured business loan. His loan was at 7.25% and he’s made 46 out of the 48 payments on the 4 year loan so he’s nearly done with the payments. I figured I would share an update along with some things that are positive and some things that are a bit negative about his current situation.
First of all, he made all his payments on time so that’s always a good thing. This lender, unlike some lenders, reports the activity for their business loans to one of the three business credit bureaus so it’s partially helped him build his business credit.
Second, he’s grown his business. That’s obviously the idea of getting financing but he’s accomplished the basic goal of growing his business. However, his business has also leveled off the last year so it appears that his growth has slowed or stopped.
Third, he has not done a great job of separating his business and personal credit with his credit card usage. He has used a combination of his Capital One business credit card, a Discover business card, and his personal credit cards. Since his Capital One business card and his Discover business card report to his personal credit along with his balances on his personal cards he’s not separating his business and personal credit, hurting his FICO scores, and making it difficult to get additional financing.
Additionally, with the use of FICO Business Credit scores at an all time high, he’s also not totally prepared from a credit perspective like he could be. The FICO LiquidCredit Business Scores combine personal and business credit into a score for a lender that is probably the best automated predictor we have for small business risk. Unlike personal FICO scores, which range from 300 to 850, the FICO Business Scores range from 0 to 300 with anything above 140 being considered good.
He currently needs some financing now for a combination of a partner buyout and some additional growth. He needs $100,000 to $125,000. SBA financing is always a long process and many businesses simply don’t want to wait 3-5 months for an answer. Plus there’s no guarantee he will even be approved. Additionally, if you’re familiar with SBA financing, anything under $250,000 doesn’t get the interest of most banks. He doesn’t need that much funding.
So we’re working through the options to see what makes the most sense. If he had preserved his credit a little better then this means he would have better FICO scores which would help. He would have also maintained lower interest rates on his credit cards. This would have lowered his debt, made his money work for him rather than against him, and his monthly payments would be lower. All these factors have either a little or a lot to do with what his current financing options are.
His quickest and fastest solution – as well as his most expensive option – would be to get a Merchant Cash Advance, also known, as an MCA. We are not big fans of MCA & ACH options except as a last resort. We do a handful of them every year and they make up less than 1% of our total credit solutions. Fortunately, he’s not in a huge crunch that forces him to take an MCA.
Since it appears that SBA financing likely won’t work, the ideal solution for him would be to grab a $50,000 micro loan for his partner buyout along with $50,000 to $75,000 in 0% business credit cards that he can use for his continued expansion. Of course, he would want to get the right business credit cards this time so he can take advantage of the many benefits of proper business card usage. He’s not yet at a point where he can get larger forms of financing but he’s growing his business and headed in the right direction. In fact, according to statistics from Clate Mask, he’s grown his business to a point where only about 12% of all small business owners get. He’s on the verge of making it into the top 5% of all businesses. The additional business credit he’s after should help him grow and should help propel him to that next level.
No matter where your business is at I hope there’s something to learn from this case study. He may not have done everything right but most of us don’t. None of us ever make all the right decisions so for this client to be where he’s at says a lot. There might be some challenges and he may not get the exact form of business credit that he’s after but he’s positioned himself and his business to have some options and they are options that make sense and that he can truly excercise in order to continue his growth.
If you are a small business owner then you know that growing your business is the goal. It’s about going after our goals and dreams. Whether you are going to propel your business with the use of an unsecured business loan, an SBA loan, or some other form of business financing I hope you can learn some lessons from this case study. Keep changing the world one client at a time if you’re B2B or one customer at a time if you’re B2C!