30. November 2017

We are sure that many business owners have heard the claim that lenders do not use or care about business credit. That claim is made due to the fact that most businesses have never taken the time to build their business credit or even know what is in their business credit files.

Far too often there is not enough history to base any lending decision on and therefore traditional bank type lenders are forced to look only to the business owner's personal credit as a measure of how their business is going to pay its bills. The truth to this is that reliance upon personal credit only leads to vastly over extended business owners, businesses that are way under funded, and then have access to no further funding once the limited resource of personal credit is exhausted.

Less Than 5% Of All Business Lending Comes From “Lenders”
The other side of this story is the fact that when you total up all small business lending in the United States you discover that less than 5% comes from Bank Lenders. The reality is that there are over 500,000 businesses (called vendors) in the United States who are extending credit payment terms to other businesses. This is where 95% of all business lending gets done. This is typically referred to as "Net Terms" where the company extending the credit provides 30, 60 or 90 days in which to pay for the goods or services provided.

Less Than 2,000 Lenders Nationwide
So you when you compare more than 500,000 vendors who are extending B2B credit terms to the less than 2,000 of the traditional bank type “Business Lenders” you also find some other huge differences. One such diffference is the amount. Banks that are making these personal credit based business loans end up with most of these loans being for $100,000 or less. They will not go higher unless the loan is secured by hard assets such as investments, equipment or real estate which are unavailable from the larger percentage of small businesses. Therefore using only personal credit for business lending ends up in businesses that are under funded.

97% Decline Rate
When these “Business Lenders” do not look at or care about your business credit you will find that they are also not reporting credit on your business if they make the loan. They are reporting on you personally. The other untold story there is that they are declining 97% of all applicants. Basically if you are financially well off and have at least 760 credit scores they will make you a $100,000 or less personal loan with your business name on it. They will then make you personally responsible so that when you default they can take your house, car, and savings. Maybe you should rethink business credit.

The Issue With Business Credit
The reason that many bank type lenders do not look at business credit is that most businesses do not have enough business credit history to make loan approval decisions on. I am willing to bet if you check your business credit right now you will see maybe 3 tradelines reporting and even those may have gaps in their histories. That is the real issue, not enough credit history. The average business that has been in business for three years has 3 or less reporting business credit tradelines and even those have gaps in their reporting.

So Little Reporting History
Why is there so little reporting history? While it is true that there are over 500,000 businesses extending credit to other businesses, the other truth is less than 5,000 are reporting payment histories to the business credit agencies. Therefore as a business owners you should try and use those vendors that will report your business payment history and you should strive to build at least 10 of those into reporting tradelines. 

Business Credit Lenders Are Hard To Find 
I am going to let you in on a little secret. Those businesses who build excellent business credit scores and that have 10 or more reporting business credit tradelines do not have to search for lenders. If your business builds business credit scores above 70 and develops at least 10 reporting tradelines you will have placed your business in the top 1% of all small businesses. You will not have to go looking for lenders and “hope” they will approve your business. Your mailbox will fill up with lenders and lending offers almost every day.

Average Daily Bank Balance
Lenders and vendors alike care about your ability to make your debt payments. This ability is going to be demonstrated by your Business Bank Rating. If you think business owners do not pay attention to their business credit you would be right. But something business owners pay less attention to is their Business Bank Rating. In fact most business owners have never heard of a Business Bank Rating and have no clue as to what their bank rating might be. Basically if your Business Bank rating is less than a "Low 5" then your loan application will most likely be declined as your business has shown no ability to have the funds available to cover the debt payments.

Business Becomes Bankable
There are four components to having your business become bankable. Business credit is one of those and your business bank rating is another. If you want to have the ability to move past the limited funding that is available using only your personal credit then you must have your business become bankable.  The full four components of becoming bankable are; having all items of lender compliance completed, having at least 10 reporting business credit tradelines, having business credit scores of 70 or above, and maintaining a business bank rating of a low 5 or above. Becoming bankable requires work and attention to detail by you.

You Choose The Outcome 
Having been is business lending since the early 90s I have seen more that 700,000 businesses in search of capital. From experience those who only seek the money are almost always already doomed to failure. It goes like this ...

Option A: Get the money, go thorugh the money like water through your fingers, business is starved for cash, personal credit is maxed out, business owner has exhausted personal resources, business goes under, and the business owners go bankrupt. Or there is:

Option B: Get the money, go down the become bankable path, establish many non-cash resources to conserve capital, within six months have many additional options for more funding, can call upon vendor relationships to extend more credit or longer terms, lenders will increase existing credit lines, and you will have credit offers filling up the company mail box.

As a small business owner the choice is yours. You have been warned that Option A "Is Going To Be Hot".

Build Business Credit, Business Credit Scores, Business Planning, Pre-Qualify for Business Loans, Vendor Credit Lines

23. November 2017

There is a massive difference in the types of debt you may have already or will take on for your business.

1 – Entity
First off if you are doing business as either a sole proprietorship or partnership then the point is mute because all the business debt is attached to you personally and there is no way of having it be otherwise. This is why your business should always be a standalone entity such as an LLC or INC. Without an entity then every dollar in debt your business owes you owe personally. If your business fails the creditors will come after all your personal assets to satisfy the business debt. In any scenario this is a horrible way to be in business and no one should risk it. Form an entity! In the case of a partnership, each partner is liable for 100% of the debt and creditors do not care who they take it from. In the event of a failure creditors will look to each partner individually and it is common to place liens on each partner for the entire amount owed. Yet another reason to form an entity!

2 – PG
The next thing to check for in your business debt are personal guarantees (PG). What these do is to make any debt that has them carry through to you personally in the event of a business default. This will be true even if you have formed an entity so these should be given out as little as possible. Many types of debt almost always require a personal guarantee. They are most common with business credit cards and term loans. They are far less likely and can be avoided all together with asset financing such as for equipment and vehicles, contract financing, invoice factoring, revenue based loans, purchase order financing and all types of vendor financing. Limit you use of personal guarantees when you can.

3 – Convert Debt
You should always take stock of what kind of business debt you have and focus on paying off that which holds you personally liable first. There are many ways to do this. For example, let’s say you have financed a vehicle and provided a personal guarantee. Now your business is a year older, you have taken the time to build your business credit and have your business become bankable so now you can refinance the same vehicle with a different lender and not sign a personal guarantee. If your business is now turning a profit and you have built strong business credit scores this will be true of any assets you have previously financed with a PG. If you have given your PG to vendors or other creditors you can now go back and ask to have it removed. If they refuse, then change vendors as there will be many ready to take their place.

4 – Personal Credit
Check your personal credit reports. Any business related debt that is reporting on you personally should be your top priority to either pay off or convert to true business debt. Also check your business credit reports. Many lenders such as Amex do not issue credit cards to small businesses. Instead they issue you a personal credit card with your business name on it. This is why you will not see it as a trade line on your business credit reports, but rather it appears only on your personal credit report. Kind of sneaky isn’t it?

5 – Ten Reporting Trade Lines
There are many articles out there providing terrible advice. Such as advice like “pay off all your small business debts first”. Pure junk! To build and maintain strong business credit scores you need at least ten trade lines that report each month on you paying your business bills on time. Way too many business owners do not know that this is a vital component of making your business bankable and able to stand on its own for financing without your PG. Instead when creditors pull up their business credit reports they see only 2 or 3 reporting trade lines. Business owners think this is great. IT IS NOT! Now you have no credit history for lender to base their approvals upon and you are forced back into everything requiring your personal guarantee.

The bottom line is that business debt is not a bad thing and neither is PG business debt when used to turn a profit. Having your business take all the steps to becoming bankable and thereby being able to stand on its own for financing is the key to your business debt not keeping you up at night.

Alternative Business Financing, Build Business Credit, Business Credit Scores, Small Business Financing

12. November 2017

Let’s compare business credit to personal credit and see what we know about both.

Scoring Systems
Both business and personal credit have a scoring system. In personal credit it ranges from 350 to 850 and with business credit it ranges from 0 to 100. What is common to both is that if you have 700 or higher personal credit scores lenders and offers will fill up your mail box and if you have 70 or higher business credit your mail box will be just as full.

Types of Credit
To achieve 700 or better personal scores you are going to need a mortgage, some installment accounts, and a few credit cards. One mortgage, 2 or 3 installments (cars, furniture, appliances) and 4 to 7 credit cards. The optimal is about 10 reporting trade lines all showing that you have paid perfectly for at least two years. Business credit is no different in that you are going to need at least 10 reporting trade lines to establish and build string business credit scores and to demonstrate to future lenders that your business has a history of on time payments. The 10 reporting trade lines can be bank or credit union term loans, business credit cards, store business cards, vehicle or equipment financing or leasing, or vendor lines of credit. You just need 10 and those ten must report every month.

Magic Number
There is nothing magic about 10 reporting trade lines other than the fact that many lenders and vendors have set that as the bar for no longer requiring a personal guarantee for lending your business the money or providing your business with the line of credit. Think about it, they need enough reporting payment history to determine a strong pattern of how your business pays its bills month in and month out and that cannot be established if your business only has 2 or 3 reporting trade lines. If you only had two credit cards and one student loan payment would you be qualified for a home mortgage? Probably not.

High Risk Versus Low Risk
Now, let’s make you the landlord and you have a choice between two prospective tenants. One has a five year credit history with 10 or more paid perfect reporting trade lines and credit scores in the 740 range. The other prospect has only 3 reporting trade lines, a few 30 day late payments, and credit scores in the 620 range. Both are willing to meet your lease terms. Which one do you select? Exactly! Lenders and credit providers are no different. They are going to approve the lower risk prospects and pass on those that have too little credit history or poor payment history, just as you would.

Becoming Bankable
Having at least 10 reporting trade lines on your business credit reports is a great step towards becoming bankable. Then you must also pay them on time over a period of time (at least one year) and during that time you must complete all lender compliance items and establish a low 5 bank rating. The 10 trade lines paid on time will create 70 or higher business credit scores. Lender compliance items and bank rating details are covered in separate blog posts. Together these four things make up how your business makes itself become bankable and be able to stand on its own for financing.

Build Business Credit, Business Credit Scores, Lender Compliance Items, Small Business Financing

1. November 2017

The Federal Contract process can be very complex and a little overwhelming. This can result in small businesses either not bidding on contracts or hiring someone to help them through the process. The problem comes from the latter. Unfortunately this sets small businesses up for scammers.

Businesses who wish to bid on federal contracts are required to register with the General Services Administration's (GSA) System for Award Management (SAM).

It is at this point that small businesses are being scammed into thinking that they must pay high registration fees in order to become eligible to bid on government contracts. This could not be farther from the truth. Both the registration and bidding are 100% free and open to all businesses.

The problem actually begins once you register. At this point your information becomes public and that is where and when the scammers get a hold of it. Everything you listed in your registration is available to them; your name, your business name, phone number, email address, and more.

These scammers then act as either real consultants or government officials and begin calling and emailing you almost immediately after you register.  Scammers will go to lengths of impersonating government officials just to mislead you into paying them.

Most small business owners do not know that there is free help for the registration and bidding process that is provided to them by existing federal programs. Therefore they end up engaging with the scammers who are seeking hundreds if not thousands of dollars for their so called registration and contract bidding help.

There are many companies providing legitimate registration and contract bidding help.  If your business does elect to engage a consultant, make sure you check them out. Do they have a BBB.org listing and rating?If not or if it not at least an "A", you should probably stay away. Ask for references of businesses they have helped to successfully obtain contract awards. Remember contract awards are public so you can see business that were awarded contracts. Since their business data is also public, you can call them to ask if they used the consultant and what was their experience.

There is also the Association of Procurement Technical Assistance Centers (APTAC). They want to get your business the help you need at no cost. They are a nationwide network of Procurement Technical Assistance Centers (PTAC). You can search to find the one closest to you and, more than likely, get all the registration and contract bidding help you need for free.

Avoiding Small Business Scams, Build Business Credit, Lender Compliance Items

29. October 2017

Small businesses use many different types of financing to fund their businesses. Below is research from the Small Business Administration as to where small business owners find the sources of capital they need to operate.

Trade Credit 34.8%
Personal Savings 31.6%
Credit Cards 11.8%
Business Assets 7.9%
Term Loans 5.3%
Personal Assets 4.1%
Home Equity 3.9%
SBA Loans 0.5%
Venture Capital 0.1%

As you can see the two sources that actually receive the most press (SBA loans and Venture Capital) when combined make up less than one percent (only 0.6%) of small business funding. This is why it is so troubling that small business owners may spend so much time chasing these Unicorn's when other sources are more readily available. Let's focus on one of those.

Credit Cards make up nearly twelve percent (11.8%) of all small business funding. Credit cards can now be used for most business expenses such as paying; rent, utilities, supplies, inventory, travel, phones, websites, marketing, and more. There are many services available which allow you to pay any bill regardless if those needing to be paid accept credit cards or not.

Unlike other sources of business financing, credit cards are available on a "Per Principle" basis. This means if you have three owners of the business you can do three sets of financing  or one per each owner. This also allows you to bring in other owners with good personal credit to have them funded as well.

So what are the requirements for Credit Card financing?

The general guidelines are for the business owners to have FICO 8 credit scores of 720 or higher. The debt to limit on revolving accounts (other credit cards) should be 45% or lower. There should be no lates or other derogatory items in the last two years and the number of recent credit inquiries in the last 6 months should be 3 or less. 

If the above requirements are met, then the average amount of financing approved is typically $70,000 to $90,000 per owner with the financing usually spread out over 7 to 9 credit cards.

One of the major advantages can be only applying for those credit cards that offer a year or more of 0% interest. This way you get to use your new source of financing for at least a year before the interest charges kick in. Another advantage is that the accounts are revolving so that if you keep them in good standing you can use them over and over again for a very long time. Yet another advantage is that after 6 months and again at one year you can ask for a credit line increase which if you have kept the account in good standing can be as much as 50% to 100% credit line increases.

Even more of an advantage to credit card financing is that the approvals tend to be automated and in most cases instant so there is little to no waiting to determine if you are approved and for how much. Normally the cards will arrive within 7 to 10 days after approval and you can start using them immediately.

While 97% of bank and SBA business loan applications are being declined, it is 99% certain business owners will get approved for credit cards if they meet the above criteria. Even if you personally do not yet meet the criteria, you can bring in a "Credit Partner" who is a friend or family member that does meet the criteria in order to fund your business.

A survey of small business owners showed that 85% of them were very satisfied with the process of obtaining credit cards to use for their business and how easy it was to pay for everything they needed with those cards.

Build Business Credit, Business Credit Cards, Optimize Personal Credit, Small Business Financing