By Tom Gazaway
In part one of this series, we discussed how to evaluate a prospective business line of credit deal. Next, we’ll discuss how to put together a strategy to obtain an unsecured business line of credit (UBL).
The next step is simple — notice I didn’t say easy. I said simple.
After evaluating a deal and determining that you and your business have the credit history necessary to obtain a UBL, it’s now time to acquire the capital. It’s time to go and get the UBL from the lender. At this point, how we proceed depends on whether you will obtain a traditional Unsecured Business Line, or you are using a business credit card platform.
If you have a business that did at least $500,000 in annual gross revenue, which meets the seasoning requirements of the lender, and it is not in a high-risk industry, then you need to know the right bank in your market that will issue the UBL. It’s important to note a couple of 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 credit lines without collateral.
If the bank offers UBLs, then it’s very important to work with a competent financial professional who can 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 get a UBL because they didn’t know the right person within the bank.
At Hawkeye Management, we’ve worked with many 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. If you are doing a traditional UBL and have the right bank and the right person, then you submit the application and your financials and work through the lender’s application process.
The other type of UBL uses a business credit card platform. In this case, the acquisition phase is a little more complex. You want to know which lenders offer business credit cards, and you need to know if they underwrite and service the loans themselves or if they have an agreement with another credit-card provider.
The largest banks in the United States offer credit cards directly. Beyond the largest tier of banks, the vast majority of banks don’t offer credit cards on their own — they partner with one of the larger credit-card providers and offer credit cards through a relationship with that larger lender. Most of the larger banks have at least some of these relationships. The bank with the largest number of these agreements — known as “private label” relationships — 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 three different banks who all have the same private-label product with the same bank, then you’ve essentially just applied at the same bank three times.
Although we’re unaware of any industry data that confirms or denies this, we estimate that in over 90 percent of the hundreds of private-label credit-card agreements that exist, the underwriting and servicing of the account is done by the larger bank that offers the private-label agreement.
The other key thing to know is just because a lender offers a business credit card doesn’t mean that it’s a good one. You must examine the terms. More importantly, in my opinion, you need to know if that lender is going to report the information to your three personal credit reports or not.
If the bank reports this UBL to all three credit bureaus, it kind of defeats the purpose. Then you’re not separating your personal and business credit, and it becomes no different than using a personal credit card. We actually run into this sometimes, when people tried to obtain financing on their own. Although there are other lenders who do this too, it’s pretty common knowledge that Capital One and Discover Card report the monthly activity for their business cards to all three 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. Most of the best lenders for business credit cards are not the largest national lenders.
If you look at the Big Three – Chase, Bank of America, and Citi – none of them would be in the top five right now for number of credit lines issued and the ease with which the credit lines can be obtained. If you look at a bank like Wells Fargo, which took over Wachovia Bank, it’s kind of unfortunate.
Wachovia used to be a very good unsecured lending institution, but now they are extremely difficult. Wells Fargo is traditionally very disinterested in unsecured lending solutions for small business owners. Most of the larger credit lines on business credit cards held by the Big Three 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 scaled back pretty dramatically on the credit lines they are issuing to small businesses.
The last thing to understand is the best order in which to approach the lenders, and what their lending criteria are. Probably most importantly, you want to know which credit bureau they consult when underwriting you application, along with their tolerance for multiple inquiries.
In other words, if you submitted six different applications for six different business credit cards to six different banks, and your credit was great, and all six 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 remember what we mentioned in part one of our this series: The number-one reason for people with excellent credit to get denied for a UBL is “too many recent inquiries.” Well, what do you think the chances are that your 4th, 5th, and 6th 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 use, along with their inquiry tolerance, then you can plan those six applications accordingly. Those six submissions, done right, could yield a great crop of approvals — but those same six applications done wrong could have minimal success.
Another important thing to note is that simply getting an approval is not your only goal. Let me explain.
What happens if you get a $5,000 approval from a lender on a business credit card? You might think that’s great, or maybe 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 $20,000 — $25,000 approvals? You just lost $15,000 or $20,000.
Most of the time, there’s no getting the additional credit 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 two to six months later and reapply.
After you’ve successfully acquired the capital you need for your business, you need to learn about how to utilize your credit. We talk about that next week in the post on utilization. At Hawkeye Management we firmly believe that if you’re going to do this then you might as well do it the RIGHT way!
If you have questions about the process of securing a small business loan or unsecured business lines of credit feel free to contact us for a free consultation.
Photo via Flickr user AMagill
