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I've been operating a local computer repair and retail business for about 2 years and haven't needed a line of credit until now. The problem is that I'm in college and have student loans. So, as a sole proprietor, credit card companies keep checking my personal credit, seeing a bunch of student loan accounts, and immediately denying me. I've had a personal credit card for almost 4 years, which I've never been late on and always pay off completely at the end of every year, but the loans always overshadow that fact.

It's a catch 22 situation of sorts. I need credit to expand my business and get more income to pay off these student loans, but I can't get a business line of credit because I have them in the first place.

What actions can I take here?

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4 Answers

up vote 0 down vote

I think that this is going to be a tough one.

Do you have an EIN? Business bank accounts?

Look for smaller, local focused banks and credit unions. The bigger ones want long history and something crazy like 4m in revenue before they'll give the business credit.

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I have a business checking account and a close relationship with a local bank, but I don't think they offer credit cards any longer. I'll check around, though. I was mainly looking at American Express OPEN because I like their reward offers, but I've been turned down by Chase, as well. – David Brown May 26 '11 at 20:22
I'm in a different life situation, but had no issue getting a reasonable (for a small business) Chase corporate card (tied to my personal of course). They wanted a crazy amount of paper work and revenue in order to get a line of credit though. I was like "if I had that much revenue I wouldn't need a $75k LOC to cover any revenue dips." – Sean May 26 '11 at 20:25
up vote 0 down vote

In the short term, you might see if one of the banks will offer you a collateralized credit card. This would be a card that has a bank account balance equal to the card limit tied to it. That way if you default, the bank seizes the collateral account. For example, Silicon Valley Bank will do this. Obvious negative is you are tying up a large cash balance that is basically frozen.

Longer term, you should consider incorporating (maybe as an LLC) and getting a Federal Employer Identification Number (FEIN) for the business. Then set up a business bank account and run everything through here. This will separate your personal from business assets but still allow you pass through taxation. It has the added benefit of shielding you from personal liability. Then if you can show 3 years profitability, some bank may consider offering the business a line of credit. Obvious negative is there is a cost to setting up and maintaining the LLC and the benefit is three years away.

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Will my existing 2 years count towards the 3 year requirement, or will I essentially be starting over after forming an LLC? – David Brown May 27 '11 at 1:16
Depends on the bank. Most though are more concerned about your performance than what you called yourself, or how you were setup when you first started. My first company went Sole Proprietor -> LLC -> Corp (with 2 different names along the way) but the bank always recognized the business as "x years old" -- not "2 months old since that is when we did the Inc." Of course you should be able to show financials from day one and PROVE you've been in business for as long as you say. -- Kyle – Kyle West May 27 '11 at 3:10
up vote 2 down vote

You're in the same position as thousands of young businesses: need credit to grow, but can't get credit because you haven't grown enough / shown enough profits.

Since you're not incorporated every bank under the sun is going to check your personal. You don't have an EIN so, to them, your business doesn't exist.

Even after you incorporate most banks are going to ask for your personal credit and/or require a personal guarantee until you establish a long history of paying your bills. A couple years ago you could have gotten a corporate AMEX with just a FEIN and nothing derogatory. After the meltdown those deals no longer exist from the big banks.

So, what do you do?

  1. Wait, grow slowly, and use your profits to build the business. What do you need the LOC for anyway? You may be able to use a little creativity to get the same results without the investment.
  2. Get a cosigner. Since your in college I assume you have no significant assets, but you may know someone who does (and believes in you). If that falls through you may be able to find an investor to cosign the LOC (it's not unheard of). You'll need a solid plan but you should be able to get better terms than a pure-cash investment since the investor isn't fronting any money. His/her money is only every used if you default on the LOC.

Kyle

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up vote 0 down vote

My advice, learn what Capital Reserves are. You don't need a LOC. LOC's are for occasional dips in revenue. The likelihood of you getting one that does not require a personal guarantee are nearly nil in today's economy. Set aside 10% of your profits, or more if you can, and in short order you will have your own LOC.

Credit is many times used as a replacement for knowing how to manage cashflow. If you have your own Capital Reserves, you will not need the LOC.

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