Think of companies like Google, Facebook and Apple. Did they rely only on their own money for growth? No. Even if you now have strong sales and plenty of cash in the bank, there will come a day when you need additional cash backing to get you through a 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 that are in a position to tap into OPM to get 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.” Similarly, the time to start building business credit is the time you form your business entity. This is when the commercial credit bureaus will begin to develop a file on your business. They say the best day to plant a tree is ten years ago, and the second best day is today! If you missed that ideal starting point, NOW is the time to develop your business credit profile so you’re in a position to help your business grow.
These are not just opinions. The highest authorities in the world of credit agree that this issue is of vital importance to 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 beginning the [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 turn to D&B® data to check a company’s creditworthiness before entering into any contractual agreement. They advise all lenders to verify a business’s ability to pay on time before establishing credit terms.
The Equifax reporting bureau 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 lending and credit 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 established business credit yet, getting 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 commercial 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 entrepreneurs really know or understand how business credit is established and tracked, and how it affects their lives and business. A personal guarantee for a business. While it can make it easier to start, your personal assets can be at risk if suppliers pay late, contracts are suspended, or orders are cancelled.
That is a sample of what the big sources of business credit information 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. These are the “Five C’s” of business credit approval that Wells Fargo considers:
-
Character. What kind of borrower will you be for the bank? Your best clue to your character is your personal credit history. They will always check 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 see your payment history with business vendors and other business obligations. They also check 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 consider the cash flow of your business as the main 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 general 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 turn other assets into cash, either by selling or borrowing against them? This could include real estate, certificates of deposit, stocks, and other sources of savings that can be liquidated quickly.
-
Collateral. Many banks provide secured and unsecured loans. With a secured loan, you pledge something you own as collateral. They can be personal property like certificates of deposit or stocks, or business property like 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 business:
1. How long does it take to build adequate 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 establish lines of business with vendors 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 vendors who report to these offices. There are more than 50,000 providers that grant 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 vendors on time, your scores are low or non-existent. Establishing lines of business with vendors isn’t the only way to quickly start building a business credit profile, but it’s one of the most important. That track record becomes critical when applying 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 fairness and responsiveness standards.
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 your file based on your 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 even worse, being out of compliance) can “red flag” that your business and YOUR NAME are high risk for this and any other business you form in the future! future!
3. Is this something I can put off for later?
As you can already see from the two questions above, 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 obtain the best results in the shortest possible 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 such thing as a “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 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 should take to ensure creditors and vendors can validate your business information:
Incorporate or form an LLC (Limited Liability Company) to make sure your company looks like 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 company name and make sure it’s listed
Succeeding 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 schedule an appointment to speak with one of our business credit specialists. You’ll quickly discover what results your business will experience and how simple our system really is and why you’ll get results too!
Creditable sources:
http://www.experian.com/small-business/small-business-credit.jsp
http://www.sba.gov/content/business-loan-application-checklist
