How to secure a line of credit for your business

Black Enterprise, Jan, 1994 by Carolyn M. Brown

Cornell McBridge Sr. knows hair care. The 50-year old former president of M&M Products, founded in 1973, helped groom the hair-raising success of Sta-Sof-Fro Oil Sheen and Comb Out Conditioner - a brand leader among 88 competing labels for nearly two decades. But McBride had to end what he describes as a "bad marriage" with his partner. So in 1990, M&M sold its four brands to Johnson Products Co. for $5 million.

The breakup, however, didn't spell the end of business for the hair-care guru, who three years later founded McBride Research Laboratories in Decatur, Ga. Today, his popular lines, Wave By Design and Design Essentials, are sold at hair salons nationwide.

Despite his 20-year intimacy with the industry (he is also a licensed pharmacist), McBride had a tough time getting back into business. What he needed most was money - specifically, a $600,000 line of credit - which he hoped to obtain by putting up $2 million worth of land as collateral. To his surprise, five lenders deep-sixed his application, and even his long-standing personal and business banker said no.

After months on the chase, McBride finally scored at black-owned First Southern Bank, based in Lithonia, Ga. "First Southern believed in us. They were willing to give us a chance to live up to our experience," recalls McBride, who eventually managed to get a $300,000 line of credit.

THE HARD LINE ON LENDING

Today, with sales increasing by more than 20% annually, McBride woeful tale is just an unsettling memory. But a full three years after the height of recession, many other entrepreneurs are facing the exact same barriers. The hard reality: Banks are not willing to take on a lot of risk. In fact, since McBride's struggle in 1990, business lending is down by 16%, according to the American Bankers Association. As for start-ups like McBride's? They have the slimmest chance of obtaining a loan. Due to high risks and failure rates, commercial lenders rarely fund new businesses.

"Bankers aren't in a financial position to do (what amounts to) venture capital lending," explains Ellis Gordon Jr., chief credit officer at Los Angeles-based Founders National Bank (No. 18 on the BE Financials List). Indeed, the SBA discovered that equity for 70% of black-owned start-ups come from friends, relatives or personal savings - not banks.

Some business owners argue that if the banks truly want to reach minority communities, then they need to be more sensitive to African-American entrepreneurs. Maybe so. After all, business lending is a highly subjective process. For better or worse, loan officers exercise a great deal of individual leverage in granting or denying credit.

How, then, can you improve your chances of qualifying for a line of credit for your business? First, make sure you understand how business credit lines work - whether or not they suit your special needs. If it makes sense for your company, you'll want to read on and follow the guidelines we set forth.

THE LOWDOWN ON CREDIT LINES

A line of credit can potentially open a huge door for entrepreneurs. With a revolving line, the most common type of credit line, one can borrow as little as $5,000 or as much as $1 million, drawing on, and replacing, the funds as needed. At the end of the year, the credit may be renewed. (A regular term loan, conversely, is a one-time deal with a set payout period of, say, one or five years.)

A line of credit offers another advantage: Unlike term loans, which require repayment of both interest and principal, borrowers pay interest charges only.

This type of loan also allows businesses to take advantage of special discounts offered by suppliers or to gear up for a special sales effort, such as a seasonal line of credit. Or it can tide the firm over until deadbeat customers pay up.

According to a survey by the Washington, D.C.-based National Federation of Independent Business (NFIB), roughly three-quarters of business owners use lines of credit for working capital. Granted, these firms aren't small potatoes: The NFIB found that businesses with $750,000 and above in gross receipts were most likely to have a line of credit.

As McBride's case demonstrates, a line of credit is generally used to maintain or expand a business - not to start a new one. There are exceptions, though, as James W. Hammersley, deputy director in the SBA office of financing, explains. "An entrepreneurs who has been in business for only a short time could go to a lender and say, |I produce lawn chairs and I need to buy 1,000 pounds of aluminum. But it will take two months to build the chairs. I already have a contract to sell them, but I need money to purchase raw materials.'" Hammersley says the SBA loan officer would probably review such application favorably.

But nothing is that simple. Just ask John L. Sims, president of Philadelphia-based Tri-State Marketing Corp. He has spent the past two years searching for a $25,000 line of credit for his company, which supplies uniforms and other career apparel to Playtex, Du Pont, Rite Aid and similar large companies.