Have You Confused Your Personal and Building Business Credit?
With all the concerns about house buying and mortgages these days, personal credit is always in the news and on everyone’s minds. If you are starting a business or even running a successful one, you may forget that this personal credit is a whole lot different than your business credit. When going to get a loan, you may get a rude awakening: Since you haven’t built up any business credit, the bank may just give you a “thumbs down.”
Don’t Be Surprised When Your Business Credit Gets Nixed If you don’t actively set up a business credit, you will probably not have one. When the lender tries to pull up your business file, there will be very little to see or nothing at all. This may come as a shock to you, because all of the equipment that you’ve put on credit, as well as your business overhead or cars. You may even have a number of employees working for you and a growing organization. The problem: Giving it no thought, you’ve been using your personal credit cards.
You Need a Dual Package of Good Business Credit and Personal Credit In most situations, it's important that new small business owners have both good business credit ratings and strong personal credit. This is especially true these days where investors aren't giving loans to someone just because this person has a great idea and a business plan. Businesses that have been around the track several times will find it just as important to provide a personal guarantee on some loans or credit cards. The Patriot Act has also made the lending situation more difficult. The banks want to know who they're
lending to behind the corporation name. They will be checking both your business and personal credit scores, and they’ll want to make sure that there’s no overlapping between the two.
New Business? Start Building Credit Now. Established Business? Get Going! A business and personal credit may be important, since a lender will want to see the ratings on both. Yet, that still means that you need to keep your business and personal credit separate. Building business credit is completely different from building personal credit. And, all the laws that protect consumers with their personal credit—they do not exist for businesses. It’s very important that a new business owner has everything in place from the word “GO,” so changes are not needed later on. If you are an established business, it will take longer to get that credit going. And, you’ll probably need some loans with a personal guarantee before you can get some without. Regardless of new or established business, the rules are the same: 1) Personal and business credit do not mix and 2) The time to start building credit is immediately.
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Business Credit and Personal Credit: Never the Twain Shall Meet
Especially when the economy takes a dip and money is tight, we see this happen time after time every day with small businesses--They use their personal credit cards to pay for
business expenses, hoping to one day, “some day,” pay themselves back. Well, we all know, that “someday” doesn’t come at all, or doesn’t come in time. Typically, the businesses just don’t make as much money as they had hoped, or as quickly as expected. Or, they are not able to pay themselves back as fast as they had promised their spouse, kids, friends, and family.
You’ve Maxed Out on Your Personal Credit. Now What? Let’s say you max out on your personal credit cards. What happens next? It’s simple. Your credit card score heads downward. Then, you decide to get some credit to build your business. You need a little bit of cash to cover payroll, some supplies or a small loan for a new piece of equipment. You head over to the bank. The lender pulls up your credit and sees no established business credit. And, to top it off, the lender also sees that your personal credit cards paid the business expenses, the credit cards are now maxed out, and the ratings are going down.
Keeping Good Business Credit Means Not Using Personal Credit Using personal credit for business expenses reflects on the way the rest of your organization is managed. It doesn't matter if your business has been growing and just needs a little boost. The bottom line is that your personal credit cards have reached their allowable funding level, and the credit rating is dropping. Naturally, the bank declines the loan. Now your business needs funding, and there’s no more available money left with the personal credit card. You’re stuck and it’s going to be a slow and arduous process building the credit rating again. It’s doable, but it will take time. How much better it
would have been if you kept your personal and business finances entirely separate from day one. ****** NEW POSTS (May 9, 2008)
It is Incredible: Business Owners Do Not Know about Business Credit
You would assume that small business owners, especially those who are running a profitable business—for years, even—do not know the ins and outs of building their business credit. It isn’t until these astute businesspeople apply for a loan that they discover they’ve be going about it the wrong way. These business owners don’t even know business credit exists as an alternative to putting up their personal savings, retirement, and home equity. And so that's what most of them do, instead of building up their business credit separately. So, the sooner they find out they need to separate their personal credit from their business credit, the better off they will be in the long term. They should not wait until it’s time for a loan. That’s way too late in the scheme of things. When it's time to get financing, they frantically go searching on how to do it.
Dry Cleaners Learn to Keep Business Credit and Personal Credit Separate Here’s a perfect example, for you. A wife was running a dry cleaning store, while her husband was still working a day job to make ends meet until everything was in place.
An opportunity came up where they could buy a second dry cleaning business. This was a perfect way to expand and for him to end his other job. Just like many business owners,
they didn't have the capital. They didn't have the down payment or even money to cover the closing costs. In fact, they didn't know anything about how to get a loan. Restructure and Rebuild Business Credit and Then Get an Unsecured Loan So, this husband-and-wife team restructured their current dry cleaning location by building a proper business credit foundation. They built their credit, got the high scores and the ratings, and then went to a bank for financing. They obtained unsecured business lines of credit that did not show up on their personal credit file. And then they used those lines of credit as the down payment for this additional dry cleaning center. Once the down payment and closing costs were in hand, they could easily finance the remaining amount, or the loan for the second business. And, just recently, they purchased their third location. They are growing, they are doing well. The husband is now working in the business. This was all possible, because they learned how to keep their personal and business separate. *******
It’s a Myth: An 80 PAYDEX Score Isn’t End All for Business Credit Loan
You’ve probably heard this myth at some point: Building a PAYDEX score of 80 suddenly makes banks want to eagerly hand out money for a business loan, without looking into the business' financials or personal credit history or even any sort of recourse, or holding the owner personally liable. If that were only the case! But, if that were true, banks wouldn't be in business very long any way.
Through Trent Lee, co-founder of Corporate Credit Concepts, I’ve learned that building a good PAYDEX score is only part of a four-tier credit building process. He calls this credit building “corporate conformity,” or establishing the credit foundation correctly in your business.
In the beginning it is usually necessary to provide a personal guarantee, especially when a business has not established any business credit. Here’s where the myth fails. Many business owners believe that by building their personal credit—using their personal credit cards and applying for personal loans—that they are building their business at the same time. Wrong! When the bank goes to pull their business credit file, there’s nothing there, even though they have been in business, perhaps for years.
It Doesn’t Matter How Many Years You’ve Been in Business without Credit And here is another common myth: So many businesspeople say, “I've been in business for X amount of years, and have a business credit card and (perhaps even a business loan). That means I have business credit.” Unfortunately, that's not the case either. It's not similar to personal credit where first you get a credit card or your student loan, or your parents co-sign on a car loan, and “presto!” you have a personal credit file.
That's not the case when it comes to business credit. With business, unless you specifically and actively know you have a credit file, you probably don't have one. And just because you've been in business for X-plus years, doesn't mean you have a business credit file. Before you go to a bank for a business loan, you will have to start from scratch
and begin the building process. But, that’s OK. It’s a beginning of a valuable step-by-step process that will put you in good stead for the future. *****
Build Business Credit Even When Personal Credit is a Problem
Here’s the story: You have a business that has been going quite smoothly for several years. Each time you needed extra overhead cash or to pay for something such as new equipment, you used your personal credit card or even a business credit card. All along you thought you were building your business credit. Now the business needs additional funding, but your personal credit is having some problems. At the same time, you find out that you really have not been building your business credit. What do you do? Well, the end of the story may not be as bad as you think.
I’ve learned a great deal from Trent Lee, co-founder of Corporate Credit Concepts, about this whole procedure of building business credit. It’s a four-tier process that he calls “corporate conformity,” or developing the foundation for future financing and growth. One of the things Trent stresses is that it is never too late to start this credit building process. It may take a little longer, depending on the situation (even Rome was not built in a day!), but it can be done.
A Broken Credit Rating can be Repaired with a Clean Slate of Business Credit So what can be done in such a situation? According to Trent, you can build business credit regardless of your personal credit. You are still able to get trade lines, a good PAYDEX score or rating, vendor credit, and credit cards without a personal guarantee--
that is, an unsecured loan. But, you are going to be limited to how much funding you can get from a lender that's actually giving you cash or equipment.
The first step in the four-tier process is opening a credit file on your business. There are vendors who are especially available to open a trade line with a new business or one that does not have much of a business credit file. They report to the business credit bureaus.
The places where you start are with trade suppliers like your local print shop or office supply. Many of these will give your business a small line of credit and payment terms. But first make sure that they will report to the credit bureaus how your business pays. If not, you are wasting your time. You will need several of these smaller accounts. Think of it as starting all over again with a clean slate. That’s a pretty nice way to begin. *****
Start with a Brand New Credit File, Not a Repaired Business Credit
If you have been using your personal credit to establish credit, I’m sure you’ve found out by now that’s not the way to get a bank loan. Banks want to see an established “business” credit, not “personal” credit. This doesn’t matter how many years your business has been successfully run.
If you want to have credit file with Dun and Bradstreet, it is not going to happen just because you have been in business, have a business credit card, or maybe have some credit with someplace by Office Depot. And it certainly does not mean you have any business credit history.
I’ve learned a lot about this whole process of setting up a business file at Dun and Bradstreet from Trent Lee, who is a guru in business credit. He says it is important to have contacts at D&B, otherwise the business is going to pay too much to get the file set up. They are in business to make money, too. He gives an example of one of his clients, a dentist. He had been in practice under the same business entity for 40 years. He was getting ready to sell his practice and wanted to build his business credit. Forty Years in Business and Still No Business Credit for Business Loans! When Trent pulled the dentist’s file to do some research, he found that there was no business credit history, or business credit presence, at all. This was after nearly a half a century of work! So just because you've been around and have some sort of history with credit, it surely doesn't necessarily mean you have a business credit file set up. And that's why Trent helped the dentist fill out an application, look at the options that were available to set up his business credit file and manually set that file up on behalf of the dentist with Dun and Bradstreet. The key to establishing small business credit and getting a business loan, says Trent, is correctly setting up the file with the business credit bureaus. It needs to be manually, not automatically set up. That’s important to remember. If a business calls Dun and Bradstreet to get a credit file going, they'll try to sell some kind of a package. The business owner will be transferred to a commission-based sales representative, who will push the very most expensive package when it's not necessarily the one that that is best.
Several D&B Credit Building Packages to Establish New Business Credit There are several packages with Dun and Bradstreet to establish corporate credit. The first option is called the D&B Credit Builder Package. Most businesses will not need this option. It costs nearly $600.00. This is the package that the salespeople are going to pitch the hardest and most often. However, there are other, much less costly options. *******
Establish Business Credit with D&B without All the Bells and Whistles
I’ve learned a lot from Trent Lee, co-founder of Corporate Credit Concepts, about the ins and outs of establishing small business credit and how to get a business loan. He calls it “corporate conformity.” One of the areas of real interest is getting a business credit line from Dun and Bradstreet. When a business owner calls D&B, the salesperson will pitch the most expensive package, which runs about $600.00. This allows the owner to set up a credit file, as well as six references in the business file. That's important because with Dun and Bradstreet you typically need four or five references, or trade accounts, or trade references, to generate a PAYDEX score.
This sounds very good, since you can add up to six references and have a PAYDEX score immediately. It appears as if in one week the references will be verified and you will have a file with history and a PAYDEX score. What they don't tell you is that these references must be in D&B's system. That is, these references need to have their own credit file set up with Dun and Bradstreet with a rating, for a particular amount of months, or, in most cases, at least one year.
Establishing Corporate Credit Package with D&B Not as Easy as It Seems Here’s the problem. A lot of these business owners who try and do this on their own get sold this $599 product. They put six references on their file--businesses that they've done business with in the past. By the way, this information is carefully verified. You can't just put your friends and family on the list. The D&B rep will call and verify that the business has a corporate line of credit and payments have been made on time. If the references do not qualify by D&B standards, they are not called. And let's face it, although Dun & Bradstreet has a vast database of businesses, most business owners, nationally speaking, don't qualify for this. They have not been in D&B’s system with a rating for over a year. So, the business owner, who just paid $599 to be added to the file, only has one or two names. For larger businesses, this package is recommended. It is a quick way to establish business credit and build a PAYDEX score and added history. The business owner has to talk with the rep to see if he/she will qualify and then decide whether or not to get the larger package. *********
Getting Small Business Credit with a DUNS Number and Credit File
Establishing business credit is a step-by-step process. Trent Lee, a guru in this area, says it’s a four-tier process of building small loans to eventual unsecured financing.
One of the first steps is establishing a credit report with Dun and Bradstreet. Trent does not recommend the $599.00 package from D&B, unless it’s a larger business that has established higher credit with four or five businesses that are in the D&B system.
The next package is $329.00. This is basically the same thing as the $599.00 one, except that the business owner cannot add six references. You will be provided a DUNS number, and your file will be set up, and you will get a rating. That’s important. D&B also has an option to get a free DUNS number. The sales representatives with D&B will just flat out tell you that with a free DUNS number, you can't build credit, you can't obtain a PAYDEX Score you can't have trade lines added to your file. That is absolutely not the case.
Misunderstandings about DUNS Number and Building Corporate Credit With a free account, you can build a PAYDEX Score. You can, with a free account, get some trade lines on your file, but you will typically not get a rating. And a D&B rating is an important part of what the lenders look for in your business credit report. With a free account, your rating will either show a dash-dash, two little dashes, or a DS. And a DS basically means a DUNS support file, or a marketing file, which is worthless. It basically discredits everything else that's on your account. Also, it takes 30 to 45 days to obtain, and you do not get an account rep.
Overall then, the $329 is usually the best D&B package since you get the rating, and, most importantly, you get an account representative. When your file needs corrections or
to be updated, or has some derogatory information, you now have someone on your side.
Once that file is set up, you will be given a DUNS number that correlates with your specific business credit file. And, you will get a PAYDEX Score of 80 or higher. With that in hand, you can build up some good history. Keep in mind that just because you have a PAYDEX Score, does not mean that the banks will suddenly become donation centers and want to give you all sorts of money without ever wanting a personal guarantee. The PAYDEX Score simply reflects how you pay your bills on behalf of the company. The banks want to look at what's behind that score. ****
How to Build Corporate Credit after Getting DUNS Number
Once a business owner gets a DUNS number, establishes a credit file with D&B, and has a PAYDEX Score, then it is possible to start building business credit. Trent Lee, who knows the small business credit business backwards and forwards, says there is a four-tier system for establishing a strong business credit. Once the business has the DUNS number, it is possible to work on the first tier of establishing credit.
For many businesses that are just beginning to establish small business credit, there may be four or five trade lines for $500 on the PAYDEX Score. That is not very much experience with a comparative credit limit when someone wants $50,000 from the bank. That’s quite a bit more than the business has ever showed as financing.
Building Small Business Credit While Going from Tier One to Tier Four Tier one is basically a list of companies that are known to grant credit—albeit small credit--to businesses having little or no business credit history. They are like a stepping stone. This is really where one needs to start the credit building process. The business has a file set up and a credit bureau presence, but no depth of history. It is now important to start building up that history.
Here's one thing that a lot of people don't understand about how business credit works, which can’t be emphasized enough: As businesses build corporate credit and go through the tier one, two, three and four, they want bank lines of credit or business credit cards for cash. That's understandable, since it is one of the end results in building business credit. But, as I mentioned before, this tier one through four trade credit process, is just a stepping stone. It’s More Feasible to Get a Business Loan Once the Business Credit is Built Here's the reason: When you ask for a loan, the lender is going to pull the Dun & Bradstreet report. D&B will set a credit limit recommendation, which gives the lender a recommended amount of credit to be extended to your business. If that figure is very low or high, the bank will use it as a guide for lending money. If someone goes to the bank right after setting up a bureau presence and has little or no history, rating, or trade lines, D&B will look at the total number of trade lines and at how much credit has been extended to the business and calculate the average amount of credit applicable. Depending on the history, this could greatly vary in size or be denied. ******
To Get a Loan Means Having to Build Small Business Credit History
If someone applies for a bank loan with very little business credit history, obviously the credit limit recommendation is going to be very low. This, in turn, will hinder the amount of cash possible from the bank or any other type of lender for equipment or an auto lease, for example. Thus, the stronger the business credit line built, the more trade credit established and, as long as the business is using this credit responsibly and working these limits increasingly higher, the credit limit recommendation is going to grow and make its way up higher and higher. It definitely makes a big difference when someone goes to the bank and applies with a credit limit recommendation of $40,000, because there is a business credit file to support this, instead of someone who has very little business credit history with a credit limit recommendation at zero or at best $5,000. The bank will look at those clients and lend two different amounts of money. It is therefore necessary to ensure that you use the right vendors, for the right trade accounts, and at the right time, in order to get the right amounts of credit. Then you gradually build your file and that credit limit recommendation. Small Business Credit Builds from Trade Accounts to Large Bank Unsecured Loans My associate Lee Trent, who specializes in this area of building up small business credit, established a four-tier system that starts with lower dollar loans—first tier—and builds up to major bank unsecured loans—fourth tier. In the beginning, or in tier one, you use your smaller trade accounts to build up credit history. The bank is not going to approve thousand of dollars if you do not have a business credit history—not even hundreds of
dollars. You may only get an approval for $50, or $100, or $250. That's where you have to start out, because there's such little history on your business credit file. You Need More than Small Business Credit. You Need to Use It and Pay For It. Now, just getting an approval is not enough. That really doesn't do anything for your business credit file at all, until you use it and show how you make your payments on this extended credit. Credit bureau vendors are reporting the payment history. If you never use this credit, it will never show up on your business credit file. However, when you use this account, get the bill and the invoice, and make the payment (most important, on time), action will occur—the vendors are triggered to report to your file, or to the bureaus, who will add these trade lines to your history. Then you build from tier one and so forth to tier four. *****
Establish Small Business Credit when Personal Credit Has Poor Rating
If there is one point that has to be made time and time again, it’s to think of the business and personal credits as two completely different entities. Keeping this in mind, then, even if your personal credit line is not the best, you can still begin to build your small business credit line. There are two options.
For example, what happens when a business owner has filed bankruptcy, which cannot be readily repaired. There are two options. Trent Lee, co-founder of Corporate Credit Concepts, has a system called corporate compliant where business owners move from a tier one level of financing, which is just $50 or $100, to the tier two, three and four,
where a bank loan for a sizeable amount can be acquired. This step-by-step process can be done when the personal credit is poor: They are not connected to one another. Here’s a breakdown of the four tiers: Tier 1 are vendors who will open a trade line with a new business or one that doesn't have much of a business credit file. And they report to the business credit bureaus. Tier 2 are vendors/businesses that will grant higher trade lines but only to businesses that have Tier 1 credit already established and reported to the business credit bureaus Tier 3 are vendors/businesses granting still higher trade lines but only to businesses that have Tier 2 credit established and reported to business credit bureaus. Tier 4 are banks and leasing companies that offer unsecured credit cards (only guaranteed by the business entity and no personal guarantees from the owner), and leasing of cars and equipment, all with no personal guarantees.
With the first option, the small business owner can work up the ladder from tier one to tier four by relying on business credit only. If his or her credit is beyond repair, it is possible to gradually work from tier one all the way up to tier four and apply for some smaller unsecured loans. And the other option is if a business owner has bad personal credit, it is possible to bring on a credit partner.
Need To Establish Small Business Credit with Your Bank? Use a Credit Partner
This credit partner can act as the guarantor on behalf of your business when you apply for bank financing. This is done all the time, quite easily. As long as you're set up properly to transfer the ownership to the credit partner and have the legal paperwork done correctly, you can work toward building your credit establishment. *******
You Are On Your Way to Apply for a Bank Business Loan !
You have been working diligently to build your business credit. You learned that personal and business credit do not mix, and have spent the last several months building your business history with D&B. Now get ready for the most exciting time--applying for bank financing. This is where you can actually get a checkbook from the bank and have the ability to write a check for $10,000, or $30,000, for whatever you need for the business. It will not show up on your personal credit report. And, it is all unsecured.
How do you know if you are ready for this process? You’ve completed all the steps that are needed: 1) You have your PAYDEX Score (and Experion Intelliscore), 2) files set up properly at the credit bureaus, 3) proper ratings with a correct amount of trade lines and 4) correct amount for the highest comparable credit on your business credit report.
Once Again, This Is Just the Beginning of Your Small Business Credit Process This is only the initial round of bank financing--really just the beginning. Unfortunately, too many businesspeople see it as the end result. They're going to apply for $50,000, or $75,000, or $100,000: That's all they need. They don't want to continue on. They make
the mistake of stopping right here. Or, the owner really jumps the gun and goes into the bank before building the business history.
If you continue with this step-by-step program, you can leverage that bank financing and turn $50,000 into $250,000 in a couple of months. Then, by the end of the year, you may be able to can it to $500,000. Just don’t cut yourself short. There’s a lot more financial growth for you by taking a long-term perspective.
Establishing a Small Business Loan Relationship with More than One Lender In most cases, you will not be going automatically from $50,000 to $250,000 credit at one financial institution. Instead, you will be going to several different banks for separate $50,000 credit lines. This way, you are adding up to that higher number and establishing credit credibility with more than one bank at the same time. You will also show them documentation, such as financials and business tax returns as you go along. *******
A $50,000 Small Business Bank Loan is Definitely Not the End All
You have been following a great process. You had been mixing your personal and business credit, but that mistake is over. Next, you spent several months slowly building up your credit from $50 from trade lines to $50,000 from a bank. Now you think that it will be down hill from here on in? Not really.
Now, just because you received $50,000 does not mean you will get the same again. The bank may come back, after looking at your business and personal file and only give you
$25,000. However, that’s all right, because you also applied to three banks for $50,000 each and received $25,000 times three. You now have a total of $75,000. It’s time to work those three $25,000 lines up to $50,000. Then you can work these up to a total of $150,000, or $50,000 times three banks. Then you are going to need documentation. There’s No Limit to How Many Banks You Can Ask for Small Business Loans You can now apply for several $50,000 loans at three or four additional banks. There's no maximum number of banks you can contact for financing. Overall, it will be the accumulation of smaller $25,000 to $50,000 lines of credit, times a certain number of banks that can get you to the high amounts of financing. With these credit lines in hand, then you can grow and develop the financials and tax returns. Then, you can go back to your original banks and others, as well, and apply for a $100,000 line, or a $250,000 line. Now you have strong business credit and some documentation, tax returns and financials to actually support the requests on behalf of the business. A Small Business Credit Coach Will Keep Your Business Lenders in Right Order The banks will not be concerned if you apply for three or four institutions at once for financing. .You just don’t want to overdue it with six, seven, eight, nine, ten banks. The bank will not understand what’s going on. And, it’s also important that you apply at the right bank in the right order. That’s important, because some banks are more choosy on inquiries than others. If you get yourself a banking coach, he or she can help you with this strategy.
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Apply for a Small Business Loan Completely and Accurately
Sometimes businesses become so concerned about getting financed, that they do not spend enough time on their loan application. This is an important part of the process that is very often overlooked and puts a damper on the transaction from the beginning. For example, it may seem fairly obvious, but even the borrower’s name may be wrong. If you are using a credit partner, you do not want to put your name down as the borrower. The borrower is the person who is the guarantor with the best personal credit, whether that is you as the business owner or someone to whom you’ve transferred ownership.
Banks are looking for 100 percent ownership. When they see an application with an 80 to 20 percent or 95 to 15 percent split, they will typically pull the personal credit report. If there are two partners in the company, one with great credit and the other one with mediocre credit, the latter can actually sour the deal for both of them. Forget applying as a 50/50 or even an 80/20 ownership, if one of the partners has a low rating. Make sure the 100 percent guarantor’s credit shines.
On the applications, the bank will ask for expected personal income during the time of the loan. You can’t just make up some random figure; it needs to be believable. Let’s say that last year your personal income was $80,000, and the business is continuing to do well. Your business will most likely grow somewhat, perhaps to $90,000 or even $100,000. That’s realistic. But you sure are not going to jump from $80,000 to an unrealistic $500,000, unless you can definitely prove it. It’s Simple: Just Tell the Truth and Whole Truth about Business Credit
Do not overstate or exaggerate, especially on an application. If your situation does change in the future, you don't want to be arguing against something you previously said. That’s a major legal problem, or even considered fraudulent. Stick to the truth and you can’t go wrong. If business owners are conducting their operations under fraudulent terms, they're just asking for problems. It’s better to lose the loan than get called up on misrepresentation.
The same goes for your account balances. Believe it or not, there are some people who actually say they have a $75,000 balance in one bank when it’s only $5,000. The bank may not be verifying it, because the loan is so small, but that does not make any difference. Put down what you actually have in the bank, not what you hope there to be one day. It is amazing what some business owners will try to get away with. *****
Requesting Small Business Credit? Stick to the Facts not the Fiction
Trent Lee, who coaches hundreds of small business owners, says that sometimes they never get further than the actual application itself requesting business credit. For example, the business description, or SIC code, raises red flags. You can expect terms such as consulting, management, property management, new business development, and research and development will lead to a number of detailed questions by the bank. What does business development actually mean? How do you “consult” with other companies? What type of R&D do you do? You can’t expect to put something down that is nebulous and not get questioned by the bank.
Another issue that occurs often, says Trent, is the date the business was established. Keep in mind that this is not always the same as the date you incorporated. When most businesses start out, they are sole proprietorships. The date that the business started may therefore be a lot earlier than that of the incorporation or LLC. You want to use the date that has the most longevity and gives you the greatest history.
The lenders will also ask about the bank account balances. Here's how you determine the amount of money you should have in your account. Simply divide the annual business revenue by 26. Let me give you an example. If your business does $250,000 in annual revenue, you will roughly get $9,615 when dividing by 26. Yet, think what the lender will believe if the owner says that the business makes $800,000 a year, but your business bank account balance is only $5,000. Something just doesn't quite add up. And when something appears odd from the lenders’ point of view, they will start looking and researching deeper. When Applying for a Small Business Loan Get Your Information in Order There are a few other areas that cause problems in loan applications. First, put down the vendors you have, such as Home Depot, Office Max and Staples, as references. These are the businesses that are helping you build your credit. Second, remember only ask for an amount of money that does not require documentation, or little documentation. Third, is the loan purpose or what you expect to do with the loan. It needs to be something such as working capital or expansion capital. You have to be able to say to the bank, "Here's the amount of money I'm looking for, here's what I'm going to do with it, and here's how I'm going to pay it back." As clean and clear cut as that. This does not seem that complicated,
but somehow many a business owner will try to make the loan something it isn’t, and lose from the start.
Relationship Building with Your Bank and Small Business Credit
Before you received your first line of credit with the bank, you probably did not have a relationship with the lender. But once you receive a loan, that’s very important. Even if you have taken a loan out at two or three banks, now’s the time to build that connection for the next loan. You may be able to get a lower interest rate, for example if 1) You show that you can use the money responsibly, and, 2) You demonstrate to the bank that you have a relationship with them.
This means money going in and out of your account, paying your bills on time, and maintaining good balances. Not only at one bank, but at each one that is lending money. Open up the checking account. Keep some money in your account and take some out, and deposit some money. This way you’ll be building a relationship.
The stronger and the better relationship you build with each of the banks, the better off you're going to be in the future. Another strategy is to focus on building one banking relationship at a time, if it is difficult doing all three. At least build a strong relationship with one of the banks. That is highly recommended. If you can build a connection with the two or three lenders, then you will be ahead of the game when you want to get another loan.
The U.S. Small Business Administration explains that “while every business has a bank, few have a banker. That's because bankers are too often seen as obstacles standing between an entrepreneur and the bank's vault.” However, you do not do business with the lending institution. You do it with the employees of that organization. When you build a relationship with a banker who understands your direction and need, he/she can help you move forward very quickly. .
The banker is the. A good relationship with the loan officer or office manager who handles your account can bring you money in the form of credit, save you money in fees, and improve your business opportunities through taking advantage of the banker's extensive personal contacts. Relations between bankers and business owners can lead to an open and trustful bond.
When You Get Your First Small Business Loan, Keep On Going
There are a couple of steps that you can continue to do after you've obtained your first financing. First and foremost: Don't stop once the business gets funding. Continue using the money, grow the business, get some documentation, expand the business credit using the trade accounts, add more trade accounts and construct a stronger and stronger business credit file. That’s the whole point of this whole process—The end result is to be able to get financing and have it based on the business only, meaning no personal guarantees and no personal checks necessary.
And that's going to take some time, and it's not going to happen just because you get a line of credit from a couple of banks for $20,000. Six months from now, you are not going to get $200,000 without a personal guarantee. It's a process that takes some time, so don't stop here. Strategies to Build Your Small Business Credit into Larger Amounts of Credit Here are some strategies to build that money: 1) Ask the bank. Each bank has a different set of rules. Every three to six months you usually can go in and ask for a line increase and a rate decrease, as long as you've shown a responsible use of the credit, meaning you've been using it and you've been paying it in time. That's important because it's really there for the asking, as long as you can show the bank that you have a use for this funding you can be yours. If you get three banks to loan you $25,000 dollars, and you're using those lines of credit making the payments in time, you can ask for that $25,000 line of credit to be bumped up. Depending on the bank and your current business situation, it may be bumped to $35,000 to $40,000, even up to $50,000 or double. That's one strategy, increase the amount of credit you have, just by asking. Also decrease the interest rate. That is always nice to get it a lower and lower interest rate over time.
Strategy on How to Get a Small Business Loan that Grows with Time
One way of building your line of credit with a bank is by building a relationship and talking to the banker every three to six months about additional financing—if you’ve been using the money already loaned, making your payments and have a need for extra
money. Another strategy. Another strategy is using the funding from one bank to build a relationship with others. For example, let’s say that a bank extended you a line of credit of $40,000. You can take this $40,000 and deposit $10,000 into a three other bank accounts.
Once that $10,000 has been there long enough, and you are ready to apply for additional financing; you have some history with that bank. It may not be a lot, preferably three months. The bank sees that you have some activity on that $10,000 business account. Now you can go and apply for a $50,000 line of credit at each one of these three banks. That gives you $190,000 dollars of credit, given the $10,000 still deposited. Once again, it’s about relationships. If you can show the bank that you are a good credit risk, and that you have relationship, you will get more amounts of money. Leverage Your Relationship with Other Banks to Form Loyalty with One Sometimes you can leverage the fact that you are dealing with three different banks for financing. You can say that you will stay with the one bank if it will bump up your line of credit to such and such amount. Or if the bank lowers its interest rate. Some banks truly reward loyalty, so use that to your advantage and say I will, "if," and whatever that "if" may be. If the bank agrees, then obviously you have to give your full loyalty. If it doesn’t, then you can continue using the multiple banks.
Reaching the Top of Four Tiers of Establishing Small Business Credit
There was this businessperson who previously used his personal credit for his business credit. When he went to get a loan for his six-year-old business, he found that he had no credit history. This was even though he had a credit card and a leased automobile and several employees. He learned the hard way that personal and business credit do not mix. Then, however, he followed the four-tier process of Trent Lee and everything turned around. First he started out with $50.00 trades with smaller companies like Office Max. Then he was able to get a few loans for a couple of thousand dollars and then for $25,000 and finally $50,000. In tier four during the application process, the bank started talking about cash credit. That’s where the business actually gets bank lines of credit - gets credit cards that have cash advances, or cash to purchase whatever wanted--equipment or auto loans, for example. In Tier 4, the business’ application and its income is going to be looked at a little bit more seriously than Tier 1, 2, and Tier 3. It does not require tax returns or financials. Even at Tier 4 It’s Smart to Have a Coach Helping You Establish Bank Credit But, here's a good rule of thumb. If the business credit report is strong enough and the business shows that it has enough money to service the debt—and that's one of the most important things--the business has to have enough money to service the debt load. If it doesn’t, then the lender is going to be leery about lending this business money that it knows the business owner can't pay back. This is another reason to have a coach work with you when you are building your small business credit and getting larger small business loans. The coach knows how much you
can ask for, without becoming unreasonable from the lender's perspective. For tier four, it is important that you're able to show that you can service this debt and that your cash flow is sufficient to service the debt. It's not just a question of your past payment history. Also, when the business is on tier 4, it tells the credit bureau, such as D&B how much year income the business has. That’s a stated figure, so it is not necessary to verify it through financials and tax records. You’ll be using a positive projected figure that is realistic for the business, but an increase nonetheless.
Why a Coach is Wise When Building Your Small Business Credit
There are times to be stubborn and times not to be. If you are trying to build up your business credit and do not know the first thing there is about going ahead with this process, this is the time not to be stubborn. Hire a coach, like the one through Trent Lee at Corporate Credit Counselors, and you’ll will be way ahead of the game.
There are over half a million vendors in the U.S. that extend trade credit to businesses. But there are only 6,000 that will report your business credit history to the credit reporting agencies, such as D&B. There are over 500 business credit card providers in the country, yet there are only 40 that will even think about approving you without wanting your personal credit score and then forcing you to personally guarantee the debt. That is not a business credit card. That is a credit card with your business name on it and there is a very big difference. Keep Track of all Vendors, Credit Bureaus, and Lenders and Make It or Break It How do you plan to find vendors and credit card providers who will actually help you build a great business card rating? That is one of the responsibilities of a coach. Just think
of this person as a very knowledgeable person who has you and the right side throughout your business growth through financing. These articles are a great start to learn the basics for small business credit. However, we have just scratched the surface for all the information to know and grow.