The 411 on Securing Business Credit

Business credit. What is it really? And how do I get it? As an entrepreneur looking to start, grow or expand a business, there actually is a way to secure business credit lines and subsequent funding without having to rely on your personal credit and putting your personal assets at risk. That's great news whether you're a startup or an existing entity operating for years.

A common mistake many business owners make is paying their business expenses using personal credit lines or credit cards, which in some cases makes them financially liable for the business entity’s actions.

If you are a business owner, ask yourself if you are able to go out right now and get high-limit store and cash credit cards for your business without having to provide your social security number on the application? If the answer is no, then you need business credit. It actually might be the only thing holding you back from ultimate success and not even know it.

As the national leader of business credit building programs, we know that very few entrepreneurs even know about, understand, or appreciate how business credit is generated, built, and tracked-and how it can actually help or hurt their business with most even having no idea if they even have a credit file under their company name.

Even though most don’t know this, when a business owner applies for financing, their business credit IS reviewed. Not having business credit established will get an owner DECLINED for financing. And never know why. There are no regulations that require the lenders notify the business owner for their reason for denial.

Having a good business credit profile and score can be the difference between having a profitable business, or being the captain of a slowly sinking ship. You simply have to have money and credit to grow into a highly successful business. This is actually one commonality ALL successful businesses have. (think your competitors).

And just like personal credit, you have to build business credit to grow and thrive to accomplish your goals. The steps are similar: borrow money (or purchases with vendors), repay, and hope your payments are reported to business credit reporting companies. Sounds simple enough right?

Of course it’s not. Business credit, unlike personal credit, doesn’t happen on its own. You have to take specific steps to make it happen for your benefit and it is best to build it before you need it. As a business owner, you know there’s always the chance that something might not go according to plan. At some point, your business will need access to cash or credit to cover unexpected costs.

But the problem for many business owners have is that they are so in awe of themselves, their company, idea or product, that they believe lenders and vendors will fall all over themselves to loan them money when they want it. Sadly, that rarely ever happens as owners hope and expect, bursting their ego bubble.

Personal vs. Business Credit

As you already know, your social security number pretty much comes soon after your birth, patiently waiting 16 years or so to go into action upon landing your first job or applying for your first credit card. Your credit profile is then automatically started. The credit reporting agencies will now track virtually every financial transaction you make. This “profile” otherwise typically referred to as a FICO™ Score, automatically updates with every inquiry, credit application, change of address or job. Eventually, the credit report serves as a mathematical look at an individual's perceived ability to pay back debt (income to debt ratio)and more so, a glimpse into a person’s overall credibility. Very Orwellian to say the least.

For business owners, a report, for those businesses that get their payment history recorded on their behalf, is reported to the business credit bureaus using the entities’ Federal Tax Identification number (FIN) or EIN number. The business credit bureaus use this data to generate a report about the company's credit worthiness. Companies considering issuing credit to a business will then rely on this report to determine if they will grant you credit and how much.

While some companies have very stringent credit-eligibility standards, others are far less strict, extending credit with very few requirements. But they are hard to find.

Once one company issues you credit, it is very likely more will follow proving the old adage “That which gets rewarded, gets repeated” So load up when you can.

Stand Alone Business Credit

Most vendors and creditors thinking of issuing credit or funding to another business will first check the customer’s Dun & Bradstreet Paydex® score. This proprietary credit scoring system ranges on a scale from 0 to 100 with 75+ considered an excellent rating, andrepresents your business credibility as to how your FICO score represents you personally.

When a business does decide to issue another business, credit, it's referred to as trade credit. Trade credit is the largest source of lending in the world. But the vast majority of companies that lend credit to other businesses DO NOT report the payments they receive from their customers to Dun & Bradstreet. It’s just simply too much of a hassle for most businesses to do it, especially mom and pop vendors who may extend credit just to their local business associates. In fact, many very large regional and national companies do not report either. And out of the thousands of business that do issue credit, less than 500 actually report on a consistent basis and many of those only report NEGATIVE data when the customer stops paying as agreed.

And as mentioned earlier, since providing payment information to the business credit bureaus is strictly voluntary—there is no state or federal requirement to do so, credit bureaus, therefore may never receive any information about your credit related transactions. In fact, just like one of my clients just learned, you could go on for years thinking you are racking up solid business credit only to find that NONE of your payment history is being reported costing you easy funding opportunities when you really need it.

Establishing Business Credit

Another mistake many business owners make while trying to build business credit is using their social security number when applying for credit, leases and loans thinking that if their company name is on the lease/loan agreement or credit card, they must be building business credit. But the reality is that once you sign on the dotted line using your social security number, you have just negated any business credit building benefits and may have actually decreased your personal credit score because of income to debt skewering from the additional credit inquiries dinging your personal credit score. A double whammy.

This faulty belief really hurts business owners who typically have double the number of inquiries hitting their personal credit profile as well as the number of credit obligations at any given time than the typical consumer.

Also note that the average personal credit score is now only at about 625 and trending lower every month….. it was 689 just 4 years ago… This means that many hard working business people are getting denied credit or slammed with high interest rates making them more likely to default before they even get started running their business.

Because of this disturbing statistic, both American Express and Experian are now recommending business owners to build separate business credit because they see what’s happening with personal credit scores and how it is affecting the economy.

Therefore, the key to establishing separate business credit is to find companies that will issue credit to your business without using your personal information and then report the payment experiences to the business credit bureaus. That’s why a company like Corporate Capital offers tremendous value to small businesses by providing hundreds of nationally and regionally known vendors who will issue credit to their clients to help them build their visibility, credibility and fundability without any personal guarantees.

Here are the basic steps to take to establish your business credit profile:

• 1.Form a corporation or LLC to operate your business under. This is the critical necessary first step in preparing for credit and funding opportunities. Operating as a sole proprietorship or partnership will more than likely require your personal credit information and you'll still be personally liable for the debts of the business, putting all your personal assets at risk in the event of litigation or if the business fails. Not very smart in a litigious society such as ours.

Corporations and LLCs, on the other hand, afford business owners liability protection (especially in NV and WY which offers enhanced protections). As a formalized structured entity, you can then apply for credit under your business name and obtain credit without a personal credit check or personal guarantee if the credit grantor will agree.

Every day, my office receives calls from entrepreneurs who have been operating as a sole proprietor, many for multiple years, thinking everything is hunky-dory, then suddenly find themselves involved some sort of litigation, either with a government agency, a disgruntled consumer, car accident, ex-employee. or tenant. Unfortunately it is too late to help them in most cases. Don’t let that happen to you.

2. Comply with business credit market requirements. It's extremely important for businesses to meet all the requirements of commercial lending guidelines in order to ensure a higher likelihood of credit approval. In fact, not being in compliance with credit market rules can raise red flags with both credit bureaus and grantors.Red flags include such simple things as not having a business address or a phone line in the business name, appropriate licenses, meeting local, state and federal requirements or even without having a website.

3. Prepare financial statements. Especially if you are an existing business with revenues. Having your numbers delineated on paper will show your true revenues and profits allowing vendors and lenders to make lending decisions more easily.

4. Prepare a professional business plan. This critical document is often required by credit grantors and cash lenders to see if you have a definitive plan for the funds and how they will be paid back.

5. Make Your Payments. At some point, almost every business needs some type of credit or funding, so not paying your bills on time will obviously affect your credit score and the continued lendability. And like personal credit, the lower the score, the higher you will pay in interest rates. So the bottom line is to manage your cash flow effectively and pay your bills on time, especially to those creditors reporting your payment history (if you even know who they are).

In closing. Good credit is not a luxury item but an absolute necessity. If you are a serious business person wanting to take you business to the next level, then this is simply what you need to do. I highly recommend starting the steps necessary to secure usable credit lines before you really need them. And who wouldn’t want the ability to access credit and funding when you need it without personally guaranteeing anything?