
Ask HN: Has your company ever needed a line of credit? - akrai
Hi! I’ve been researching this question for a while and after going through a bunch of research reports I’ve decided to ask some entrepreneurs directly. So, here it goes. As an emerging business, have you ever needed a line of credit to meet your obligations or to fund growth? How easily have you been able to secure a line of credit, if you did seek it?
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patio11
When I was running my own software business, we needed one pervasively for
cashflow management. They're rather difficult for small businesses to secure
from traditional financial institutions in the US, especially post financial
crisis, and the international character of my business didn't make access
easier.

The initial limit most banks floated to me was 10% of top-line revenue, but
once they heard what topline revenue was (low to mid 6 figures), they
generally suggested withdrawing the application and getting a credit card
issued instead. I believe this is primarily because they thought it was
unprofitable to underwrite the line of credit rather than an early denial for
probable credit risk.

I ended up with ~$200k available on credit cards but couldn't get a line of
credit through a traditional lender. Since I needed one, I ended up getting it
through OnDeck, which charged 36% APRs. While I was not thrilled about that
number, at all, it protected me from having to raid family finances to support
the business several times.

(This product theoretically exists in Japan, too, but is extremely hard to
access for SMBs without hard collateral like real estate to lend against.)

~~~
ig1
As a lender the big risk with small businesses is fraud.

Online lenders have automated much of the underwriting process so the main
cost is actually CAC rather then staff overhead.

Loans are generally designed to be recoverable (requiring personal guarantees,
assets, etc) so even in case of defaults lenders will recover most of their
money (recoverability is also the reason it's normally capped at 10%-20%)

However with fraud the chance of recovery is essentially zero, so fraud is
typically what blows up lending books.

With small businesses it's often hard to distinguish legitimate business from
fraud and that's the real bottleneck.

~~~
cm2012
The other risk, which does really impact the book, is called "stacking".

The small business goes to OnDeck + 6 others companies and gets loans at the
same time. OnDeck can't see these other loans because it takes a while for
them to show up in reporting. This is technically fraud (the loan contracts
say you can't do this), but most of the time, the intent of the business owner
is not to outright steal. Usually they are deep in the hole and trying a last
ditch effort to get their business on its feet.

When OnDeck approved the business, they approved them based on the ability to
repay _1_ loan. Naturally, adding so many more loans is much more likely to
lead to default on the insane payments. And because there's 6 creditors, each
get pennies.

~~~
akrai
That’s a great point. Do you think a platform where businesses are explicitly
asked to declare other outstanding loans could reduce this problem, at least
enough to reduce risk for online lenders to a more comfortable level?

~~~
jonahbenton
No, the businesses that you need to worry about generally won't track or share
this information.

Lenders need to see bank accounts and transaction histories (last 6 months, at
least). With transaction records, along with accounting records, it's a fairly
straightforward data science task to determine a) whether you are seeing the
entire cash picture and b) whether the business has other loans. One should
also get tax returns; with those and accounting data one can make a good guess
at whether c) the business is just making up numbers when it comes to their
operations.

~~~
akrai
Thanks for the input. That’s very helpful!

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bhouston
It is actually preferrable to get a line of credit instead of investment as it
is non-diluting, especially if the interest rate is low.

There are a ton of ways to get loans or lines of credit.

In Canada (and there are probably equivalents in your country) there is:

The Business Development Bank which is government backed and will lend to
riskier businesses. I have taken advantage of it. It will not take on risk
like a VC but if you are already profitable, it can help you grow. I've done
this to a large extent as the interest is often prime + 4% which is generally
amazing.

The Export Development Canada which is a bank that will fund export oriented
projects. You need a contract and they will advance you the expected payments.

There are high interest ways of factoring accounts receivable, but the
interest rates can be quite high. I've never done that as I can not justify
+30% interest rates.

True lines of credit are hard to achieve from a standard bank as they will
want collateral that they can seize if you run into trouble. I have a software
company so I never had true collateral, thus I couldn't get a true line of
credit.

Lastly, there is the possibility to use VISA and personal lines of credit that
are tied to your assets. Just be careful that you do not screw up and put your
hard earned assets at risk.

Also this seems to be realistic: [https://www.svb.com/blogs/alex-
mccracken/guide-to-financing-...](https://www.svb.com/blogs/alex-
mccracken/guide-to-financing-growth)

~~~
akrai
Thanks for responding! For such lines of credit, did you have to demonstrate
your business’s viability in the past? And if so, how long of a track record
did you have to show? Also, would you factor accounts receivable if interest
rates were lower? And agreed on being very careful on using personal loans to
finance business operations.

~~~
js4ever
All this depend on the amount you are asking for.

~~~
akrai
True. I was originally mostly asking about revolving lines of credit to cover
cash flow needs so maybe in the $10k range for early stage ventures. But I’m
open to hearing from people who need more or less. I just want to get as much
input as possible!

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syedkarim
I've used several of the high-interest rate online lenders, such as Able
Lending, Kabbage, Fundation, etc. They are all the same. The company was over
three years old, which is sometimes a requirement (or a key factor in risk
assessment). The business was doing about a million dollars top-line, but not
quite profitable. We did not need to point to growth, but did need to outline
a plan that shows how we pay the loans back. The lower the amount borrowed,
the less the lender was concerned with future cash flow. Almost all of the
lenders required access to either Quickbooks or the business bank account.

Kabbage was fairly easy for $50,000; 18 month term loan around 19%. Fundation
was fairly easy for around $100,000 for 18-months at 13%. Able Lending was an
involved process for $500,000. That was a 36-month term loan at roughly 16%.

Since we can point to some months of profitability, significant capital
expense in the form of R&D, and consistent cash flow, an SBA loan (in the USA)
is a possibility now. The interest rate is under 10%, the term length is 7
years (?) for working capital (25 years for real estate). That's really the
best deal in town, if you qualify. It's not that hard to qualify, as long as
you are not just starting out.

I've also borrowed $250,000 from a supplier. That was a pain in the ass, but
was critical to staying alive. In all cases, I've had to personally guarantee
the debt.

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squirrel
In the UK at least, lending on accounts receivable is one way businesses,
especially those with large, slow-paying clients, can obtain financing. This
can be called “factoring” or “invoice discounting” - there are technical
distinctions between the two terms, but basically you get, say, £80K now, and
the lender later collects your £85K invoice from the customer, keeping the
difference as the cost of credit. This can be structured as a one-off, like
the example I just gave, or an ongoing line of credit, if you have recurring
invoices that you discount consistently. MarketInvoice is one company I know
that provides this service.

~~~
tluyben2
Factoring is the way to not die when doing consultancy for gov clients in my
country; they pay so slow (we had invoices unpaid for over 6 months). So
credit and factoring together kept us successful over the years.

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tluyben2
Yes, even though my company was (sold my shares, it still is I think)
profitable and wildly successful for the region, we needed a million euro from
the bank to cover staff costs. Money comes in slower than it goes out in our
business, but we had reputable clients so the bank had no issue providing a
line of credit against signed contracts and sent invoices.

It was easier (and better imho) than getting an investor. Bank did not meddle
in our business, just took interest (if we could pay it; it compounded for 3
years if I remember correctly).

~~~
akrai
Thanks for replying! That was very helpful!

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thrwawyyy1905
No wasn't able to secure it. Should have abused distributors to send us stuff
without meeting their payment terms as written, since our fixed costs were
low, profits excellent, and people loved it. Flying off shelves with high
margin. At the time I thought meeting obligations as written was important for
"karma". Actually, I now think giving the distributors another outlet is way
better for karma and for them than not being behind on payments. Abusing them
for credit is an easy win for everyone especially them (and they know it) -
long-term health is much more important, and money is very scarce and pursuing
it is a waste of time. We left behind disappointed customers who couldn't give
us the money they wanted to, disappointed distributors when we weren't
reordering, and an ecstatic landlord who got all our renovations for free
after successfully evicting us. We should have left behind happy customers,
distributors who loved thay we were selling all their stuff and ordering a lot
more but a frustrated receivables department with them having to chase us for
months, and a disappointed landlord that they were stuck renting a place in a
prime location for so cheap, when it was now so palatial.

If profits are very high, sales are very high and the fixed costs are low, the
missing part of the equation is payment terms. Abuse them. The distributors
aren't going to go out of business if you pay them from your own profits on
them. You will be the one to go out of business, if you try to get credit or
factor it instead. Then they don't get any reorders from you. I really wish I
had known this.

~~~
kabouseng
Remind me to never be one of your suppliers. Not paying on time is a absolute
shit head thing to do and suppliers will not* love you for it.

~~~
bootloop
This is normal business. Many companies will not pay before the get the first
notice as it reduces the risk to pay bills for POs which were never
fullfilled. Also, many businesses give you a discount when you pay on time:
[https://de.m.wikipedia.org/wiki/Skonto](https://de.m.wikipedia.org/wiki/Skonto)
(german) This practice is more popular in Europe because trust between
companies is high (also because its harder to establish a business and you
need assets as reserve).

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stevenjgarner
Managed collateral through a trust: I set up a local access fiber to the home
company in Iowa in 1996 and after we invested all our available capital in
plant and equipment, we needed a line of credit to provision an unexpectedly
large customer. We needed $400k and our assets were worth multiples of that,
but they were not corn, securities or real estate (which is all that Iowa
banks had any comfort with). An investor had $100k in a securities portfolio,
which he was happy to pledge as collateral for the deal, but he did not want
to lose the ability to trade the securities. So we set up a trust agreement
with our local small town bank and trust, into which our guarantor contributed
$100k. The bank (as trustee) opened an online discount brokerage trust
account, into which they deposited the funds. Under the trust agreement, the
guarantor had the right to trade the securities (but not withdraw any capital)
and we had the right to pledge the entire value of the account as collateral
towards our $400k line of credit at another bank. This was adequate (together
with our plant and equipment) to get a non-recourse $400k line of credit. This
technique could be used with virtually any type of collateral.

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apcyyn3b7qipz5i
I relied on a line of credit for my solo consulting business. Was fine for
many years until 2008 struck. Lost in the static about 2008 is that from
approximately October through the end of the year many businesses couldn't get
commercial paper debt, no one was buying.

In my case both of my clients failed to pay routine invoices, which lead to my
being late with a single payment on the LOC. The day after I paid (albeit the
bare minimum), the lender closed the LOC and my affiliated credit cards and
demanded repayment of all outstanding debt. I ended up digging into my IRA to
clear the debt as prospective clients were calling out the debt as a reason
not to hire me.

I had relied on the LOC to smooth out month–to–month invoice zaniness with
client purchasing departments. It had never been a problem until 4Q2008 and
then it was a critical problem.

One of the two clients never paid, the other paid about six months into 2009.

I refuse to float clients any more and require all hardware to be paid for
before I buy it or purchased/leased directly by the company.

Took me over a decade to clean up the hit to my personal finances and credit
rating.

------
rwmj
When we were running a small company [edit: in the UK] we tried and failed to
get an overdraft facility with our bank, and I think it was this failure which
led to us having chronic cash-flow problems at the end of every month and for
me at least it massively increased the stress of running the business. So line
of credit == good!

I would just say that the time to get a line of credit is when things are
going well. When you've got plenty of cash on hand and regular payments into
your account from customers (or investors I suppose), that is the time to ask
the bank for an overdraft facility / line of credit. The worst time to ask is
when you need it.

In hindsight I'd say get one even if you never anticipate needing to use it.
(As far as I know an overdraft which you don't use is free.)

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rmetzler
Not a founder, but I worked for a small company which was buying hardware and
rented it out to their (much bigger) customers. Usually they didn't have the
money for getting the hardware and had to get a loan from the bank. I don't
think, there was much risk to it for the bank, because the company would get
it back over time with the signed contract. But that might be my bias.

The founder told me that they were lucky because if the customer would have
wanted even more expensive hardware but the bank wouldn't want to lend the
needed amount of money that would be a problem. Also timing was important for
contract signing, securing the loan, getting the hardware and installing it.

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0xcde4c3db
I'm not an entrepreneur myself, but I vaguely recall an interview with a tech
executive of some sort in which he said that he regretted buying servers
instead of leasing them because the latter would have given the company a more
solid credit history. Basically, the message was that it's a mistake to wait
until you _need_ credit to make use of it.

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gumby
I usually get a line of credit as soon as I close venture financing. That’s
the easiest time to raise.

It increases the cash available in a non-dilutive way, and has been cheaper
than factoring and other such tools offered to startups. “Small business”
deals are usually terrible — basically credit card deals.

If you raise the line and then manage to your original plan you can consider
the debt an insurance policy in case things take longer than expected or some
assumptions are a little wrong (if they are a _lot_ wrong change your plan!).

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antif
If you have suppliers or vendors, you can request credit lines from them.
Business credit cards are an option too, or you can apply your own captial.

Commercial lending typically factors in the current business revenues (or
receivables). You should have a few lenders able to offer the business a line
of credit, capped at about 100-200% of your average monthly deposits.

You could demonstrate that for an underwriter by providing either your most
recent three months bank statements or a tax return. Personal credit of the
owners will be reviewed, unless the business has comparable borrowing history.

~~~
mirimir
> If you have suppliers or vendors, you can request credit lines from them.

Right. One of the major hardware firms sold me ~$30K of gear. As I recall, it
was five years at 0% interest.

~~~
akrai
Wow, that sounds like a great deal! Was there any time when you felt the need
for credit and it was not available from suppliers/vendors?

~~~
mirimir
I'd be lying if I said "no". My clients were all plaintiffs' firms, and
sometimes paying me wasn't a top priority. But after a while, I learned the
best times to invoice. Such as, not within a month before the end of a
quarter.

Edit: That being when partners got their distributions.

~~~
akrai
Do you think you would benefit from having a low fee/interest line of credit
available where you could get funds if necessary when clients don’t pay/pay
late?

~~~
mirimir
Mainly, it just cut interest expense, by reducing credit card usage. But
interest is deductible, so it wasn't a huge thing.

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PopeDotNinja
Banks don't like risk, and you can assume they'll assume as little risk as
possible when extending you a line or credit. If you're established (aka not
just starting out), it's much easier for a bank to see you as stable. If you
have no track record of success, a line of credit will almost always be
secured by some salable asset: real estate, accounts receivable, inventory,
etc. If the business does have the necessary assets, then you'll have to
secure the debt by using your personal possessions up for collateral.

~~~
akrai
Just out of curiosity, what options are there for businesses just starting out
with little assets to offer as collateral? Are there banks taking a sort of
“venture style” approach to opening lines of credit where they offer them to
businesses whom they think have a high probability of success (and therefore
paying the loans)? In this case, the lender would be assessing the strength of
the business they lend to similarly to a venture capitalist. And if this is
not already available on the market, do you think it would be appealing to
startups?

~~~
shoo
I don't understand how it would be similar to VC. What is the upside for the
bank?

~~~
akrai
The bank would be paid interest on the loan. By VC I was just trying to put it
in analogous terms. Basically, rather than judging whether the loan will be
paid off based on the company’s past income/assets/etc the lender tries to
determine whether it would be paid off by judging the company’s future chances
of success.

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idlewords
I use a credit card that at this point has a $30K lending limit to fund things
like hardware purchases. I suspect you'll hear something similar from most
small outfits, since it's essentially impossible to get a bank loan at this
size.

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mirimir
I had a ~$50K line of credit from a local bank, when I was working as a
consultant. As I recall, I provided maybe five years of federal tax returns.
My gross income was ~$100K at the time, but I could go months earning nothing.
There was no requirement for collateral. The interest rate was pegged to
prime, and about twice the usual mortgage rate.

~~~
akrai
Thanks for replying! I was wondering if you used the line of credit mainly to
cover cash flow needs or to fund business growth?

~~~
mirimir
I used it for both. I also had a couple business credit cards, as backup. The
interest rates were much higher, however. For me, business growth mainly meant
buying more gear, and improving my server room, network, and so on.

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dawhizkid
I see ads for Brex all around SF for corporate credits cards w/ no personal
guarantee.

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debatem1
In the past I've used lines of credit up to roughly $50k. They didn't require
a lot to get started and I think we peaked at about 50% utilization. Happy to
answer questions.

~~~
PopeDotNinja
Just be careful. If you rely on a line of credit, and the bank decides to
close that line of credit, that is a good way to kill your business overnight.

~~~
akrai
Ah. Very good point. Thanks for letting me know — this is something I wouldn’t
have thought of otherwise.

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simonjgreen
As an organically grown business, rather than investment funded, we live on
credit. We flex through an overdraft every month and we make all purchases
larger than £10k on HP.

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luxuryballs
Not mine but a family member, frequently waiting to get gov contracts paid,
can take months, but still has to make payroll, uses credit all the time to
cover the gaps.

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charlesdm
Depends on the country. In the EU many countries make available debt for
growth purposes, generally supported by EU funds.

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andrewljohnson
We got a line of credit via Wells Fargo, but like all the business credit
cards, it’s personally guaranteed.

