The Ultimate Guide To Improving Your Business Credit Score

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A good business credit score is important for a multitude of reasons. For one, it’ll help you get a business loan if you need one – and you never know when you might need some help. Additionally, a higher business credit score will result in lower rates on loan interest and insurance, meaning you’ll be paying less money every month. It will also allow you to separate your business and personal credit scores, since many new businesses that don’t have business credit rely on their personal credit to get loans and such. Finally, raising your business credit score will improve your business’s reputation and potentially win you more business; after all, your business credit score is public information that anyone can look up.

Okay, now that you know why you should improve your business credit score, let’s get on with the how. It’s actually easier than you might think!

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Establish Your Business Credit

The first step to improving your business credit score is to simply establish all of your business credit scores – that’s right, you will have multiple business credit scores, and you have to take certain actions in order to establish them. Personal credit scores are calculated by the same criteria and scoring system set forth by FICO, but the three business credit scoring agencies are more disparate in their calculations, and their scores all signify different things. Only once you establish credit with each agency can you work on improving these scores.

The Three Big Credit Agencies

The three major business credit scoring agencies are Dun & Bradstreet, Equifax, and Experian. As you may know, Equifax and Experian also perform personal credit scoring, but your personal credit score with these agencies is different than your business credit score.

Dun & Bradstreet

Dun & Bradstreet assigns something called a PAYDEX score. This score, which ranges from 1 – 100 (100 being perfect), primarily has to do with repayment of creditors and is of particular importance to lenders looking to make decisions about whether to grant your business a loan. To qualify for a D&B credit score, you need to register for a D-U-N-S number and have active trade lines with at least three vendors or suppliers (more on those topics in a bit).

While it’s free to register for a D-U-N-S number, you will have to pay between $61 and $188 to purchase a Dun & Bradstreet business credit report to see your score.

Equifax

Equifax has two different business credit scores: one that predicts how likely you are to skip payments to creditors, and another that predicts how likely your business is to fail. From Equifax’s website:

  • Business Credit Risk Score predicts the likelihood of a business incurring a 90 days severe delinquency or charge-off over the next 12 months. The score ranges from 101 – 992 with a lower score indicating higher risk.

order an Equifax business credit report for your company (or another company) for $99.99 per report. You can also order multiple reports at a discount, or pay a monthly fee to monitor your business credit report on an ongoing basis.

Experian

Experian assigns just one credit score, ranging from 1 – 100, that designates your risk to both vendors and lenders. You want your score to be as close to 100 as possible.

To establish an Experian business credit score, Experian requires at least one trade line and/or one demographic element, such as years on file, business size, and/or Standard Industrial Classification (SIC) code.

You can order a business credit report from Experian’s website for $39.95 or $49.95; Experian also has monthly and yearly subscription packages.

Unlike with Dun & Bradstreet, you don’t need to register for a proprietary number to get an Equifax or Experian credit score. However, in order for them to have enough information to go on, you will need to differentiate your business (as its own entity) from your personal identity with an LLC designation, employer ID number, and accounts in your business’s name. Which brings us to …

Register For Numbers & Titles

So let’s say the credit agencies don’t have enough information on your business to provide an accurate score or complete credit report. No worries. By registering your business for a few important designations, you’ll put your business on the map as far as credit agencies are concerned.

D-U-N-S Number

On the Dun & Bradstreet website, you can set up your D-U-N-S number for free. This is a nine-digit number that identifies your business’s physical location. You’ll need to have one of these in order to obtain a PAYDEX business credit score through D&B.

Many business organizations use D-U-N-S as a form of business identification and to check your business’s credit report.

Employer Identification Number

If you don’t have one already, registering for a federal employer identification number (EIN) through the IRS can help establish your business credit. In addition to identifying your business to creditors, having an EIN also allows you to stop using your personal social security number for official documents, thus separating your personal credit from your business credit.

Use the IRS’s online EIN Assistant Tool to get started with your EIN registration.

Limited Liability Company

Forming your business as a Limited Liability Company instead of a Sole Proprietorship has some important benefits, including establishing your business credit. As with registering for an EIN, restructuring your business as an LLC will help separate your personal and business credit because it differentiates your business as its own separate entity.

Rules on how to start an LLC vary somewhat from state to state, but here’s a useful resource with a few general steps for how to form an LLC.

Incorporating your business is another option.

Open Accounts In Your Business’s Name

Opening accounts in your business’s name will also put your business on credit agencies’ radars. All of these accounts need to be dedicated specifically to business purposes, meaning you can’t use the same account for personal business. Some important accounts to open include:

  • Business bank account
  • Business phone line (listed)
  • Business credit card

Besides helping separate your personal and business finances and establish your business credit, a business credit card will also help build your business’s credit score. Just keep in mind that you’ll need to practice good credit habits — such as keeping your debt-to-credit ratio low and making all payments on time.

Vendors & Your Credit Score

Setting up business trade lines with vendors — i.e., “accounts payable” relationships — helps demonstrate your business’s ability to make payments on time. Even if you don’t strictly need this sort of arrangement for your business, you can still set one up to help boost your credit score – you could, for example, set up a trade line with your office supplies or drinking water distributor. Note that D&B requires businesses to have at least three trade lines with vendors and four payments on file before they will even assign a PAYDEX score.

It’s also important to note that that you need to work with vendors that report your payments to the major credit bureaus for your trade lines to positively impact your credit score.

Repay Your Debts

To get a perfect business credit score, you don’t just need to repay your debts on time; you need to repay them early. This includes payments to suppliers, service providers, and any other entity to which you owe money. If you pay all your vendors on time, you will likely get a PAYDEX score of about 80, but if you pay them early you could get a perfect 100 score.

Remove Negative Marks

I’ve dedicated most of this article to the topic of building business credit by establishing it in the first place, as many small business owners rely on their personal credit for their business. However, it may be the case that you do already have a business credit history, and it’s not a good one. Depending on the nature and severity of the credit infraction, you might be able to remove that blemish from your record.

Check out this resource on how to remove negative marks from your credit report.

Business Loans & Credit Score

Having a small business loan in good standing will help build or improve your business credit. However, if you have no business credit or you have bad credit, it will be difficult to obtain a business loan. In such cases, you may have to take out a loan in your personal name and/or find a lender that does not check your credit in order to get that capital you need.

Business Line Of Credit

While any business loan is good for building up your credit, a business line of credit is an especially easy way to help bolster your business’s credit score. If you have a line of credit, you have access to a sum of money, but you only have to pay interest on the amount you borrow. Lines of credit may also be easier to qualify for than actual term loans, especially if you choose an online line of credit such as Bluevine, Kabbage, and others.

Business Loans For Bad Credit

If you’re reading this post because you need to get a loan for your business ASAP but have poor business and personal credit, you might consider getting a loan with no or low credit score requirements. Just make sure you read the fine print, because you may have to sign a personal guarantee and a UCC blanket lien on your business assets. Here are a few good lenders to consider for businesses with poor credit:

However, be aware that lenders might not report to the credit agencies. If you’re taking out a loan to improve your credit score, ask potential lenders if they report to credit agencies before accepting a loan.

Looking for a lender that doesn’t check your credit at all? Head over to our article on 5 Business Loans With No Credit Check.

Managing Your Credit Profiles

Once you know what your business credit scores are, you can start to work on improving them. But that’s not the only thing you need to do; it is also advisable to monitor your scores on at least a semi-regular basis by checking your reports from time to time – at least once a year. Additionally, you will want to correct any mistakes on your business credit profile that could be negatively affecting your score. All of the credit bureaus provide a process to correct inaccuracies on your report, like an inaccurate SIC code or wrongfully filed UCC lien.

More Tips

Finally, here are a few more things you can do that might boost your business credit score.

  • Fix your personal credit (some lenders check personal as well as business credit)
  • Deal with any judgments, liens, or other black marks on your report
  • Avoid behaviors that hint at risk, such as closing any business-related accounts
  • Keep revolving debt low
  • Stay on the right side of the law in terms of business taxes, business licenses, insurance policies, etc.

Final Thoughts

Building up a strong credit history for your business can help your business in a lot of ways. You’ll be able to increase your borrowing limits, qualify for lower interest rates, limit your personal liability in business dealings, keep your personal credit lapses from hurting your business’s reputation, and more. While most startups rely on personal credit to get things off the ground, once your business is up and running you can establish business credit in just a few easy steps. After your business credit profiles are firmly established, you can build up your scores by simply paying your bills on time (or, ideally, early) and exercising other good credit practices.

Shannon Vissers

Shannon is a freelance writer and editor based in San Diego, CA. Shannon has a three-year-old daughter named Izzy. Shannon likes to unwind by watching trashy reality television and reading literary fiction during the commercial breaks.

Shannon Vissers

Shannon Vissers

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Everything You Need To Know About Secured Business Credit Cards

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If you’ve been comparing business credit cards online, there’s a decent chance you’ve come across some secured cards. If you aren’t sure what “secured” means or how to compare secured cards to other business credit cards, we’re here to help.

Read on for everything you need to know about secured business credit cards.

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You Won’t Want A Secured Card Unless You Need One

There may be a few rare cases where this is untrue, but for the most part, a secured credit card is a good option only when unsecured credit cards are unavailable to you.

Secured business credit cards do offer rewards similar to many of their unsecured counterparts. At the same time, your selection of cards will be limited. Not only that, but your interest rates will probably be higher than they would be with a similar unsecured card.

What Makes A Card Secured?

Have you ever lent yourself money? The concept sounds kind of absurd, and in a way it is.

Secured credit cards require you to put down a security deposit when you sign up for them. The bank will then use that security deposit to establish your credit limit. So if you put $200 down, you’ll have a $200 credit limit. If you’re lucky, the bank will apply a small multiplier to your deposit.

Why would you do that? If it helps, you can think of it as a strategic money transfer between your different accounts that maximizes the efficiency of your money.

How Secured Cards Can Help

Secured credit cards are a way for business owners who have recently filed bankruptcies to access revolving lines of credit. Many of these individuals may find it difficult to be approved for an unsecured business credit card.

The security deposit removes the risk from the bank, and the cardholder is able to access rewards and perks similar to those they would get with unsecured business credit cards.

More importantly, a secured business credit card becomes an easy way to repair your credit. Just be aware that banks aren’t always consistent about how they report business credit card activity. Some will report to a consumer credit bureau. Some will report to business credit bureaus. Some will report to both. Some will report to neither. Be sure to find out before you sign up.

How You Should Use A Secured Credit Card

Secured business credit cards usually have very low credit limits, so it’s difficult to get yourself into too much trouble by using them. That said, you should use your secured card judiciously, avoiding spending more in a month than you can pay off that month.

As for what you should spend it on, that depends on the type of card you get. Some cards return a small amount of cashback for every purchase you make. Others use a multi-tiered system that might reward telecommunication expenses at 3 points per dollar and general expenses at 1 point per dollar. You’ll get a better return on your investment if you use the card for purchases that maximize your reward points or cash back.

What Are The Drawbacks?

For starters, secured business credit cards come with all the same risks of unsecured business credit cards. Business credit cards aren’t governed by the same regulations that consumer credit cards are. That means you’ll need to be on guard for surprise rate changes, floating due dates, and fast and loose terms of service.

Secured credit cards come with a few additional risks, however. The big one is higher interest rates. If you pay off your card’s balance every month, you don’t have to give interest rates too much thought (just watch out for that aforementioned floating due date). That said, if you can avoid getting charged usurous fees if you miss a payment, you should. With a little research, you should be able to get a secured credit card with a reasonable APR.

The other things to look out for are miscellaneous fees. It’s not unusual for even unsecured business credit cards to carry annual fees, but secured business cards can come with even more charges, including application fees, maintenance fees, and processing fees. Avoid as many of these as you can.

How Long Should You Have A Secured Business Credit Card?

The answer is, of course, no longer than you need to. You should expect to have to use a secured business credit card for about a year. After that, a bank will usually offer you an unsecured credit card.

In the event that the issuing bank doesn’t offer you a new card, don’t be afraid to ask to be promoted to an unsecured card.

At that point, you should have your security deposit returned to you. Unfortunately, you don’t usually earn interest on your deposit.

Final Thoughts

A secured business credit card should primarily be viewed as a road back to decent credit health. Remember, however, that it isn’t necessarily the best or only path you can take. Some banks also offer high-interest, low-limit unsecured credit cards to customers with poor credit. Avoid offers that pile on the fees, and you should be back to normal unsecured credit card usage in no time.

Looking for a good unsecured card instead? Check out our 2018 business credit card guide.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

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Who Is Responsible For Business Credit Card Debt?

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Business credit cards are a useful way for anyone in your organization to make purchases, all while earning reward points. But while swiping the card may be easy, it raises questions about who is ultimately responsible for the purchases made with the card. The swiper? The business owner? The business itself?

If you’re confused about who is responsible for business credit card debt, read on.

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The Personal Guarantee

In most cases, it’s pretty easy to figure out who is ultimately responsible for business credit card debt. Typically, a credit card company will require the business owner to sign a personal guarantee.

What this means is that, even though the business credit card is technically taken out in the name of your business, the creditor can try to collect on you, personally. This bypasses some of the protections granted to your personal assets by your business’s corporate status.

If you’re worried about creditors knocking on your door after they’ve squeezed all the blood from your business, you may want to think twice before signing a personal guarantee–and scrutinize the ones you do sign.

Personal guarantees come in limited and unlimited forms. An unlimited guarantee is a great deal for your creditor. Under that agreement, you can be held responsible not only for your debt, but for any legal fees associated with collecting that debt. As you might guess, signing an unlimited guarantee is far from ideal.

Limited guarantees come in a couple different forms, but in most cases they assign liability between multiple parties. You’re most likely to see this arrangement if you have business partners, but it’s possible, at least in theory, to negotiate an unlimited guarantee down to a limited one.

Does That Mean The Owner Is Always Personally Responsible?

While a personal guarantee sounds pretty straightforward, in practice it’s far from an air-tight contract.

A side effect of pushing the responsibility onto the business owner is that it can make the debt subject to personal bankruptcy protections. In those cases, your business credit card debt is treated like personal debt.

Even if you don’t declare bankruptcy, a personal guarantee doesn’t necessarily entitle the creditor to declare open season on all your property. To collect anything, they’ll need a legal judgment against you. Depending on your balance, your creditor may decide your debt isn’t worth the trouble.

Is There A Way To Avoid A Personal Guarantee?

You might be noticing a theme so far: there are few certainties in the world of business credit cards. And what do you know? It applies here as well.

The default terms for almost all business credit cards include a personal guarantee, so it won’t be a matter of hunting down a rare, plastic unicorn. On the other hand, banks are more inclined toward negotiation with established customers. You stand the best chance of having a personal guarantee waived if you’re applying for a business credit card from a bank with whom you’ve previously had a relationship.

Bigger businesses and corporations may also be able to use the heft of their enormous accounts to negotiate better business credit card terms with their bank.

Who Is Responsible If You Avoid A Personal Guarantee?

If you circumvent the personal guarantee, your liability for unpaid debt will depend on the way your business is organized. That means limited liability corporations (LLCs), C-corps, and S-corps will, in most cases, have the protection from personal liability that you normally enjoy.

Final Thoughts

Business credit cards come with personal risks. Be sure to understand what your liability is and which assets will be exposed should you default. And, if you can, negotiate a deal that will leave you as protected as possible.

Looking to compare business cards? Check out our 2018 business credit card breakdown.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

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What Are The Risks Of Using Business Credit Cards?

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Business credit cards offer a variety of enticing perks to companies that use them skillfully. But with those tempting rewards come a unique battery of risks that can catch unprepared businesses off guard.

Here are some of the risks that come with using business credit cards…

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Interest Rates

The most obvious risk you take when using business credit cards is accruing interest.

Business credit card APRs typically fall in the mid-to-high teens. If you carry a monthly balance on your business credit card, interest will begin to accrue on your account. This interest is an additional, and often unnecessary, business expense.

To figure out how much you’ll be spending in interest, divide your APR by 365. So, if your APR is 18 percent, your daily interest rate will be 0.0493 percent. In other words, if your balance on a given day is $1,000, you’ll accrue 49 cents in interest on that day.

As you can imagine, those small charges add up very quickly. Most carriers will offer a grace period to make payments without being charged interest, but you’ll need to keep an eye on your bill to see if you’re meeting them. Unlike personal credit cards, there’s no set, legally enforced interest-free window.

Bait & Switches

Personal credit cards are governed by the Credit CARD Act of 2009. This legislation ensures that cardholders get 21 days to pay their bills, won’t be subject to retroactive rate increases, will receive ample warning before rates are increased, and will have payments applied to their highest APR items first.

Unfortunately, those protections do not apply to business credit cards. That means credit card companies can change your rate, and even your billing date, with little warning. In a worse case scenario, this can leave you facing charges you aren’t prepared for or make it more burdensome to pay off standing debts.

This doesn’t necessarily mean your credit card company will be pulling shenanigans with your account, but you need to be on guard for it. Be especially wary of changes if you miss a payment, as they’ll often be used as a rationale for tinkering with your terms of service.

You’ll also want to be aware of less nefarious tactics like introductory offers. You may be expecting them to expire, but did you know your credit card company can revoke them at any time, for any reason?

Needless to say, keep an eye on your statements.

Affect On Your Credit Report

At this point, business credit cards are probably sounding like the wild frontier of revolving lines of credits. Unsurprisingly, this can carry over to credit reporting.

There’s no industry standard governing what bureaus your credit card activity is reported to, or if it’ll be reported at all.

This means that some companies will report your business credit card activity to commercial credit bureaus. Others will report it to consumer credit bureaus. Some will report it to both. Some will report it to neither.

So if you’re hoping to create a partition between your personal and business credit, you may have a hard time doing it with a business credit card. This can also make it difficult for you to use a business credit card to repair your personal credit.

If you’re concerned about how your business credit card usage shows up on credit reports, be sure to contact your credit card company and find out what their policy is.

Debt Responsibility

Depending on how your business is incorporated, you may or may not be personally liable for business debts in general.

Business credit cards, however, tend to require a personal guarantor on the account. That means that you are responsible for those debts should your business close. On the other hand, that also means you can treat that business debt as personal debt if you file for bankruptcy.

Final Thoughts

Keep in mind that these risks are a collection of worst case scenarios. Many companies maintain mutually beneficial relationships with their business credit card providers. Nevertheless, it is a poorly regulated segment of the credit card industry that comes with a number of dangerous pitfalls. Just don’t be caught unawares.

Looking for a convenient rundown of some of the most popular business cards? Check out our comparison chart.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”

Business Credit Card Rewards: Everything You Need To Know

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One of the biggest perks offered by business credit cards, other than convenience, is rewards. Gamed correctly, business credit card rewards can be a way to save money on your biggest expenses.

Not sure which rewards are right for your business? Wondering what kinds of expenses to use your card on? Not even sure what’s out there? Read on!

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What Are Business Credit Card Rewards?

Simply put, they’re incentives to use your card to make purchases. When you make a purchase on your card, you’ll be awarded points or cash for each dollar you’ve spent. The number and type of points awarded vary by card. In many cases, where you’re spending it matters too.

How Many Types Of Rewards Are There?

A lot. In fact, many business credit card rewards cater to a specific type of spending. Overall, you can break them down into two broad categories.

  • Cash: This is the simplest, and oldest, kind of reward program offered by business credit cards. Cash rewards accumulate as you make purchases on your credit card. You may, for example, earn 2 percent back on every purchase you make. Depending on your carrier, you’ll have the option to redeem the rewards automatically at specific times of year, when you reach reward thresholds, or when you request them. Cash rewards can be redeemed as checks, statement credit and, in some cases, as gift certificates.
  • Rewards: Other business credit cards don’t return cash, instead awarding points or frequent flyer miles to cardholders. These cards tend to cater to specific types of business. For example, businesses whose staff frequently travel may choose a card that awards flyer miles. A business that spends a lot on telecommunications, on the other hand, may choose a card that rewards expenditures on those expenses. Other reward programs are more general, presenting you with a diverse (but limited) array of rewards to spend your points on.

What Are Reward Tiers?

Not all business credit cards have reward tiers. Cash cards almost never have them, for example, but many reward cards do.

Reward-based cards use tiers to influence your spending habits. For example, the Chase Ink Business Preferred Credit card breaks its reward point system into two tiers. For each $1 you spend on travel, shipping purchases, telecommunications, and social media advertising, you’ll earn three reward points. Any other purchases you make will be compensated with one point per $1.

Most cards that use tiers will have two or three of them. The lowest tier almost always represents miscellaneous purchases.

How To Choose The Right Reward

Business credit cards, ideally, reward a specific kind of spending behavior. With that in mind, it’s best to consider which rewards best sync up with your expenses.

This means you’ll probably want to itemize your monthly business expenses to see where you’re spending your money. You’ll also want to get the cash value of the reward points offered by any rewards cards you are considering (expect a value somewhere around a cent or two).

To make a comparison, pretend you’ve put all of your monthly expenses on the credit card and calculate the cash value of the points (or cash back) you would get for making those purchases. So if you have $800 of expenses that qualify top tier points (3) and $1,000 of miscellaneous purchases, you’d be earning $34 worth of rewards each month or $408 per year.

If your expenses aren’t concentrated in any specific area, consider cash rewards. You may not get as big a multiplier on specific purchases, but you’ll often recoup a better value on your miscellaneous purchases. Not only that, but you can spend your cash return on whatever you want. Consider cash as “breadth” to rewards’ “depth.”

What Else Should You Factor Into Your Reward Calculations?

You didn’t think it would be quite that easy, did you? Business credit card terms feature a large number of asterisks and footnotes. Here are some things you should also consider when calculating a card’s reward potential:

  • Sign-up Bonus: Many business credit cards will offer an initial sign-up bonus. This is a one-time offer and usually requires you to spend a minimum amount of money in order to qualify.
  • Annual Fee: Some business credit cards charge an annual fee to keep the card active. You’ll want to deduct this amount from your yearly reward value. Note that many cards will waive the first year’s fee.
  • Reward Limits: While it might be fun to think of ways to earn an endless torrent of reward points, your carrier is one step ahead of you. Some carriers will limit the number of top tier points you can earn. Others may stop rewarding points or cash for the year after you hit a spending threshold of, say, $150,000.

Final Thoughts

Remember that your business credit card should match your existing spending habits. Don’t fall into the trap of thinking you should have a specific card just because it’s popular or even well-reviewed.

Need help getting started? Check out our 2018 business credit card comparisons.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”

The Dos And Don’ts Of Business Credit Cards

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Business credit cards offer one of the most convenient ways for your company to borrow money for goods and services without having to have your purchases scrutinized by a lending institution. Best of all, the revolving credit offered by your card means that as long as you pay off your card on a regular basis, you will always have access to a certain amount of money.

But like all forms of debt, business credit cards have downsides and come with fine print that can leave an unprepared business spending far more money than they should. Below, we’ll explore some of the do’s and don’ts of business credit cards.

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DO

Be Aware Of Terms & Fees

Credit cards come with a lot of fine print detailing everything from introductory APRs to how your reward points are calculated. The more transparent carriers will take pains to make you aware of the important details, but beware of asterisks lurking near numbers. Business credit cards don’t have as many protections as personal credit cards, so you’ll want to know if (and when) your carrier can raise your interest rates.

Choose The Type Of Rewards That Best Suit Your Business

Perks are a big part of what distinguishes one business card from another. With some rare exceptions, perks fall into one of three categories:

  • Money Back: For every x amount of money you spend on your credit card, you’ll get a percentage of the expenditures back as cash. Depending on the carrier, this money may be returned as a check, a bank deposit, a gift card, or credit to your account.
  • Rewards: This is a catch-all for a number of different reward schemes, where you’re credited x number of points for each dollar you’ve spent. These rewards can be redeemed for goods and services from selected vendors.
  • Mileage: If you do a lot of long-distance traveling, some business credit cards use frequent flyer miles as rewards. As with the other types of rewards, you’ll earn x number of miles for each dollar you spent.

Be Aware Of Reward Tiers

As important as selecting the right reward type for your business is understanding how to maximize your rewards. Rewards are usually broken up into two or three tiers (although some don’t have tiers). In most cases, the tiers correspond to the multiplier applied to each dollar you spend. You may, for example, earn 3 points per dollar you spend at restaurants, 2 points per dollar you spend at gas stations, and 1 point for each dollar you spend on other purchases.

Ideally, you’ll want to use your card for purchases that earn you the most reward points.

Calculate The Earning Potential Of Your Card

An easy way to figure out which card is best for you is to break down your monthly credit spending into categories like travel, telecommunications, and office equipment. You can then choose a card that will give you the biggest return on your expenses.

Create A Credit Card Policy If Your Employees Will Be Using It

Since business credit cards are for business expenses, the owner isn’t necessarily the only person who will be using it. You’ll want your employees to be aware of how and when to use the card, and how to maximize its value.

DON’T

Pay Too Much In Annual Fees

One of the easiest business credit card fees to avoid is the annual fee. Unlike most personal credit cards, business credit cards frequently require a yearly fee to keep active. These fees usually range from ten to a few hundred dollars. Many cards will waive the first year’s fees, so make sure you know what you’ll be paying over the long term.

Leave Balances On Your Card Longer Than You Have To

You can file this under general credit card advice, but it’s worth remembering: the longer the cost of an item remains on your credit card, the more that item effectively costs. Why would you pay a higher price than you have to? And best of all, you’re still earning rewards!

Use Your Card Recklessly Just To Earn Rewards

As nice as the rewards are, they can be a trap if you adopt the wrong mindset. Running up unmanageable balances in the hopes of maximizing your rewards points will leave you with a net loss.

Use Your Business Card For Personal Expenses

You won’t get in trouble for it, but it’s a best practice to avoid mixing personal and business expenses. At best, it’ll complicate your bookkeeping. If you’re running a small sole proprietorship with minimal expenses, you may want to just use your personal credit card.

Ignore Prerequisites For Sign-Up Bonuses

Many business credit cards offer sign-up bonuses. In most cases, you’ll need to spend a minimal amount of money before those sign-up bonuses kick in. Factor them into your calculations.

Final Thoughts

A business credit card can be a powerful tool for your business. For a side-by-side comparison of popular cards, check out our 2018 business credit card feature.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”

What Is A Secured Business Credit Card?

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Conventional wisdom dictates that you’ll have a difficult time accessing credit — including business credit cards — after declaring a bankruptcy (or if your credit score is terrible). But as true as that can be, it doesn’t take into account the credit cards of last resort: secured business credit cards.

Below, we’ll take a look at what secured business credit cards are, where you can find them, and what they offer.

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How Is A Credit Card “Secured?”

The justification for secured credit cards is simple, actually. These cards address a very specific conundrum: banks can’t afford to extend risky borrowers a line of credit, but businesses often can’t rebuild their credit scores unless they have access to a line of credit.

How do you get around this Catch-22? The answer is counterintuitive.

To obtain a secured credit card, you must first give the bank a sum of money that becomes your credit line. If you make a deposit of $300, the bank will extend you a credit line of $300. That deposit secures your credit card. In some cases, the issuer won’t even check your credit (or if they do, it’s only to confirm your identity).

Simple, right? But wait …

Why Wouldn’t I Just Spend The Cash Directly?

That’s the question, isn’t it? On the surface, giving a bank money to lend back to you at interest seems like a pretty bad idea. In fact, it sounds like a completely insane idea.

Luckily, it isn’t quite as bad as it sounds. If you’re able to keep up with your payments, that deposit is eventually returned to you. In some cases, you may be automatically upgraded to an unsecured card when your credit improves (but not always, so keep an eye on your credit rating).

Even before that happens, there are a few perks that can come with secured credit cards. In some cases, the creditor may extend you a credit line equal to your deposit, plus a percentage of your deposit. So you might deposit $300 and have a credit limit of $330.

And again, the only legitimate reason to ever use a secured card is to rebuild your credit.

Does A Secured Card Function Like Other Business Credit Cards?

Yes. In most cases, secured business cards will offer familiar perks and bonuses. You should be able to find cards that offer cash back or reward points.

And once you set it up, you can use it just like a normal business credit card.

What’s The Difference Between A Good Secured Credit Card And A Bad One?

Short answer: fees and interest rates.

The less scrupulous secured credit cards providers know that you probably have poor credit and will try to take advantage of your lack of options.

If possible, you want to select a card that has a low annual fee or no fee at all. These fees are common even with unsecured business credit cards, but they can end up being quite high. Be especially wary of annual fees over $40.

While APRs on secured cards are often higher, there are secured credit cards with rates in the single digits. On the high end, however, are APRs over 30 percent. You’ll want to stay away from those. If you don’t plan on carrying a balance, this isn’t as big a deal, but you should still avoid high rates if you can. Emergencies happen, after all.

Are Secured Cards My Only Option If I Have Bad Credit?

Not necessarily. A lot of banks will offer high-interest unsecured credit cards with very low credit lines to businesses and individuals with poor credit. Depending on the APRs and credit limits, they may or may not offer you a better deal than you’d get with an unsecured card.

Final Thoughts

Traditional lending and credit may still be hard to come by, but for almost any type of credit you can think of, there’s an alternative available for high-risk borrowers. If you do your due diligence, you can use secured credit cards to your advantage. But once your credit is rebuilt, you’ll want to ditch them for an unsecured card.

Not sure where to start with business credit cards? Check out our some of our favorites.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”

SBA Loans Explained: Everything You Need To Know

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The Small Business Administration (SBA) is an excellent resource if you need a business loan. Loans offered in partnership with the SBA tend to have better rates and fees than other types of loans, typically boasting longer term lengths and lower interest rates. And, because the SBA guarantees a portion of these loans, they are often easier to obtain than bank loans.

Does the SBA offer the type of loan you’re looking for? Read on to find out!

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What Is The SBA?

The Small Business Administration (SBA) is a government institution that was founded in 1953. Its mission is to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.”

The SBA assists small businesses in a number of ways, but arguably, its most important contribution to the American business landscape is its loans program.

There are a number of SBA loan programs; these vary according to business need. The most popular are the 7(a) Loans, but the SBA also offers a Microloan program, CDC/504 Loans, and Disaster Loans. These programs are typically offered in partnership with banks, credit unions, nonprofits, and other organizations.

SBA Loan Programs At A Glance

Below is a short summary of each loan. In the following sections, we’ll go over individual loans in more detail.

7(a) Loans General-use small business loans for many business purposes.
Microloans Small (max $50,000) loans for working capital, equipment, inventory, or other business projects.
504 Loans Large loans used to acquire fixed assets such as real estate and equipment.
Disaster Loans Loans used to rebuild and maintain businesses following a disaster.

7(a) Small Business Loans

The 7(a) Loan Program is the SBA’s primary program, and it’s by far the most popular. Many loans fall under the umbrella of the 7(a) program. These include:

  • Standard 7(a) Loans
  • 7(a) Small Loans
  • SBA Express Loans
  • Export Express Loans
  • Export Working Capital Loans
  • Veteran’s Advantage
  • CAPLines

Loan Uses

This is the SBA’s most popular loan program, in part because it’s so versatile and widely applicable to most business needs, though some loans are for specific businesses or specific uses. Of particular note is the SBA Express program. While SBA loans can still have time-consuming applications, the SBA Express program is designed to make the process a little faster.

7(a) loans can be used for many business purposes:

  • Working capital
  • Expansion or renovation
  • Construction
  • Land and real estate purchasing
  • Equipment purchasing
  • Inventory purchasing
  • Starting a business
  • Debt refinancing
  • And other reasons

Eligibility

Eligibility is dependent on the SBA’s standards as well as the standards of the partner lender.

The SBA’s standards are fairly straightforward:

  • Your business must be for-profit
  • You must do business in the United States or its territories
  • You must have reasonable owner equity
  • You must have used personal savings and other alternative financial assets before seeking an SBA loan

If you meet those requirements, you have a good chance of qualifying for an SBA loan, at least in the eyes of the SBA (partner lenders have more standards). That said, the SBA will not fund certain industries, including gambling businesses, pyramid sales plans, and lenders. Other business types, such as farms, recreational facilities, and fishing vessels, might have to meet certain requirements or submit extra documentation to be approved.

Partner lenders might also have additional requirements. Most will require you to have been in business a certain amount of time, have a certain credit score, and maintain a debt-to-income ratio that will support repayments. Specifics regarding these standards will vary according to partner.

Rates & Fees

The maximum amount you can borrow via most 7(a) programs is $5 million. Some programs, such as the SBA Express and 7(a) Small Loan programs, will allow a maximum of $350,000.

Term lengths vary according to why you are borrowing. For most loan purposes, including working capital and equipment, the maximum term length is 10 years. If you are using the loan to purchase real estate, the term length can go up to 25 years.

Interest rates vary depending on the financial institution you’re working with. That said, the SBA has set maximums regarding how much the lending institution can charge.

Currently, these are the maximums:

Loan Amount Less Than Seven Years More Than Seven Years
Up To $25,000 Base rate + 4.25% Base rate + 4.75%
$25,000 – $50,000 Base rate + 3.25% Base rate + 3.75%
$50,000 Or More Base rate + 2.2% Base rate + 2.75%

The base rate can be determined by one of three sources: the prime rate (such as the one published by the WSJ), the LIBOR, or the SBA Peg Rate. Rates can be fixed ( the rate stays the same over the life of the loan) or variable (the interest rate will change if the base rate changes).

For example, if you are borrowing $100,000 and your term length is 10 years, your maximum interest rate might be 7% (the current WSJ prime rate plus 2.75%). As you can see, SBA loans tend to have more reasonable interest rates than many other business lenders, whose rates generally range from about 5% – 30%, or even higher.

The interest rate isn’t your only fee, though. In addition to the interest, SBA 7(a) loans come with a guarantee fee, which varies based on the size and length of the loan. This fee is initially paid by the partner lender, but they can pass the cost on to you. Partner lenders can also charge other fees in addition to the guarantee fee.

Microloans

Microloans are small loans that are typically granted to businesses in need of an infusion of cash to start or continue business growth. The SBA doesn’t originate microloans itself—it loans money to intermediaries, which are then responsible for passing the money to small businesses.

SBA microloans can be a good resource for startups or small businesses that need a small amount of money. Microloans do not exceed $50,000 and have short term lengths, which make them less risky (and easier to qualify for) than larger-sized business loans.

Loan Uses

Microloans are not as all-encompassing as 7(a) loans. Still, these loans can be used for many business purposes, including “working capital and acquisition of materials, supplies, furniture, fixtures, and equipment.” You can’t use these loans to purchase real estate.

Eligibility

In the eyes of the SBA, any business eligible for a 7(a) business loan is also eligible for a microloan. Non-profit childcare centers are also eligible for this type of loan.

That said, the SBA does not actually have a hand in evaluating loan applicants or distributing loans. The intermediaries responsible for distributing the loans have separate application processes and their own qualification requirements. It’s important to note that the intermediaries you’re eligible to borrow from will depend on where your business is located.

Rates & Fees

Microloans max out at $50,000. According to the SBA, the average microloan size is $13,000.

The interest rates are set by the intermediary, but the SBA will not allow them to go over a certain amount. Generally, you can expect interest rates between 7% and 10%. Intermediaries are allowed to set term lengths as well, but these cannot go over six years.

CDC/504 Loans

The 504 Loan Program is designed to promote small business growth and job creation by financing the acquisition of fixed assets such as land, real estate, or machinery.

The SBA works with Community Development Companies (CDCs) and partner lenders to offer 504 loans. CDCs are not-for-profit organizations certified by the SBA that are dedicated to, as you might guess, developing communities. Partner lenders are typically banks and other financial institutions.

Loan Uses

504 loans can be used to fund fixed assets, such as land, real estate, long-term equipment, and construction. Loans can also be used to refinance debt, but only if the debt is “in connection with an expansion of the business through new or renovated facilities or equipment.”

SBA 504 loans cannot be used to fund short-term needs or current assets, such as working capital or inventory. They also cannot be used to refinance most debt (unless the debt meets the above standards).

Eligibility

These are the requirements you must meet in order for the SBA to approve a 504 loan:

  • Your business must be for-profit
  • You must have used other resources before seeking a 504 loan
  • Your business must have a tangible net worth below $15 million
  • Your business must have an average net income of $5 million or less after federal taxes for the last two years
  • You must not be engaged in non-profit, passive, or speculative activities

You must also meet other standards set by the SBA, the CDC, and/or the partner lender. For example, the project has to meet certain community development goals by creating or retaining jobs, improving the local economy, increasing competitiveness, etc. Naturally, you must also be able to prove that your business is creditworthy and that you can repay the loan.

Rates & Fees

504 loans do not have a maximum borrowing amount, but the maximum the SBA will contribute in most cases is $5 million. The amount contributed to fund projects is divvied up between three parties: the SBA, a partner lender, and your business. Typically, the SBA puts up 40%, the partner lender puts up 50%, and you contribute 10%. In some cases, you will have to contribute as much as 20%.

Term lengths vary depending on the use of the proceeds. The term length is 10 years for equipment and machinery and 20 years for land and buildings. Interest rates are based on 5- and 10-year US Treasury rates.

Disaster Loans

If your business has incurred physical or economic damage due to a disaster, you may be eligible for a disaster loan from the SBA.

Disaster loans are designed to help small businesses that have been affected by disasters such as floods, hurricanes, or earthquakes. Small businesses in a declared disaster area can apply for a long-term, low-interest loans to rebuild or weather the aftermath of the disaster.

Loan Uses

Disaster loans can be used to cover physical damage and economic injury losses. Physical damage losses include, as you would expect, damage to real estate, equipment, or inventory. Economic injury is a little more complicated — this term applies to businesses that cannot resume normal operations because of the disaster. A portion of the loan can also be used to make improvements that will minimize or prevent damage in the future.

Eligibility

Private property owners are eligible for disaster loan assistance. This includes small for-profit businesses, private non-profit organizations, homeowners, and renters.

To qualify for a disaster loan, you must be in a declared disaster area. You can check whether your area qualifies via the SBA’s Disaster Loan Assistance website.

Rates & Fees

For small businesses, the maximum borrowing amount for a physical damage or economic injury disaster loan is $2 million. Naturally, the maximum amount you can borrow is based on your need and ability to repay the loan, among other factors. According to the SBA, “The amount SBA will lend depends on the cost of repairing or replacing your business and business contents…minus any insurance settlements or grants.”

Your maximum interest rate and term length will depend on whether or not you have credit available elsewhere. If you do, the maximum rate is 8% and the maximum term length is seven years; if you don’t, the maximum rate is 4% and the term length is 30 years. Disaster loan interest rates are fixed, which means your rate will not change over the life of the loan.

How To Find SBA Loans

The easiest place to start your search for an SBA loan is via the organization’s Lender Match service. After answering a few questions about yourself, your business, and the financing you’re looking for, the SBA promises to match you up with eligible partners within two business days.

If you think you might be eligible for a disaster loan, you might want to take a look at the SBA’s Disaster Loan website. And if you’re looking for a microloan, the SBA has a list of lenders available on their list of intermediaries page.

Bianca Crouse

Bianca is a writer from the Pacific Northwest. As a product of the digital age, she likes absorbing large amounts of information and figures she might as well pass it on. When not staring at a screen, she is probably foraging for food outside, playing board games, or harassing somebody with theories about that movie she just watched.

Bianca Crouse

Bianca Crouse

Bianca Crouse

“”

What Is Affirm And What Does It Offer?

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We often talk about how tightening credit standards have changed the face of lending. What’s less discussed is the effect the Great Recession has had on consumers

American credit card debt, currently amounting to around $808 billion, is one of the easiest types of credit to overextend yourself on. Not coincidentally, many younger Americans are avoiding credit cards at a higher rate. Fewer than one-in-three Millenials claim to have a credit card, for example.

That’s where Affirm comes in. Companies like Affirm count on the fact that cardless consumers will still face situations where they need to buy something that they can’t afford.

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How Does Affirm Work?

Affirm offers point-of-sale (POS) financing. This isn’t a new form of lending, but rather a technology-assisted reinvention of an old lending model.

Here’s an example of how the process works:

You decide you can’t possibly live without the hottest new gaming console a moment longer, so you add it to your online shopping cart and proceed to checkout. Among your options to pay are the usual credit and debit cards, along with payment processors like PayPal. But this merchant also provides an option to use Affirm, which allows you to take out a short-term loan on the spot to finance the exact cost of your purchase. You’re given the choice of paying back the loan over the course of three, six, or 12 months. Affirm then shows you how much money you’ll be paying back, expressed as both an interest rate and a dollar amount. If you accept, your purchase is processed.

Congratulations, you’re the proud owner of a new game console…and a short-term loan!

Isn’t That Just How A Credit Card Works?

In a sense, sure. Revolving lines of credit and short-term loans have a lot in common. In both cases, you’re “taking out” an amount of money equal to the cost of your purchase, which you’ll be paying back (hopefully) within the next few months. Additionally, in both cases, creditors aren’t concerned with what you’re buying, just the amount you’re requesting/using.

But there are some important differences.

The big one is that Affirm evaluates each loan separately rather than as a line of credit. You won’t be cut off when you hit a specified credit limit, but your loan may be denied if you missed payments on other Affirm loans or if they believe you’ve overextended yourself. Additionally, Affirm may not always cover the entirety of your purchase; you may have to make a downpayment.

You can expect APRs between 10% – 30% with Affirm. The average credit card APR is around 15%, so you can easily end up paying more than you would with a credit card. Loans are capped at $10,000.

Why Would I Want To Use Affirm Instead Of A Credit Card?

The short answer is that it’s mostly a matter of your own spending psychology, but there are some specific reasons why you might choose a POS loan over a credit card purchase.

You Have Poor Credit

Credit card companies aren’t quite as conservative as they were during the financial crisis, but many shoppers may still find themselves unable to access credit. Or they may only qualify for a very low credit limit. POS lenders take credit into account (Affirm, for example, does a soft pull on your credit when you first signup), but don’t weight it as heavily.

You’ve Maxed Out Your Credit Cards

While you may want to reconsider taking on more debt, there’s nothing really stopping you from utilizing both credit cards and POS loans.

Special Offers

It’s not unusual for credit card companies to offer 0% APR introductory rates. PoS loans also come with 0% APR offers, but they’re a little different. Instead of being attached to new accounts, Affirm will sometimes offer 0% APRs at specific partner stores.

You Like The Way The Loans Are Structured

Credit cards offer enormous flexibility in how they’re repaid. Other than making the required minimum monthly payment, you can throw any amount of money you want at your balance every month. At the same time, it’s not necessarily clear how much you should be paying to make a good dent in your balance. A POS loan has a prescribed end and tells you the amount of money you need to pay each month in order to meet it.

Final Thoughts

There’s a lot of diversity in the types of financing being offered to individuals and businesses these days. POS loans fit into the broader alternative lending trends. That is to say, they’re fast, easy, and more expensive. Still, they do provide options for borrowers who have a hard time otherwise accessing credit, or who wish to avoid credit cards’ minimum payment trap.

Meanwhile, if you’re a business that prefers old-fashioned credit cards, why not take a look at our business credit card comparison chart?

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”

What Is A Loan-To-Value Ratio (LTV)?

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If you’re investigating hard money loans, a type of private lending used to purchase or upgrade real estate, you’ve probably come across an unfamiliar acronym: LTV. We’ll take a look at what LTV is and the role it plays in lending.

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What Is A Loan-To-Value Ratio?

LTV stands for Loan-To-Value ratio. While it plays a more pronounced role in hard money, LTV isn’t unique to hard money loans. Banks also use the LTV ratio in their calculations when they write a mortgage.

Simply put, LTV is a number that represents the approximate risk of the loan to the lender. This number is expressed as a percentage. The higher the number, the greater the risk to the lender.

How Is It Calculated?

LTV is actually a pretty straightforward calculation. Simply take the amount borrowed, divide it by the value of the property, and convert it to a percentage. For example, if you’ve taken out a $100,000 loan on a piece of property estimated to be worth $140,000, your LTV would be 71%. ($100,000 / $140,000 = 0.7142.)

As that number increases, the lender takes on more risk. A lender that finances 100% of the property value is providing full financing. If the LTV climbs above 100%, the borrower is considered to be underwater. Banks will usually only offer higher LTV loans to customers with excellent credit.

The value of the property is usually determined by an appraiser, although some lenders will use a different metric. Hard money lenders, for example, may use the property’s after repair value (ARV) rather than its current market value.

What Role Does LTV Play In Hard Money Loans?

Hard money lenders use LTV to assess risk just like more traditional lending institutions. There are some small differences in how they use it, however. Because of the higher risk involved with hard money lending, the lenders have to consider the strong possibility that the borrower will default.

Whereas banks might heavily factor credit into their calculations along with LTV, hard money lenders will weight LTV substantially more than credit. Some lenders may not care about credit at all. As a counterbalance, they tend to use the equity the borrower puts into the property as a security. Effectively, this means hard money lenders will, in most cases, look for a lower LTV than a bank would.

How much are they willing to cover? The answer is a bit tricky. In addition to any background checks the hard money lender may decide to factor in, the property’s qualities will be considered. Properties in booming real estate markets and “up-and-coming” neighborhoods may push the lender’s LTV tolerance close to 75%, often considered the upper limit for hard money. In contrast, a property in a poor market, or a remote one, will push the maximum LTV closer to zero.

Similarly, the state of the property will play a large role in how much risk the hard money lender is willing to take on. The better the state of the property, the higher the LTV can go.

Remember that some lenders will calculate the LTV based on the ARV of the property. This is most likely to happen when you’re borrowing money to rehabilitate a property.

How Important Is It To Understand Your LTV Ratio?

At the risk of being evasive, let’s just say that it can’t hurt to understand how your lender is making their underwriting decisions to make sure you’re getting a good deal. On the other hand, you’ll end up seeing the LTV eventually in the form of the amount of money they offer you. The most important thing to remember is that the more the lender is willing to cover, the higher they’ve assessed the value of the property.

Final Thoughts

Hopefully this overview has given you a basic understanding of what LTV is and how it’s used in real estate transactions. If you’re looking for other options for business loans, check out our handy guide.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”