The one thing that convinces a bank to loan your business cash

By Sospeter Opondo

Kenya: Many critics will tell you that it is impossible to obtain unsecured business lines of credit without the use of personal guarantees.

Well, it is difficult to obtain large credit lines without the use of personal assets, but it is not impossible. In fact it can be very easy if you have one major weapon in your arsenal: a reputation for paying off a business credit card bill.

The reason I started my consulting company is because I kept running into business owners who knew very little about this source of financing. Many were going to banks, applying for loans and being turned down because they didn’t understand the process.

Many business owners that I interacted with wanted to throw in the towel because they felt they were in a hopeless position. I suggested they change their business plan to a game plan by building a strong business credit profile and then applying for business lines of credit to grow the business.

Many entrepreneurs utilise their own cash and personal assets to operate their business, but this does not help the entity build a reputation.

One of the many difficulties of starting or growing a business is gaining credibility during the start-up phase, which is generally within the first five years after inception.

A business credit card can ease your firm’s cash flow problems, allow you to meet payroll and enable you develop and implement a sound financial plan to grow your business. You will also be able to withdraw cash from ATMs for emergencies.

Unlike a personal credit card, business credit cards also provide lines of credit, which have higher limits. They also allow for easy identification of expenses, which helps when filing for income tax refunds.

The perks and benefits associated with building business credit can be very useful in helping small or medium-sized businesses compete more effectively in the market place.

The purpose of building a strong business credit profile should be to limit the use of personal guarantees and build a good reputation for your company.

This credit profile will give you more cash for the business, separate your personal assets from your business so that they are not seized, allow you to purchase equipment without personal guarantees, and prepare your business for its future lending needs.

The goal of the business owner should be to build credibility to get business credit. The key to making this happen is establishing business credit scores with each of the three major credit reporting agencies.

Find vendors, suppliers and credit card companies that will give you credit without using your personal credit scores. And ensure they report your payment history to the Credit Reference Bureau.

Also, register for and obtain tax compliance certificates from the Kenya Revenue Authority, and join business associations and national/county chambers of commerce and industry for credibility and networks.

Lenders want to see that you can manage debt, that your company has all the necessary certificates and licences, and is registered with the State. Some lenders want you to have collateral, so ask if that’s the case before you apply for a loan.

Remember, the reason you want unsecured credit is to separate your personal from your business credit profile. To do this, open a Limited Liability Company (LLC). A sole proprietorship or partnership makes you liable for any and all debts of the company.

Open a business credit file with a bank and apply for a credit card to establish your firm’s profile. The information in this file will determine whether your business is approved for financing or not in the long term.  Just beware of the fine print.

The writer is a business development consultant.

bizbeat@standardmedia.co.ke