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Think of companies like Google, Facebook, and Apple. Did they rely solely on their own money for growth? No. Even if you now have strong sales and plenty of cash in the bank, the day will come when you need additional cash backing to get you through an unexpected turnaround in your business. It may be the loss of a key supplier, partner, employee, or customer, but the companies that beat the odds are the ones in a position to tap into OPM to see them through tough times when they come. They don’t have to rely on their own cash reserves because they followed a clear plan from day one to build good business credit.
Most business owners learn the hard way that the day they need credit is not the time to start building it.
George Ross, Donald Trump’s lawyer, said: “The time to go to the banks is BEFORE you need the money.” Likewise, the time you start building business credit is the time you form your business entity. That’s when the commercial credit bureaus will begin to develop a file on your business. They say that the best day to plant a tree is ten years ago, and the second best day is today! If you missed that sweet spot, NOW is the time to build your business credit profile so you’re in a position to help your business grow.
These are not just opinions. The greatest authorities in the world of credit agree that this topic is of vital importance for small business owners. What do they have to say?
The Small Business Administration (SBA) is clear about the importance of a business credit report. “If you’re already in business, you should be prepared to submit a credit report for your business. As with your personal credit report, it’s important to review your business credit report before you begin [SBA] application process.”
According to Dun & Bradstreet®, risk management is critical to the success of all businesses. That’s why banks, vendors, suppliers and partners use D&B® data to check a company’s creditworthiness before entering into any contractual agreements. They advise all lenders to verify a company’s ability to pay on time before establishing credit terms.
The Equifax reporting office issues similar warnings. “Understand your business relationships! Before you sign a contract with a key partner/supplier or ship that big customer order, make sure you know who you’re doing business with.”
According to Corporate Experian®, creditors and vendors are increasingly using business reports to make credit and loan decisions. That’s why it’s important to establish a separate credit report for your business. If your business is new, or if you haven’t yet established business credit, obtaining business lines (vendor lines of credit) is a great way to start building your business credit report.
They go on to say that, “A small business score is vital to separating your personal and business financial risk. As a forward-thinking small business owner, you know that credit affects your ability to raise capital to grow your small business.” Your business credit report can influence:
- The amount of your loan and the interest rates you will pay
- The cost of your business insurance premiums
- The credit terms that your suppliers will extend to your company
Entrepreneur Magazine stresses the importance of keeping business credit reports separate from your personal credit. “Less than 10% of all business owners truly know or understand how business credit is established and tracked, and how it affects their lives and businesses. The conventional wisdom has been that there are no consequences for using personal credit cards, lines of credit, home equity credit or a personal guarantee for a business. While it may make getting started easier, your personal assets may be at risk if vendors pay late, contracts are suspended, or orders are cancelled.”
That’s a sample of what the big business credit sources have to say on the subject. So what about the sources of the money? Here’s what the big banks are saying about the importance of business credit and how they lend money to business owners:
Both Citi® and Wells Fargo® say that business and personal credit are important factors when making decisions about business loans and lines of credit. Here are the “Five C’s” of business credit approval that Wells Fargo considers:
- Character. What kind of borrower will you be to the bank? Your best clue to your character is your personal credit history. They will always check to see how well you have managed your personal debt in the past. Personal references, business experience, and employment history can sometimes substitute if you don’t have a personal credit history, but strong personal credit indicates that you have the will and discipline to pay off past debts and future obligations.
- Credit. Banks use a credit reporting agency to view your payment history with business providers and other business obligations. They also verify that your payments to other financial institutions are up to date.
- Cash flow. A bank will generally be a cash flow lender. That means they will look at your business’s cash flow as the primary source of payment for the money they lend you. A company’s cash flow is its net profit, plus its non-cash expenses: depreciation and amortization. Our rule of thumb is that for every $1 in total loan payments, your business should generate $1.50 in cash flow.
- Ability. They want to know how you will be able to repay the loan in the event of a sudden downturn in your business. Do you have the ability to convert other assets into cash, either by selling them or by borrowing against them? This could include real estate, certificates of deposit, stocks, and other sources of savings that can be quickly liquidated.
- Collateral. Many banks provide secured and unsecured loans. With a secured loan, you pledge something that you own as collateral. They can be personal property such as certificates of deposit or stocks, or business property such as real estate, inventory, equipment, or accounts receivable.
So now that we have some background on the importance of strong business credit, let’s get specific about how it works and how to establish it. There are three critical questions that all new business owners should consider, even before their first day of operations:
1. How long does it take to build proper business credit?
Business credit is a generic term, but there are two main types: cash lines of credit and vendor lines of credit (also known as business lines). When we talk about business credit, most people think of bank lines of credit that are immediately available like cash. Most new businesses can’t qualify for these until they set up business lines with providers who will report their payment history to business credit bureaus. It can take 2-4 years to build strong business credit profiles with the Big Three, Dun & Bradstreet®, Corporate Experian®, and Corporate Equifax®.
That is if you do it right and if you work with providers who report to these offices. There are more than 50,000 providers that provide business lines of credit, yet less than 10% of them report to the bureaus. For this reason, chances are that even if you are paying all of your providers on time, your scores are low or non-existent. Establishing business lines with suppliers is not the only way to quickly start building a business credit profile, but it is one of the most important. That track record becomes critical when you apply for cash lines of credit with banks, business account cash advances, or SBA loans.
2. What are the consequences if I make a mistake?
This is not like your personal credit score where if something is inaccurate you can send a letter to Transunion®, Equifax® or Experian® and they are required by law to respond and meet certain standards of fairness and responsiveness.
Commercial credit bureaus have no such rules. The system is much less forgiving and much more difficult to navigate. There is no oversight on how they operate or when and how they update their file based on their entity’s EIN number. You really only get one chance to build your profile right from the start. Any mistake, as small as having a wrong digit in an address (or worse, being out of compliance) can “red flag” your business and YOUR NAME as high risk for this and any other business you form in the world! future!
3. Is this something I can leave for later?
As you can already see from the previous two questions, waiting until later is extremely risky. Building business credit is a process that requires a system to do it quickly and accurately! Following a proper sequence to get the best results in the shortest amount of time is what sets Fast Business Credit apart. The other factor is honesty. When you work with Fast Business Credit, we let you know up front how much credit your business can get, what types are available to you, and how long it will take.
No matter what you may have heard, there is no “cookie cutter” approach. Results will vary just as they do in personal finance. This will depend on several factors, including but not limited to length of time in business, gross income, net profit, business account income, your personal credit, how many vendors are currently reporting, and much more.
Dont wait! Here are the initial steps you need to take to ensure creditors and vendors can validate your business information:
Incorporate or form an LLC (Limited Liability Company) to ensure your business is seen as a separate business entity
Get a federal employer identification number (EIN)
Open business bank accounts in your legal business name
Set up a dedicated business phone line in your business name and make sure it’s listed
To be successful in all of today’s changing economic environments requires your business to be both credible and bankable, and that requires a system to quickly (and accurately) build business credit! Take the next step and call Fast Business Credit today at 1-888-313-6333 to make an appointment to speak with one of our business credit specialists. You will quickly find out what results your business will experience and how simple our system really is and why you will get results too!
Creditable sources:
http://www.experian.com/small-business/small-business-credit.jsp
http://www.sba.gov/content/business-loan-application-checklist