A recent study released by MBO Partners provides an interesting look into the state of the American work force. The U.S. Independent workforce has grown to 18 million and those 18 million people generate a massive $1.2 trillion in total income while also accounting for $150 billion in business expenses every year. That’s a lot of people working for themselves as independent contractors. It also means those who are trying to set up shop as something a bit more than an independent contractor and perhaps into a small business designation, there are a lot of people who are finding it extremely difficult to do so because of their credit histories. Is small business credit really that difficult to secure?
Past Affects Future
There are no hard numbers that we could find, but we do know that many people used the job loss they experienced during the recession as a golden opportunity to finally strike out on their own. They might have chosen graphic art, freelance writing or other similar paths. They typically work at least 15 hours a week (though some put in as many as 65 or 70 hours a week, depending in how quickly they’re trying to grow a clientele), they may or may not have other employees and they’re being credited for making substantial contributions into the economy. Many of these independents say it’s realistic for them to consider growing their business. Their problem is often facing huge obstacles for financing opportunities because of the hits their credit took as a result of losing their jobs in the recent past. They might have fell behind in their mortgages or credit card payments.
These are big challenges. Banks, while they’ve eased the reins for lending to business owners, won’t go near these micro structures because they simply don’t have to. They have plenty of other small businesses to choose from: those that are incorporated, have several employees and business plans at the ready. They’re not going to take a chance on either the individual or his life’s work if there are credit problems. That’s not even considering the unknown factors surrounding the new healthcare laws. The penalties alone are enough to cause some lenders to take a step back to see how it plays out. They might see it as an entity wanting to borrow money and if they’re doing that, are they taking into account the hefty fees associated with Obamacare? Even those who might have improved their credit over the past few years, they too are also finding a series of brick walls.
Small Business Credit Sources
There could be new options opening up, however. There are new lending models that some financial entities are using that allow them to take those risks on independents or other small business owners. The best part is that these types of models will grow in the coming years. Granted, they may cost more, but for a small business owner who knows he has what it takes for success as an independent or small business owner, it could be money well spent. It can also open the door to even better credit offers.
Cash Advance Companies
There are a number of companies, usually referred to as merchant cash advance businesses, that will take a percentage of a company’s future credit card transactions. Of course, a business will need to have already an established clientele who use credit cards when dealing with that particular business owner. It’s a fast solution that doesn’t require high credit scores; however, expect to pay more in interest. The good news is that qualification can be had in as little as 24 hours. Also, remember that you won’t know your monthly payments each month as they’re determined by how many credit card transactions you see each month; that could make it difficult to budget your finances, which is crucial for any kind of start up business.
Microloans
Microloans are another way to access much-needed cash for a business venture. These are ideal for those who need less than $40,000 or $50,000 (which, as the study points out, is actually more than enough for most). These types of companies are usually considered non profit and the good news for women and minorities is the preference they’re given in the decision making process. Again, you don’t need stellar credit to qualify. You can usually garner a faster approval process as well.
Business Credit Cards
Business credit cards might not be something an individual considers if he knows he has bad credit. But did you know a lot of banks have these types of products designed for business owners and independents with less than perfect credit? It can also serve as a vehicle back to better credit offers – low interest rates, for example. This is also the preferred way for anyone to rebuild his credit, not to mention the fact that it’s great for keeping an eye on spending. By going this route, you can better keep your personal and business expenses apart.
One example is the Applied Bank Visa Business Card. This credit card can be used for anything a small business owner needs to cover his expenses. That said, you’ll need to provide banking information for your business accounts. This might not prove beneficial for the independents mentioned above since many aren’t at the point that they must have business bank accounts. It’s also considered an international credit card, which means it serves a purpose outside of the country should you travel on business. The drawbacks of these types of business credit cards is that there are often a lot of fees, including maintenance fees, transaction fees and of course, as is the case with most credit cards, higher APR for cash withdrawals.
Rebuilding
In the meantime, efforts can be made to improve one’s business credit as a business owner. In fact, the rules are actually similar to what consumers are told to do as a whole when their credit has taken a hit. If you have established a business from a legal perspective, you should check your business credit report from time to time. Establishing a business credit file is different. The credit rating agencies differ as well – especially when it comes to Dunn and Bradstreet numbers, which are calculated on a number of factors.
- The company’s current financial obligations
- Payment histories
- Length of time the business has been place
- Any legal considerations: bankruptcies, lawsuits filed against the business, employee-filed suits, etc.
- Credit utilization
Also, avoid opening up too many credit accounts, regardless of whether they’re credit card accounts, small business loans or automobile purchases.
Be sure to separate your business accounts from your personal accounts – and the sooner, the better. You should also take steps to incorporate your business. Interestingly enough, lenders see a true business structure and are more inclined to working with a small business owner. And don’t forget to put your company’s name on your building lease, utilities and contracts. This is especially important if you approach the Small Business Administration.
Take advantage of every opportunity to save so that you can continue to reinvest in your company or your talent. That means you should speak with any vendors you have a relationship with to see if they can offer discounts. You might be surprised. With some, you might even learn that prepayment yields a nice discount. Others offer rewards programs for purchasing online.
There’s hope out there and any lifeline tossed to an independent or small business owner can be just what’s needed to help them cover that financial obstacle.
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