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

20. October 2017

It is staggering to think that less than thirty out of every one thousand businesses is able to obtain the financing they need from a bank. So unless you know exactly how to prepare and you work to pre-qualify your business before you apply you have about a 3 in one hundred chance of being approved. Wow!

What can you do about it? The best thing you can do is to increase your odds of being approved for any type of financing; bank, traditional lenders, alternative financing, crowd funding, etc.. You do that by knowing exactly what is required to become pre-qualified, fundable, and bankable.

Pre-qualified is simply knowing that yoiu are ready to apply for one or more specific business finance programs.  Fundable is knowing that you meet the general requirements of a large number and type of lenders. Bankable means that you have gone the extra mile to make sure all Lender Compliance items have been completed, you have built and optimized your business credit scores, that you have optimized the personal FICO 8 scores of the business owners, and you have made sure your business has a bank rating of a low 5 or above.

Having your business become bankable before you apply for any type of business financing will help insure you hear "Approved" rather than "Declined". Doing nothing put just applying will almost certainly place you in the 97% who are not getting approved now.

Becoming bankable have many other benefits. Vendors will offer you better terms and without personal guarantees. Landlords may give you lower rates and leases with signing personally. Business financing offers will come in the mail for all types of programs. You may beat out a competitor for that project or contract because your business is viewing as more credible or stable.

Your business becoming bankable is also something that can increase the value of your business if and when you sell. It is also transferrable to the new business owners making your business much more attractive than others the buyers may be considering.

The bottom line is it you want to move your business into the 3% rather than the 97% you will need to do the work to become bankable.  

Build Business Credit, Business Credit Scores, Lender Compliance Items, Pre-Qualify for Business Loans

18. October 2017

The phrase "Finding Business Financing Is Really Hard" is true, but only for those who are unprepared and not yet pre-qualified.

For those business owners who take the time to prepare and to educate themselves on what it takes to pre-qualify, finding business financing becomes easy and in fact in most cases it finds them. People with 760 FICO scores know this because they get financing offers thrown at them almost daily. The same is true of those business owners who become pre-qualified, fundable, and bankable.

A growing percentage of individuals now take care to educate themselves as to what goes into a 760 FICO score. What is it based upon? What type of accounts do I need? What is the mix of those accounts? What debt to limits are optimal? They learn that FICO is doing nothing more than crunching numbers, so they set out to optimize those numbers themselves. It is math plus time and nothing more.

So why is it that business owners think it would be any different in business lending? It is not. Business lenders have underwriting approval guidelines just as do personal lenders. The business lenders are also looking to minimize their defaults by simply not approving known high risk of default flags. Your goal as a business owner should be to simply know what those high risk of default flags are and eliminate them. Sounds easy right? Well it actually is easy.

Let's quickly look at a few of those flags.

Flag 1 - Home Based Business - Having a home based business is great. Work when you want, no long drive, play when you want, and more. The downside is that those before you who had home based businesses had a way higher rate of default so there you have raised that flag.

Flag 2 - Not An Entity - The default rate among sole proprietorships and partnerships has been significantly higher than those who operate as an incorporation or LLC. So here too you have raised the default flag.

Flag 3 - Cell Phone - Cell phones make all our lives easier, however those business owners who have elected to have only a cell phone as their main business line have also shown much higher rates of default. And now your number of flags that are waving is getting pretty high.

Flag 4 - Free Email - At last count there were 1,637 free email account providers. So who needs to pay for an email account, right? Well as a business owner that answer would be "You Do". Those businesses who operate as "joesplumbing@gmail.com" versus those who are "Joe@joesplumbing.com" have proven to have a higher rate of default. Now you have so many flags raised that it is hard to see you.

Simply put, vendors and lenders are looking for any data points that will help them to lower their rates of default. They want portfolios the make money and not ones they have to chase around constantly to collect or that worse end up defaulting.

The more high risk of default flags you raise the less likely it becomes that you will get approve. Put yourself in their shoes. If you raised 5 or more high risk of default flags would you lend to you? If your answer is "yes" then just remember "A fool and his money are soon parted" and most lenders are not fools.

This means you need to be smart. Educate yourself on what your business needs to do to become pre-qualified, fundable, and bankable. At Fundability.com you can find it all in one place and for free.  

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