You know that credit is important, but how do you build it and how do you use it to access capital?
Introduction to Financing
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Introduction to Financing
You can build credit and access financing as an independent contractor or small business owner regardless of immigration status. This topic will provide you with a foundational understanding of credit, why it’s important, and how to build credit and use it to access capital.
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What is Credit?
It can be difficult and confusing to navigate credit without immigration status or eligibility for a Social Security Number (SSN). However, it’s important to know that even if you do not have a SSN, an Individual Tax Identification Number (ITIN) is an alternative that allows you to build credit, open a bank account, and file your taxes.
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Credit Score
Credit is all about building and maintaining trust in your ability to repay debt. Imagine you are having dinner at a local hometown restaurant. When you receive the bill you realize that you’re short on cash and ask the waiter if you can pay later. The waiter kindly agrees because he/she knows you and trusts that the bill will be paid. However, what if you are not in your hometown and you are a stranger to the waiter, chef, and owner? It is necessary to have an agreed upon way to prove your trustworthiness.
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Your Credit Report
It’s easy to forget about something like your credit score in the hustle of everyday life, but it’s important to check in on your score from time to time. You don’t want to wait until you are applying for a needed loan to find out that your credit score isn’t where it needs to be.
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Secured Credit Cards
Check with your local bank to see if they provide a secured credit card option. This service allows you to use your own cash as a line of credit. You make purchases with your secured credit card and make payments as you would with any other type of card, including interest. The bank will report your payment history to the credit bureau and after a year of successful payments they will return your cash and transition your card into a regular credit card.
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Accessing Credit
Now that you know what credit is all about you might ask “what if I don’t have credit yet but I still want to start a business and need to borrow money?”
The first thing you should do if you are ineligible for a SSN is apply for an ITIN. You can complete your ITIN application through the Internal Revenue Service by filling out form W-7 - Application for IRS Individual Taxpayer Identification Number. This number does not authorize work in the US or give you eligibility for Social Security benefits, but it does allow you to open bank accounts, establish credit, and file a US tax return.
While this may seem like a hurdle, it is well worth the effort to take charge of your US credit profile as good credit will give you more freedom and flexibility in the long run. Make sure all of your good borrowing activity gets reported to the credit bureaus and recorded to your credit report using your SSN or ITIN.
Undocumented immigrants in the U.S. face a number of challenges, but building credit doesn’t have to be one of them. Avoid predatory lenders, such as payday loan companies and other high-interest, high-fee loans, and seek out legitimate banks and credit card companies. If you are just starting out with your credit there are two great products that you can access to start building your credit history.
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What Lenders Look For
Let’s say you’ve decided to approach a lender about borrowing money so you can grow your business. You can use your Individual Taxpayer Identification Number (ITIN) to build credit and access capital even if you are ineligible for a Social Security Number (SSN). The ITIN is a social security number alternative used by the IRS to account for tax returns and tax payments of resident and non-resident aliens, regardless of immigration status.
Your credit score is a key component in how lenders will assess your eligibility for a loan, but it’s not the only factor. Lenders look at five primary factors:
- Credit: how likely are you to make payments on time and pay off the loan?
- Liquidity: do you have assets such as stocks, mutual funds or accounts receivable that you can turn into cash quickly to pay back your loan?
- Collateral: you might be asked to provide something of value such as real estate, equipment or inventory to back your loan.
- Capital: what is your income and available cash?
- Character: how responsible have you been with your past debts?
Link to check your credit score: AnnualCreditReport.com
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What Borrowers Should Look For
It might seem like lenders hold all the power, but the decision making power is in your hands as well. Watch out for predatory lenders who offer “easy” loans with unreasonably high interest rates or unrealistic pay back periods. Pay close attention to fees and interest rates when you go to apply for a loan.
Even though it may seem like a hurdle it’s actually a good sign if a lender is asking you a lot of questions because it means they want to make sure you are making a financially sound decision. As a responsible borrower you should be looking for four pieces of information from your potential lenders:
- Terms & Conditions: terms include the interest rate, monthly payment requirements, associated penalties, or special repayment provisions.
- Interest Rate: pay attention to the interest rate and whether it is fixed or variable.
- Fees: there may be start-up fees, late fees, or other administrative fees.
- Client Services: make sure your lender is someone you want to work with long-term and that they treat you with respect.
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Small Business Capital
You may be wondering why your personal credit history matters if you’re looking to borrow as a business rather than for something personal. A lot of times when you are just starting out as a small business, lenders will want to look at your personal credit history.
Fortunately, there are a couple of well known organizations that aim to help small businesses access capital.
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Small Business Administration (SBA)
One of the most well known and trusted is the Small Business Administration (SBA). This is a nationwide organization that is well connected with many helpful local resources and services. If you do not have a social security number you can still access SBA loans but you will need a cosigner for your application.
Alternative Lending Options
Alternatively, there are many lending options that do not require a SSN or co-signer such as business credit cards from local banks, Community Development Financial Institutions fund, and Opportunity Fund. You can also visit lendingcircles.org to access potential capital as well. A chart with more details about different funding options is included below. As your business grows you will be able to build business credit just like you build your personal credit.
There are also a number of helpful resources available through federal and non-profit agencies (see resources section).
