Think of companies like Google, Facebook and Apple. Did they rely only on their own money for growth? No. Even if you have strong sales and plenty of cash in the bank now, a day will come when you'll need additional cash support to overcome an unexpected twist in your business. It might be the loss of a key vendor, partner, employee or client, but the companies that beat the odds are the ones who are in position to access OPM to bridge those 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 you need credit is not the time to start building it.
George Ross, the attorney for Donald Trump said, "The time to go to the banks is BEFORE you need the money." Similarly, the time to start building business credit is the moment you form your business entity. That is when the business credit bureaus will start developing 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 ideal starting point, the time is NOW to build your company's business credit profile so you're in a position to help your business grow.
These aren't just opinions. The biggest authorities in the credit world agree that this subject is critically important to small business owners. What do they have to say?
The Small Business Administration (SBA) is clear on the importance of a business credit report. "If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your business' credit report before beginning the [SBA] application process."
According to Dun & Bradstreet®, managing risk is critical to the success of every business. That's why banks, vendors, suppliers and partners turn to D&B® data to check a company's creditworthiness before they'll enter into any contractual arrangement. They advise every lender to check the ability of a business to pay on time before setting 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 suppliers 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 yet established business credit, obtaining tradelines (vendor lines of credit) is a great way to begin building your business credit report.
They go on to say that, "A small business score is vital for separating your personal and business financial risk. As a forward-thinking small business owner, you know that credit affects your ability to obtain capital to develop your small business." Your business credit report can influence:
The amount of your loan and what interest rates you'll pay
The cost of your business insurance premiums
The credit terms your suppliers will extend to your company
Entrepreneur Magazine stresses the importance of keeping business credit reports separate from your personal credit. "Fewer than 10% of all entrepreneurs know about or truly understand how business credit is established and tracked-and how it affects their lives and businesses. Conventional wisdom has been that there are no consequences to using personal credit cards, home-equity line or a personal guarantee for a business. While it can make getting started easier, your personal assets may be at risk if vendors pay late, contracts are put on hold or orders are cancelled."
That's a sample 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 say about the importance of business credit and how they lend money to business owners:
Both Citi® and Wells Fargo® are on record as saying that business and personal credit are both important factors when they're making decisions on business loans and lines of credit. These are the "Five Cs" of business credit approval that Wells Fargo considers:
Character. What kind of borrower will you be for the bank? Their best clue to your character is your personal credit history. They'll always check to see how well you have managed your personal debt in the past. Personal references, business experience and work history can sometimes substitute if you have no personal credit history, but strong personal credit indicates that you have the willingness and discipline to repay past debts - and future obligations.
Credit. Banks use a credit-reporting agency to look at your payment history with trade suppliers and other business obligations. They also check to see that your payments to other financial institutions are current.
Cash Flow. A bank will generally be a cash flow lender. That means they'll look at the cash flow of your business as the primary repayment source 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 must generate $1.50 in cash flow.
Capacity. They want to know how you'll be able to repay the loan in case of a sudden downturn in your business. Do you have the capacity to convert other assets to cash, either by selling them or borrowing against them? This might include real estate holdings, certificates of deposit, stocks and other sources of savings that can be liquidated quickly.
Collateral. Many banks make both secured and unsecured loans. With a secured loan, you pledge something that you own as collateral. It might be personal assets like certificates of deposits or stocks, or business assets like real estate, inventory, equipment or accounts receivable.
So, now that we have some background on the importance of solid business credit, let's get specific on how it works and how to establish it. There are three critical questions that all new business owners must consider, even before their first day of operation:
1. How long does it take to properly build 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 tradelines). When we talk about business credit, most people think of bank lines of credit that are immediately available as cash. Most new companies can't qualify for these until they build up tradelines with vendors who will report their payment history to the 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's if you do it right and if you work with any vendors that report to these bureaus. There are over 50,000 vendors that grant business lines of credit, yet less than 10% of them report to the bureaus. For this reason, odds are that even if you're paying all your vendors on time, your scores are low or nonexistent. Establishing tradelines with vendors is not the only way to quickly start building up a business credit profile, but it's one of the most important ones. That history becomes critical when you to apply cash lines of credit with banks, merchant 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 submit a letter to either Transunion®, Equifax® or Experian® and they are required by law to reply and to abide by certain standards of fairness and responsiveness.
The business credit bureaus don't have any such rules. The system is far less forgiving and a lot more difficult to navigate. There's no oversight on how they operate or when and how they update your file based upon the EIN number of your entity. You really have just one shot at building your profile properly from the start. Any mistake, as small as being one digit off on an address (or worse yet, being out of compliance) can "red flag" your business and YOUR NAME as high risk for this and any other businesses you form in the future!
3. Is this something I can put off until later?
As you can already tell from the previous two questions, waiting until later is extremely risky. Building business credit is a process that requires a system to do it fast and accurately! Following a proper sequence to get the best results in the shortest period of time to 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 secure, what types are available to you and how long it will take.
No matter what you may have heard, there's no "cookie cutter" approach out there. 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 revenues, net profits, merchant account revenue, your personal credit, how many vendors are currently reporting and much more.