This is the 3rd in a three part series.  If you haven’t read the first article read it here.  The 3 Kinds of Unsecured Business Lines of Credit (UBL’s) Part 1.

And the 2nd article can be read here.

3 – This last type of UBL…well, I’ll be honest – it’s a bit of a stretch to call these UBL’s and I personally do not refer to them as UBL’s but technically they are so I guess they belong on the list.  These are the Vendor Lines of Credit.  What’s a Vendor Line of Credit?  It’s a line that is given by a store, a company, or a business.  For example, I have many of these Vendor Lines of Credit for Hawkeye Management.  My Staples card is technically a UBL because I did not provide any collateral and it is a line of credit.  I can buy at the store, online, or through the Staples catalog using our Staples card.  It is great and I like having it but it can only be used one place – Staples.  I cannot turn this into cash, I cannot finance receivables with it, and I can’t use it for anything other than buying products and services from Staples.  So these UBL’s are not Cash UBL’s.  They have some value but their value pales in comparison to the other two types of UBL’s that can be used for anything under the sun.

The other thing to note here is that these Vendor tradelines or Vendor Lines of Credit are often part of a strategy that is designed to build business credit.  Also, if this is done properly, these Vendor Lines of Credit are obtained WITHOUT a personal guarantee.  I will also say this at this point.  I do understand this strategy pretty well but when and if we get involved in a business credit building strategy where we want to help someone build up their D&B and other business credit reports we will bring in a third party provider to do this.  We don’t consider ourselves to be experts at this strategy.  Now, with that being said, it’s also only fair to point out that most of the companies that are collecting fees for doing this are not really truly experts.  If you know me at all you know that I do not consider you an expert if you know a little more than the average guy knows.  So be careful and use caution with this strategy if you hire someone to assist you with the process.  The other knock I have against the “business credit” providers is that they often sell it or promote it with a carrot that doesn’t really exist.  What do I mean by that?  Well, if you build your business credit up to where you want it then it’s still VERY UNLIKELY that you can obtain CASH lines of credit WITHOUT a PG or personal guarantee.  Did I say this is VERY unlikely?  In other words, if you think that a good business credit report will get you any traditional credit lines or business credit cards without a PG then think again!  I’ll tell you like this.  At Hawkeye Management we have an 80 Paydex score, a 2r2 rating with D&B, 25-30 tradelines reporting, and we also have a 99 Intelliscore (out of 100) with Experian Business.  With all of that we can’t find anyone who will get us a Cash Line of Credit without a PG.  I’ve had numerous people tell me that they could do it and, as one of my good friends would say, “it ain’t happened yet dude.”  So just know what you’re getting and don’t fool yourself into thinking you’ll get something on the other side that really isn’t there.

I hope you enjoyed this 3-Part series about UBL’s.  If you have any questions or comments then let us know.  Our mission at Hawkeye Management is to assist entrepreneurs and Small Business owners with achieving their goals and dreams.  We do this by assisting business owners who want to start, build, or grow their companies.  If you need some capital to grow your business then we are passionate about helping you do it the RIGHT way.  Go to our “Contact Us” page on our website or give us a call and we’ll assist you and give you some HONEST feedback.  Have a great day!

Tom Gazaway, CCEW, FICO Pro, CMPS, XCO

Hawkeye Management LLC

888.783.1503 Ph

Unsecured Business Lines of Credit – or UBL’s – are very popular and sought out by many business owners.  After all, if there’s no collateral needed and it’s a line and you only make payments if you use the capital then WHY NOT get a UBL or UBL’s?  Why not obtain some unsecured business credit?  The other side of the story is that they can be difficult to obtain and often mis-represented by the companies that offer and peddle them.  So let’s talk about the 3 type’s of UBL’s so you can clearly know what you’re getting into and how to interview/screen any companies you’re looking to work with in obtaining these UBL’s.  Remember that unsecured business credit is not always in the form of a “line of credit” but that’s the focus of this article.

1 – The first type of UBL is what I call a Traditional Unsecured Business Line of Credit.  This is probably what you think of when you think of a UBL.  It’s typically (but not always) a $25-100k business line of credit where it’s tied to your deposit account at the bank where you obtained the UBL from and you have check writing capability as well as the ability to move the funds back and forth to your operating account.  These have certainly been very popular in the past and they are probably what most people think about or think they want when they look for a UBL.  They are great…however (here it comes)…there are also 2 major reasons why these UBL’s are not nearly as well liked or as popular as they used to be.  One reason is just because of how difficult and elusive they are.  Many banks who used to offer these Traditional UBL’s will no longer offer them without collateral.  In other words, almost any bank will tell you that they offer Business Lines of Credit but whether you can get it without collateral is another story alltogether.  The banks that still offer the Traditional UBL’s are out there but there’s not as many of them and they are more difficult than ever to obtain.  The sheer challenge of finding these banks and then being able to get your deal through underwriting and actually approved and funded is so elusive that many have thrown in the towel or decided that they are not worth the effort.  The second reason these Traditional UBL’s are not so popular anymore is because of what’s happened to those who were fortunate to actually obtain them.  This product (the Traditional UBL) is the target of many banks as they evaluate their portfolios and many banks have either closed, taken away, or termed out the UBL’s of their existing clients.  In other words, how would you feel if you obtained a UBL from a bank and then 6 months or a year later they contacted you and told you that they re-evaluated their portfolio and no longer want the risk exposure involved with your line of credit?  If you want to keep it all you need to do is give them the last 2-3 years of tax returns showing revenue growth, profitability, and – oh yeah – some collateral too.  How do you think that goes?  Yeah, not so great.  The result is that you no longer have the UBL and if you had an existing balance then it’s either due in full or the loan is turned into a term loan.  If you had a balance of $100,000 that means your monthly payment was probably less than $300 and now that it’s termed out you’re probably looking at a new monthly payment of between $2,000 – $2,500.  Ouch.  There’s no typo’s in there…did you catch that?  Yeah, there’s been a lot of problems with these UBL’s in the last 18-24 months so be careful what you wish for!  One other important footnote…although those of you who have been around the block a few times in the world of business finance will already know this I want to mention one other important factor.  Banks have never been crazy about approving these types of UBL’s for high risk businesses such as real estate investors.  So if you’re a real estate investor or have a business that the banks would classify as “high risk” then you will not be a good candidate for a traditional UBL.  Remember, we’re talking about unsecured solutions so I’m not saying that a real estate investor or a business that is in a high risk industry can’t get a business line of credit (with collateral)…what I am saying is that it’s VERY – one more time – VERY difficult and certainly not duplicatable for most of us to think these UBL’s (Traditional Unsecured business credit lines) are obtainable in todays lending environment.

2 – The second type of UBL is…(stay tuned it’s coming soon)…

This is it…the final step of the process.  Some people will tell you that you’ve made it or that now you’re home free…of course, I would agree that after you have obtained your approvals you’ve accomplished the goal but let me help you with some VERY important keys to proper management of your business lines of credit. 

Let’s start by discussing the traditional business lines.  In other words, let’s start by talking about the unsecured lines that are NOT tied to a visa or mastercard.  This is not geared toward business lines that are backed by collateral…although some of the principals will apply it’s important to note that not all of them will and this is meant specifically for the management of “unsecured” business lines.  Unsecured lines pose a greater risk to a bank so you will play by some different rules when managing an unsecured line than when managing a business line that is backed by collateral. 

Most lenders who issue these lines of credit will open a business checking account (deposit account) that ties or it attached to your business line.  Although each institution can manage their portfolios differently there are two main rules to adhere to if you wish to keep your UBL’s open and active.  

Before we talk about these two rules let’s bring up two things that I think it’s important that you know.  One is that you should remember that business lines are intended to be used for shorter term borrowing needs.  A business line isn’t really intended for you to use for a long term purpose.  You shouldn’t be using it as a down payment on your dream home or to buy that new S Class Mercedes.  I know that should normally go without saying but if you did these things you would not be the first to do so.  I’m sure you get the point.  When you have financing needs for longer term purposes then you should be looking at a different type of financing – normally an installment loan product. 

Two, is that I think one of your goals should normally be to avoid the attention of the lender.  In other words, you don’t want your activity on your account or your account history to cause the lender to review your account and begin to ask questions or seek additional answers or documentation from you.  

Okay what are the two biggest keys or factors to always be mindful of.  One is that you never want to pay this account late…not even 1 day late.  If you wish to maintain and preserve this account then don’t give the lender a reason to close it or review your account.  If you pay them late then it’s one thing that could work against you.  I’m not saying that if you do this then the lender will never take any adverse action against you but I am saying that you don’t want to give them any ammunition.  Don’t pay late.  Period. 

The second thing that is VERY important has to do with that good ole deposit account that the lender opened up for you when they approved your UBL.  In most situations your deposit account should be paying or making the monthly payments on your UBL.  The bottom line here is simple, don’t let this deposit account go overdrawn.  Keep it funded.  It’s probably not a great idea to keep $100 in this account but whatever you do don’t go overdrawn.  I know that sometimes the business line serves as overdraft protection and that in those situations it’s usually not a big deal but I still recommend very close and vigilant management of the deposit account and zero overdrafts is better than 1 overdraft so avoid it if at all possible.

Why do I suggest this?  These are the two main factors (not the only ones) that cause lenders to review your file.  If a review is done this is when it’s more likely that your credit will be checked, questions will be asked, and possibly the lender will request documentation from you.  We want to avoid that if possible. 

Next let’s talk about the management of the UBL’s that are business credit cards.  After those UBL’s are properly utilized and you borrow from them I think it’s wise to set up each and every business card up for auto pay of the minimum monthly payment right out of one of your accounts.  If you only have one account then obviously you make the minimum monthly payment right out of that account.  If you have multiple accounts then pick one and it’s usually best to have the monthly payments for each business card come out of the same account. 

Another suggestion I would have for proper management is this.  Let’s say you have $100,000 in business credit cards and you want to access those funds or put them to use.  We always suggest that you set aside $20-30k and then to only use the balance of those funds.  In other words, if you only use $70k then you’ll have $30k set aside and that $30k could cover your monthly payments for over a year.  If you do this then you’ll have a Net-zero impact on your budget.  This strategy is especially good when you have the 0% introductory offers that most of our clients receive.  If that’s the case then you not only protect your budget but you’ll have little to no cost for doing it this way. 

A last thing I want to talk about is about rates and credit line increases.  Right now (July 2010) we’re in an credit and lending environment where lenders are actually more likely to cut credit lines than they are to increase them.  That does not mean that you cannot get your credit lines increased…it’s simply that I want you to make well informed decisions with the best possible chance of getting your desired outcome.  We seeing more success in opening new credit lines than we’re seeing in the increase of existing credit lines. 

The other aspect of this has to do with your rates.  Interest rates on business cards obviously fluctuate up and down based on a few different factors.  As long as you’re making your payments on time, not going over your credit limits, and managing your account properly you should be able to maintain good interest rates on your UBL’s.  At either 6 month or 1 year intervals it’s a good strategy to ask the lender for either a credit line increase or for them to lower your rate.  You won’t normally get if you don’t ask.  As I mentioned earlier I think that nowadays it’s best to ask for a lower rate rather than a credit line increase. 

I hope you’ve found this 4 part series helpful.  If there was anything that was helpful or if you have any questions then please drop us an email or give us a call.  At Hawkeye Management we’re here to give you honest and dependable feedback and answers related to your financing needs for your business. 

My best to each of you who are starting, building, or growing your businesses.  Do it the RIGHT way and Have Fun!

Tom Gazaway CCEW, FICO Pro, XCO, CMPS

Hawkeye Management LLC

www.hawkeyemgmt.com

888.783.1503 Ph

This is the next part of the 4 part process we’ve been discussing in the blog about how to put together a strategy to obtain unsecured business lines of credit. 

The next step is simple – notice I didn’t say easy, I said simple.  After evaluating a deal and determining that you or that person has the qualities necessary to obtain some UBL’s it’s now time to ACQUIRE the capital.  It’s time to go and get the UBL’s from the lender or lenders.  At this point it obviously depends on whether you will obtain traditional UBL’s or if you’re utilizing a Business Credit Card platform.

If you have a business that did at least $500,000 in gross revenue, meets the seasoning requirements of the lender, and it is not in a high-risk industry then you need to know the right bank or banks in your market that will issue the UBL’s.  It’s important to note a couple things at this point.  One is that most banks are no longer offering business lines of credit without collateral…so just because a bank offers business lines of credit isn’t enough…you need to know that you can obtain those business lines WITHOUT collateral.  If the bank offers the product then it’s VERY important to work with a competent individual who can actually help see your deal through the underwriting process.  I can’t tell you how many times people have picked the right bank and failed to close because they didn’t have the right person within the bank.  At Hawkeye Management we’ve had our share of clients who came to us after they were denied by a bank and then we took them back to that very same bank and worked with our contact person and were able to get the deal closed.

So IF you have the right bank and the right person then you obviously submit the application and your financials and work through whatever the process is that the lender has in place.

The other type of UBL is when a business credit card platform is utilized.  If a business card platform is utilized then the acquisition phase is a little more complex.  You want to know what lenders offer business credit cards and you need to know if they underwrite and service the loans themselves or if they have a private label agreement with another credit card provider.  The largest 5-7 banks in the United States obviously offer credit cards directly.  However, after you move away from that largest tier of banks the vast majority of banks don’t actually offer credit cards on their own…they partner up with one of the larger credit card providers and offer credit cards through a private label relationship with that larger lender.  Most of the larger banks have at least some private label relationships.  The bank who has the largest number of private label relationships (with several hundred banks throughout the United States) is US Bank through their Elan Financial Services subsidiary.  The reason why the private label component is so important is because if you applied at 3 different banks who all private label the product with the same bank then you’ve basically just applied at the same bank 3 times.  Although we’re unaware of any industry data that is available to confirm or deny this, it is our estimate that in probably over 90% of the hundreds of private label credit card agreements that exist the underwriting AND the servicing of the account is done by the larger bank who is offering the private label agreement.

The other key ingredient is that just because a bank or lender offers a business credit card doesn’t mean that it’s a good one.  You must examine the terms but also, more importantly in my opinion, you need to know if that lender is going to report the information to your 3 personal credit reports or not.  Obviously, if they report this info to all 3 credit bureaus then that kind of defeats the purpose because you’re not separating your personal and business then and it becomes no different than a personal credit card.  We actually run into this sometimes when people tried to obtain their financing on their own.  Although there are other lenders who do this too it’s actually pretty common knowledge that Capital One and Discover Card report the monthly activity for their business cards to all 3 personal credit bureaus so please don’t apply for their business cards.

Once you get beyond those concerns you’ll want to know who the best lenders are, how many of them you can approach, and the order in which to submit your applications with them.  Most of the best lenders for business credit cards are not the largest national lenders.  If you look at the Big 3 – Chase, Bank of America, and Citi – none of them would be in the top 5 right now if you base your criteria on average credit lines being issued upon origination and the ease with which they can be obtained.  If you look at a bank like Wells Fargo, who is in the process of taking over or acquiring Wachovia Bank, it’s kind of unfortunate.  Wachovia used to be a very good unsecured lending institution but now they are extremely difficult and Wells Fargo is traditionally VERY dis-interested in unsecured lending solutions for small business owners.  Most of the larger credit lines on business credit cards that are held by the Big 3 are from lines that were established prior to 2008.  Again, there are exceptions to every rule and they are still offering the product but they have all scaled back pretty dramatically on the credit lines they are issuing to small businesses.

I read an article recently by a guy who claims to be a business credit expert.  I’m sure he’s probably a good guy and maybe he is an expert in some areas but his online article on his website that I’m referring to was entitled “Top 5 Business Credit Card Lenders.”  Since I live in that world and have for a few years now I was anxious to see his list when I saw him promote it on twitter.  After all, he has a few thousand followers on twitter so he must be an expert right?  Like I said, he may be an expert in some areas of business credit but this obviously isn’t one of those areas.  His list of 5 lenders included 2 of the Big 3 credit card lenders, another lender who offers the product but just reports the monthly activity right to the 3 credit bureaus, another lender who only offers their business credit card in states where they have branches (about 25-30 states is the translation here – plus if his following of people is anywhere centralized around NJ where he’s from then this lender does not have branches in NJ and doesn’t offer the product there), and then the 5^th lender on his list is just a lender who offers business credit cards but they fall so low on our list based on many reasons that I can’t imagine why anyone would put them anywhere close to the top of a list like this.  The other part that makes this so comical is that with his reference to Chase (might as well mention the name here) he claims to have some sort of secret access to their business cards even though the website says they don’t accept new applications.  This is so funny because that is so outdated.  It was a long time ago that Chase took their applications off their website and they were only offering them through their branches and if he would have taken two minutes to check his sources before he published this terrible list of the “Top 5 Business Credit Card Lenders” he would have seen for himself that the Chase apps are right there on the website for all to see.  So be careful who you listen to.  Are they an expert or do they have a cool website and claim to be an expert?  I don’t know your thoughts on this but if you know a little more than the average guy that doesn’t make you an expert to me.

The last thing is that you want to understand the best order to approach each lender and what their lending criteria is and probably most importantly you want to know which bureau they pull when underwriting you application along with their tolerance for multiple inquiries.  In other words if you submitted 6 different applications for 6 different business credit cards with 6 different banks and your credit was great and all 6 of the lenders were good lenders for this product in our current lending environment is that all that matters?  Well, not exactly.  This is where you need to know what we mentioned in one of our previous blogs that is a part of this series: the number 1 reason for people with excellent credit to get denied for UBL’s is “too many recent inquiries.”  Well, what do you think the chances are that your 4^th, 5^th, and 6^th applications will be approved when they will possibly see all those previous inquiries?  The answer is that if you know which credit bureau they each pull along with their inquiry tolerance then you can plan those 6 applications accordingly.  Those 6 submissions done right could yield a great crop of approvals…but those same 6 applications done wrong could be a complete mess with minimal success.

Another important thing to note is that getting an approval is not the only goal you should have.  Let me explain.  What happens if you get a $5,000 approval from a lender on a business credit card?  You might say that’s great or maybe that it’s at least a good start and maybe that’s correct.  However, what happens if that $5,000 approval is with a lender who commonly issues $20-25k approvals?  You just lost $15-20k.  Most of the time there’s no getting back what you lost if you obtained the smaller amount to start.  At Hawkeye, we prefer denials over small approvals when it’s a lender who has demonstrated a consistent track record of larger approvals.  This is because we know it’s easier to appeal a denial or come back to that lender 2-6 months later and re-apply.

We’re going to wrap up this part where we’ve discussed the Acquisition phase.  This blog entry is not intended to cover all aspects of the acquisition process but hopefully you get the idea of the basics that are involved.  We’ve now covered the evaluation and acquisition components of a UBL plan…next we will talk about the Utilization phase so tune in for the next blog entry to hear more about this.  At Hawkeye Management we firmly believe that if you’re going to do this then you might as well do it the RIGHT way!

Be sure to visit the rest of our website to get some of your other questions answered.

Tom Gazaway CCEW, FICO Pro, XCO, CMPS

Hawkeye Management

www.hawkeyemgmt.com

888.783.1503 Ph