A frequent question I often hear asked by entrepreneurs is “Can I obtain a loan for my business even if I have credit card debt?”. You do not have to be debt free to obtain financing for a business.
You do need to be credit worthy. When you apply for any type of business loan the first thing a bank will look at is the amount of debt you currently have and how well you manage that debt.
Debt is measured as a percentage of income and the acceptable percentage can vary from bank to bank and change due to economic conditions, too.
Equally important to the amount of debt you carry is your personal credit that reflects your payments habits and may say more about your financial management skills than you imagine.
A few years ago someone who paid their credit card a couple days late almost every month was labeled as a “slow pay”. In the current economy, one late payment in a year’s time can disqualify you for a loan.
It isn’t surprising that lenders and credit rating agencies have tightened their standards. Money is tight today and lenders are wary of making loans that might not be repaid.
The long ago excuse of a bill or payment being lost in the mail doesn’t work today as almost every lender has a website where you can check your balance due and make payments online.
If you have an established, profitable business, obtaining a business loan if you have credit card debt may not pose a problem.
If you are pursuing a loan in order to start a business, your personal finances will be of importance to the lender. There are three methods you can use to get money for your business:
1. Bank Loan
Your local bank is the best place to start if you need a business loan. If you have personal accounts that have been in good standing over a long term, that is to your advantage.
If you have well managed personal credit cards or previous loans you have repaid, that can also tilt the decision in your favor.
For a business loan, your bank may require quite a bit of paperwork from you. They may ask for your business plan, your financial projections, your list of suppliers, etc.
It’s common for those with new business startups to complain about the extensive information required by the bank when they apply for a business loan. The information is that which any new business should have compiled.
The same is true if you are applying for a loan to increase the size of your business. When you apply for a business loan, be prepared to provide your bank with details of what you will purchase and how much additional income the increase in business is expected to yield.
2. Credit Line
A business loan is for a specific term of months or years at a specific interest rate. A credit line is likely to carry a variable interest rate and a shorter payoff term but can be renewed after it is paid off.
A credit line might be used to buy new equipment and spread payment out over 7-10 years. The credit line for a business may be $50,000 and once the entire amount has been repaid, you can again access the amount granted for that credit line as long as you paid off the initial loan according to agreed terms.
A credit line may be easier to obtain for a small business owner. The variable interest rate and the shorter term of payments carry a higher profit for the bank. The credit line may be a secured loan that uses your current business equipment or accounts as collateral.
3. Small Business Credit Card
Perhaps the easiest way to solve your loan dilemma is to apply for a small business credit card. This may be easier to qualify for than a bank loan or a credit line.
It offers the advantage of providing future credit available as the balance is paid off. If personal credit card debt is not excessive and has been paid in a timely manner, that may be a plus for you when you apply for a business credit card.
If you are an entrepreneur with credit card debt but who desperately need a business loan, I suggest you to look first at your payment habits.
If you have well managed credit card debt, it will not prohibit you from obtaining a loan, credit line or credit card for business use.