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Ask HN: Has your company ever needed a line of credit?
60 points by akrai 23 days ago | hide | past | web | favorite | 57 comments
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?

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.)

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.

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.

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?

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.

Thanks for the input. That’s very helpful!

Why do you think small business loan fraud is so high? What could be done to prevent it?

That’s a great question. I’m wondering the same thing.

I worked for OnDeck for almost four years. I really like their business model/product.

You hit the nail on the head with regards to why banks don't like "small" loans. It costs them almost as much to underwrite a $10 mil loan as a $100k loan, so they know which of the two they prefer.

10% of topline is frustratingly low. To make matters worse, my bank wanted to total debt to fall in that realm so the existing credit cards kept us from getting the loan at all.

The 10% is based around the assets they think might be recoverable if you default - So it’s fair for them to consider all the other companies/debt which will be fighting for a slice of that pie in a default scenario.

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-...

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.

BDC required profitability and would loan out based on my expected ability to repay. I borrowed around 300k at max from them.

EDC will finance a whole export contract you have up to millions based on the client being teputable and the export contract being legit.

Personal personally backed Visa usually are in the range of 5k to 30k range. Personally backed line of credit is usually up to 70% of your paid off mortage value.

All this depend on the amount you are asking for.

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!

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.

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.

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.

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).

Thanks for replying! That was very helpful!

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.

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.

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 (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).

I was talking about large, established suppliers dealing in large volume, not you, unless you have a special AR department with multiple employees. what these established suppliers love is sales, growth, and especially reorders. obviously they need to be paid but establishing repeat channels is the most important for them.

At the time, I had the perspective you just stated, and I thought large suppliers had the same perspective. they don't. (as the other reply to you stated.)

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.

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.

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.)

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.

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.

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!).

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.

> 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.

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?

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.

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?

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

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.

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?

A few options: wait to start a business (what most people should probably do), get friends and family to invest (this is a good way to lose friends & family), make money the old fashioned (hint: it involves earning it). You also have the option to borrow money using credit cards, but I recommend against this. You could sell your $100,000 Magic The Gathering card collection on eBay, too.

Or do what I did... after you max out your credit cards, use money you saved up to pay for taxes to fund a business, run out of money, and end up homeless with $200,000 in debt (including student loans).

You have also just discovered why there are early stage investors. If you create an app has some potential to make billions that attracts millions of active users in a month, but doesn't make a dime now, no bank will lend you money the 16 million USD you need to keep building that. But if you convince a tier 1 VC (Accel, Sequoia, A16Z, etc.), to invest 12 million, an early stage bank might lend you 4 million USD, using your big pile of VC money to secure the loan. Just remember that raising money the first time is super hard. You can easily run out of real money by spending too much time trying to raise money (which will suck extra bad if you are living off the money you set aside to pay taxes).

Or you can just say "fuck it", go for it, and hope for the best. When I was homeless, I kept hustling, managed to get my hands on a check for $5000, turned that into a business with 15 employees and sound it a couple years later, and sold it for $200,000. You can read a very polished version of that story in my LinkedIn profile (link in my HN profile).

If bank sees the risk too high to underwrite it themselves. Typically when there are no assets and collateral in the firm, banks require someone else to underwrite the loan. Bank underwriting is one of the areas where machine learning is used to evaluate risk.

It can be you if you have property or assets, it can be your parents, friends etc. with assets. If you can't pay the loan, they will answer for it. It's kind of 'sponsored underwriting'.

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

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.

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.

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.

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

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.

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

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.

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.

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

Hi! Thanks for the response. This was very helpful. Do you want to get in touch via email for further discussion? You can reach me at ashutoshraiofficial@gmail.com.

I can discuss here or there-- being blunt, I probably won't say anything over email I wouldn't say here. Up to you if you'd prefer to take it private.

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.

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.

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

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

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