America has recently hit a record-high debt level on all fronts — consumer, business, and government.
At the same time, according to the Federal Reserve Bank of St. Louis, delinquencies have increased for the last 11 quarters — that’s nearly three full years. Although the issue is widespread, the increase is more notable in the poorest ZIP codes, where delinquency grew from 11% in the second quarter of 2021 to 17.4% in the first quarter of 2024. This is a staggering 58% in relative terms. As a result, many lenders have already started to pull back by tightening underwriting guidelines, making it harder to get approved, and lowering lending limits.
Commenting on the matter, Ray Smith, CEO of Trycera Financial, says, “Those who already have business credit are tapping into it more often, and for larger amounts, lately. But there’s also a huge segment of the business community that has no credit, and that represents a tremendous opportunity for them because access to capital can provide the leverage they need to make things happen in their business.”
But the problem isn’t what it probably appears to be on the surface for most people.
That’s because the debt levels we’re seeing now are more a reflection of consumers just trying to keep up with today’s costs, which have been driven through the roof by inflation fueled by government spending.
To put this in context, the average annual income needed to afford rent on a one-bedroom apartment is $44,550, while the average income is just $59,428, so there’s not a lot of wiggle room for many consumers. In other words, rather than irresponsible spending, much of this increased debt is just people trying to make ends meet. This is a very real problem for many Americans. However, few are impacted as significantly as business owners, many of whom are also employers. Access to capital during an economic downturn can mean the difference between going out of business or thriving through that downturn.
This is critical because it doesn’t just affect small businesses — they account for over 64% of all jobs in the U.S. today.
Unfortunately, many of these entrepreneurs today are facing another challenge. The credit underwriting guidelines that determine who does or doesn’t get credit are getting a lot tighter, making it more difficult to get credit and reducing the total amount available. That can force a business owner into layoffs just to keep the company afloat.
“That doesn’t mean it’s an unwinnable situation,” says Amanda Webster, COO of Fund&Grow.
She explains that there are lots of options available to borrowers. People just need to know what to look for. However, she warns that business credit is very different from personal credit and says that business credit is scored differently than personal credit because a person and a business are obviously very different types of entities with different goals, legal standing, and authority. So what is good for one can hurt the other, and vice versa. But there’s another area of business credit that most people misunderstand, and that’s the infamous personal guarantee.
I know when I say the phrase, I almost feel like ominous music should start playing in the background, and the lights should dim, but it’s really a pretty standard part of most contracts you’ve already signed.
Webster explains, “Personal guarantees are a requirement no matter what season of business you’re in, no matter what industry you’re in, no matter what type of funding you’re looking for — there’s going to be a personal guarantee required until you get to a certain level. So unless you are inheriting a business with years of credit history, in order to get business credit just on your EIN with no personal guarantee, you have to put in a lot of work first that requires a personal guarantee and demonstrate proper use of that credit over time. Even simple things like getting a cell phone, internet, or utility account set up require a personal guarantee. It’s just a normal industry standard that will always be there. I don’t care if you’ve been in business for 10 years, certain companies, like the water company, the electric company, the phone company, they still may require a personal guarantee.”
He continues, “But, also, it’s not a bad thing or something to be scared of. It’s just a step in the process, and one that’s required to reach the next level. And it’s something you should address sooner rather than later because your personal guarantee is only meaningful if you have good personal credit.”
“Another thing to consider is that everybody just thinks if you have a personal guarantee that it’s not really on the business, that’s not true. A personal guarantee is simply an agreement that you’ll repay the debt personally if your business can’t — but neither the debt nor the personal guarantee will appear on your personal credit report in any way. In fact, the only reason a creditor is looking at your personal credit in the first place is to evaluate your ability to manage credit,” concludes Webster.
According to Webster, once a business owner gets over the myth that they don’t need a personal guarantee, it’s pretty simple — but it’s not intuitive. She says there are three key reasons for that.
The first, she says, is, “When you’re looking at business credit, the very first thing you have to look at is the strategy side of it, because this is something that’s going to be long-term. There are hundreds upon hundreds of offers out there in the business credit space, so being able to determine which ones are going to be best for your profile, for your business, for your long-term goals and the trajectory of where you want your business to go. The only way to be successful with business credit is to have a solid strategy, and the only way to do that is to understand the offers that are out there, how your personal profile and your business profile fit into underwriting guidelines, and which offers best align with your situation.”
The second, she goes on to say, is, “The biggest misconception about business credit cards is that you can’t use them for certain things or in certain industries. In reality, a business credit card can be used to purchase anything you can think of with two exceptions — you can’t buy crypto, which is also true for any credit card, and you can’t generally buy products for the cannabis industry. It’s not that it’s impossible, it’s just difficult. But outside of those two constraints, business credit cards can be used the same way you would use a business line of credit. It’s just that sometimes there’s like an extra step. We teach clients exactly how to do that properly. Bottom line — it can be used for any valid business expense, even if you can’t swipe the card or enter it on your computer. It’s just a matter of knowing how to do that process and that step properly.”
And the third, she says, is, “The biggest struggle, though, in coming up with the strategy is actually having the product-specific knowledge. These products that are out there, they change all of the time. There are times when we will go in and try to apply for, say, a Chase card and the link is actually no longer up because the offer was discontinued that morning. Or, the other side of that coin is when we find out about products that the public doesn’t even know about because they haven’t been publicly announced yet. Here’s the bad news, though — you probably don’t have time to research the virtual ocean of ever-changing offers that are out there because that is literally two full-time roles in our company, where we have a research team of two constantly reviewing current offers and talking with lenders about the future products they’re planning to launch. This is a key part of getting the strategy right, so we monitor the offers so intensely because those little tiny minute changes can really affect the consumer on whether or not a particular product is a good fit for them.”
I think this may seem like unconventional advice to those who haven’t heard of the approach before, but banking experts inform me that it’s not only completely legal, but also standard practice in the financial industry. They described it as an effective strategy to fund a business that eliminates a lot of the time and administrative hassle that comes with more traditional funding, as you’d see in an SBA loan or a loan at your local bank.
Smith says, “Unfortunately, most entrepreneurs were never taught financial literacy — which includes business credit, so they don’t understand how it works, and that leads to significant missed opportunities. Lenders are just as frustrated because they have loads of money to lend, but since most people don’t understand business credit, they never make it through underwriting.”
Webster says the key is to understand how business credit works, and maximize your efforts for that. In doing so, you’ll develop a stronger credit profile that you can leverage to get even more credit for your business.
She explains, “When people think about business credit, they don’t understand that the rules are different. There’s a lot of information online about how personal credit works, but there is not a lot of information out there about how business credit works. Each works completely differently. For example, if you get a card with a $50,000 limit on your personal credit and you use $40,000 of it, your credit score starts to tank. In fact, once the utilization is over 35%, it starts bringing your scores down. Whereas on the other side, in the business world, you can go all the way up to your credit limit, use it, pay it, use it, pay it, and that kind of activity actually improves your credit score.”
She continues, “It’s the craziest conundrum, because on the business side, it’s almost like they understand that business owners need money in order to function, but on the personal side, it’s just a different world.”
“And then the other reality is the credit bureaus, those are a separate business model that plays into the equation here too. On the business credit side, it isn’t like that. No one is necessarily profiting from your credit score being modeled so creditors are looking at you on an individual basis. For example, when you have an account with American Express, they are going to look at your individual business history with them to decide if they want to increase your limits. They don’t really necessarily care what’s happening on your cards with other lenders as long as your accounts with them are in good standing. One thing on the business side that’s the same as the personal side, though, is that your history plays a huge role, so the longer you use credit properly, the stronger your credit profile will become. Ultimately, using your cards improves your score and then also improves your relationship with those lenders,” concludes Webster.
Most economists today would agree that we’re facing perilous financial times ahead, and while credit is becoming tougher to get, it is still available and, when used properly, can be a game changer. But it’s also important to use it cautiously because, as economist Dr. David Phelps noted in a recent article about inflation’s impact on our economy, the stability of the market is unstable, to say the least. This means a misstep could put you into a worse position than when you started because leverage will multiply the effects of your decisions, whether they’re good or bad, so be sure to weigh your options carefully.
