Business Borrowing Guide

1.) Time In Business


Next to a good D&B Report, I would say that time in business (TIB) has the greatest positive or negative impact when a lender is considering your request. Most businesses that fail do so within their first (3) years. Therefore, if your business is under (3) years old, it will automatically be viewed by the lender as a higher risk. No slight to you, those are just the facts. You should have available proof of your TIB. This can be in the form of your Articles of Incorporation, your Operating Agreement (for an LLC), your Partnership Agreement, or your Name Registration if you operate as a Sole Proprietor. 

(For information regarding business structures and which is right for you, visit www.mycorporation.com . I have found this to be a highly informative and well-run site).

In many instances for Corporations and LLCs the Secretary of States website will provide your filing date, who the registered agent is, and if the business is in good standing with the state. Some states do charge for this information, but I would say 80% are FREE. I would strongly suggest you check the information on your own company BEFORE you apply for a lease. Your company will need to be “Active” and “In Good Standing” with the Secretary of State or your request will be denied. Here is the link to the best site I have found for checking your corporate status. 
http://www.coordinatedlegal.com/SecretaryOfState.html

Finally, if your D&B Report has been built or repaired correctly, this information can be found directly on the Report. In most cases the date on the D&B Report is sufficient proof for TIB. 

Based on your TIB lenders will limit the amount of their exposure. While every lender is different here is a typical lending chart for application only requests based on TIB.


Time In Business Maximum Lending Amount
Under 2 Years Up To $25,000
2 To 4 Years Up To $50,000
5 Or More Years Up To $75,000



2.) Personal Credit Check


Your D&B Report, TIB , and Personal Credit are very closely related. If your D&B is in good shape and you have over (5) years TIB, there is a good chance that you will not have to sign personally for (ie, PG) this debt. When I say your D&B is in “good shape”, I mean in addition to all the items we looked at above, is there a comparable credit on the Report. (See Comparable Credit # X below). If you have all these things, you’re looking good!

Just a little aside here. I see a lot of forums and websites that offer and sell information on how to get business credit with no personal guarantee. I think that is a noble goal and should be yours as well... Don’t sign personally if you don’t have to. My guess is that these sites may work for some smaller lines of credit. ($500 at Staples, $300 at Nebs, $500 at Home Depot, you get the idea). But we are not talking about $500 here. We are talking about $75,000. Would you lend $75,000 to a business whose owner themselves are unwilling to stand behind their own operation? 

Not signing personally is an appealing goal, but it is not a gift… It needs to be earned. That takes time and good payment history. 

When lending to a closely held corporation with over (5) years TIB and a good D&B Report, some leasing companies will not require a Personal Guarantee for the transaction, but will still want to take a look at the owner’s personal credit. They want to make sure that the person who controls the corporation is not in, or close to, a personal bankruptcy.

Note: If you have chosen to operate as a Sole Proprietor by definition you are signing personally since there is no corporate structure. You are the business. 

Personal credit is subject matter all of its own. I could write for days on why it is important, what the scores mean, how they are derived, and the different methods for repairing your credit report (yes, there are different methods). Below is a chart showing the “big three” credit agencies, their scores, and where your score needs to be if your request is going to be approved by a lender. If you fall below the score required for approval, the best personal credit repair company I have found is American Credit Experts. If you have questions about repairing your personal credit give a call to Arthur Kopelman at 866-620-5140. Please let Art know that Steve Trumbo gave you his number. Art has handled 1000’s of my clients who have had personal credit problems over the years. He will take good care of you.

3.) Business Bank Account


Because this is all about business credit and because you are doing a commercial loan or equipment lease as opposed to a consumer lease, you will need a commercial or business bank account. It does not matter what form of business structure you have chosen, you will still need a bank account in the business name. 

Those of you who are Sole Proprietors please listen… if you are operating your business out of your personal checking account you are making a mistake. Open a business account immediately and do not co-mingle your personal and business expenses. You are asking for IRS troubles. 

For those of you who have a business account, the lender will want to know what the average balance in the account has been and if there has been any Overdraft (OD) or Non-sufficient Funds (NS) activity in the account. The lender will get a bank reference from your bank. If you have had any OD or NS activity in the last year you may be immediately declined. At a minimum you will have some explaining to do. 

So let’s assume you have had an account open for a couple of years with no negative activity. What has the average balance been over the last year? Lenders will set limits as to what they will lend based on how much money you maintain in your bank account. Let me be clear… this has nothing to do with how much money runs through your account but what you keep as an average daily balance. I can’t tell you how many times I have heard from a client “but I run over a million dollars a month through that account.” Yeah, but your average balance is only $1000 and you bounced 5 checks just last month. You spend as much or more than you make. How much can you borrow based on your average daily bank balance? Here is a general outline. 


Dollar Amount Requested Required Average Daily Bank Balance
Up to $25,000 Low to Medium 4 Figures ($1000 to $7000)
$25,000 To $50,000 High 4 To Low 5 Figure ($8000 to $15,000)
$50,000 To $75,000 Moderate to Mid 5 Figure ($15,000 to $50,000)

4.) Comparable Credit


What in the world is comparable credit? Comparable Credit is where you have borrowed a similar dollar amount from another lender or leasing company. The new lender wants to see that you can handle this type of debt. They will want to get a credit reference from the original lender. Did you pay them on time or did you run late on your payments? How many times where you late and how late were you (30, 60, or 90 days)? 

So the question arises, if you are borrowing for the first time, how could you possibly have comparable credit? It’s a catch 22… the chicken or the egg. 

Comparable credit is usually required on larger transactions, that is $35,000 or more. Lenders, understanding that your business is growing and you may not have borrowed as much as your request, will typically accept a comparable credit as 50% of your application amount. For example, if you are borrowing $35,000 the lender may be looking for a comparable credit of $17,500 or more. Once you have borrowed, (and have a good payment history on the $35,000), you can borrow up to $70,000 (because you have a $35,000 comparable credit). So how do you get the first $20,000 to start the snowball? Usually, you will have used your personal guarantee to get your first business loan.

A new service that some lenders use to explore comparable credit is a company called PayNet. PayNet started in 1999 and it is “a members only data repository that collects and aggregates small business term payment information and delinquency history from the accounts receivable systems of its member companies.” In simple terms, only companies who report into PayNet can get information out of PayNet. The information being accumulated is term loan or lease history only. While some of the same companies may report to both D&B and PayNet, Paynet focuses in on comparable type debt only. That is, how did you pay your last lease or equipment loan? You may pay some of your supply vendors slow and therefore have a lower than desired Paydex score with D&B, but how did you pay your past loans and leases? PayNet would let the new potential lender know. This is a significant breakthrough for small ticket lenders. 

5.) Business Phone – Directory 


Are you a legitimate full-time business or are you just working out of your home and using your home telephone. Any lender wants to see that you are a real business. One of the ways they do this is to check directory assistance to see if you business is listed. Well, are you?

6.) Equipment Description – Vendor


When you are applying for a lease or loan you should know exactly what the equipment is that you would like to obtain, how much it costs, and from whom it will be purchased (the vendor). 

It is important that you are able to quantify how the equipment will benefit your business. 

a. Is the equipment going to save you money? That is, you can reduce your labor costs by laying off (5) employees at $2000 per month while the lease payment is only $1200 per month. 

b. Is the equipment going to boost production? With your current equipment you can only produce 500 units per month but with the new equipment you can produce 5000 units per month with a $10 net margin on each unit. That’s $45,000 of additional revenue per month against a lease payment of $1200 per month. 

c. Is the equipment going to do both? Lower costs and boost production.

7.) Industry Experience


Previous industry experience is particularly critical for younger or start-up companies. After all, if you have (10) years time in business, I’d say you have industry experience. But if your company is less than (2) years old, your previous knowledge surrounding your industry can be important. Where were you most recently employed? What were your responsibilities? How will your past experience benefit your current endeavor? It is always a good practice to have a current resume handy… just in case.

8.) Insurance Requirements


You can expect that your lender or leasing company will require both loss and liability coverage on your equipment. If you are working with a leasing company they will need to be named as a Loss Payee and an Additional Insured on your policy since they will retain title to your equipment through the term of the lease. If you do not carry insurance, in many cases the leasing company will automatically place coverage on this equipment only. You will have no liability or loss insurance on any other equipment you own. The premium is based on the cost of the equipment and is usually significantly more expensive than coverage you would place yourself.