5. October 2017

In order to start building a business credit profile you will need to first select the proper entity formation for your company.  This step by far is the most important because it’s the foundation for what you will be building your business credit upon.  Not to mention all the other important areas that entity selection affects such as taxes, liability and asset protection.

When you decide to select your business structure, the first questions that an entity formation specialist will ask you are:

What Does Your Business Do?

This will be a deciding factor for getting you into the best structure for taxes. How your income is taxed depends on the type of income your business earns. If your income is earned through passive sources – rent, portfolio income, etc., it will be taxed differently than if your business provides a product or a service that you sell.

Where Do You Live?

This question is more important than you think because where you live can make a difference to the kind of business structure you form. Some states charge more for one type of structure over another. An entity formation specialist will ask you this question because it allows them to choose the best economic structure for your company.

How Much Does Your Business Earn?

This question again relates to taxes, and is specifically geared towards someone who receives “earned” income (that’s income from selling a product or providing a service). There’s an income threshold to look at – once your income surpasses it, it’s time to rethink your options.

Taxation is a Critical Factor!

Did you notice that all three of these questions are related to taxes? That’s the secret lesson to take away here. All business structures will work in all situations. The secret is knowing which business structure best matches your income and tax situation so you keep more of what you earn.

The mistake I see so many business owners make is selecting the wrong entity structure for their company. They get anxious about building business credit and think that one type of entity is better than all the rest. There is no cookie cutter approach to entity selection because every business is different. Don’t take any shortcuts in this step because it can cost you big time.

As a business owner, you have four real choices when it comes to business structures for building business credit, and two bad choices:

    * C Corporation

    * S Corporation

    * Limited Liability Company

    * Limited Partnership

    * Sole Proprietorship

    * General Partnership

To learn why Sole Proprietorships and General Partnerships are so dangerous to you and your family, read on.

A Sole Proprietorship is bad…

Have you heard the saying “You get what you pay for?” Well, you normally don’t pay anything to start either a Sole Proprietorship or a General Partnership. Of course you don’t get anything, either. 

Unless you count the following as valuable business assets:

    * Lots of personal liability

    * No protection from your business creditors

    * An increased risk of being audited

    * Problems with valuation for a subsequent sale of the business

The reason for this lack of protection is because neither of these structures is considered a separate legal structure. Instead, they are considered personal extensions of you, if you are operating as a Sole Proprietorship, or you and your partners, if you’re operating as a General Partnership.

And, because these business types are considered personal extensions of you, you don’t have any protection from them.

But a General Partnership is downright ugly!

It gets even worse if you are operating with a partner as a General Partnership. That’s because not only are you responsible for all debts and agreements you enter into in the name of your business, you’re also on the hook for all of your partner’s actions in the name of your business as well. This can be devastating if your partner is financially irresponsible, and, because either of you can bind the partnership; you have zero protection from your partner.

If You Don’t Choose a Good Entity, the Government Will Choose a Bad One for You!

If you’ve been doing business up to now without a business structure, both the IRS and your state government have defaulted your business into either a Sole Proprietorship or a General Partnership.

And that means you’re exposed.

Now is the time to select the proper business structure if you want to build business credit and you want to protect yourself from personal liabilities. 

Build Business Credit, Lender Compliance Items, Small Business Financing

4. October 2017

Commercial finance is one of the many options available to entrepreneurs seeking capital to start or grow an existing business. This sort of financing is also referred to as asset-based lending, meaning that it is a secured business loan. The borrower guarantees the loan by giving up business assets as collateral for the loan. Another popular phrase for commercial finance is asset-based finance.   

Account receivable factoring is one form of commercial finance. This consists of selling open invoices for cash that can be used right away in the business. There are many benefits to this financing option including not giving up equity, being able to take advantage of early payment and volume discounts from your suppliers, you can actually purchase in greater volume from suppliers, and you also accrue no additional debt in your business. 

Another popular commercial finance option is purchase order financing because it offers quick cash flow reserves. When any business is growing or expanding their business the cash flow simply isn't there because of the money it takes to market and produce products. Suppliers also want to be paid with C.O.D. and your customers are on Net-30 terms; so you run into a cash flow problem. Purchase order financing solves this issue by paying for the costs of your goods directly to the supplier, thus giving you more cash to use on more critical business expenditures. To begin with purchase order financing simply obtain a purchase order from your customer, find an approved supplier, place the order through that supplier. 

Asset based loans, an additional commercial finance option, provide a short term approach to maximizing cash flow within a business. This form of financing is used as test for a business to show how they would perform with a long term loan. The business who is receiving the asset based loan has a short window to prove that with the proper financing their business model is effective, and that a long term loan would ensure business growth over a long period of time. This form of financing is perfect for the business that can't afford to wait to establish their business credit. The assets that are accepted as collateral for this type of loan include real property, accounts receivables, and completed inventory. 

Other forms of commercial finance include bankruptcy reorganization, expansion financing, import and export financing, inventory loans, secured lines of credit, and merchant account advances. Financing a business is a difficult process, but if you utilize the financing resources available, your business have a much greater chance of success.  

It is also good to work on establishing your business credit, ensuring that you separate your personal credit from your business credit. With good business credit scores obtaining large loans and other forms of capital is very simple, and you won't be one of the 97 percent that actually have a loan application denied. One other strategy that is easy to do and beneficial on your quest for business capital is to use a free business capital search engine.

Alternative Business Financing

3. October 2017

I’m sure we can agree that for far too long business owners have relied on the strength of their personal credit to dictate their ability to obtain funding for their businesses.

Unfortunately this dependence can be easily avoided if more business owners knew about the advantages that business credit provides. 

To provide some insight I have assembled some of the key advantages of business credit compared to personal credit that I know will get your attention:

Social Security vs. Federal Tax ID

Your social security number (SSN) is your personal unique nine-digit number issued to you so you can pay taxes and pay into the social security system. It’s also used by the credit reporting agencies in the creation of your personal credit files.

A Federal Tax ID Number (EIN) is the corporate equivalent to a social security number. It’s a nine-digit number assigned by the IRS to business entities operating in the U.S. in order to identify each company.

The major difference here is even though you are issued only one social security number as an individual as a business owner you can obtain multiple Federal Tax ID numbers if you own multiple companies.

Single Personal Credit File vs. Unlimited Company Files

Now this is the part where it gets really exciting because while you have only one consumer credit file linked to your SSN you have the ability to create and establish multiple business credit files with the business credit bureaus.

You can accomplish this because each company you incorporate has its own individual identity separate from that of its owners. Each business can obtain its own unique Federal Tax ID number allowing it to build its own unique credit file as well!

Limited Credit Capacity vs. Unlimited Credit Capacity

 If you’re like most business owners who rely on their personal credit for business you’ll really get a kick out of this one.

Did you know that business credit has 10 to 100 time’s greater credit capacity then personal credit?

When you use personal credit to apply for business financing your mortgage, auto loan, credit cards and even student loans are affecting your ability to qualify.

But when you take advantage of business credit reports you truly get to leverage the power of your business. Your files include your company’s payment history and may include revenues, assets and company financials depending on how much information you furnish to the business credit bureaus. In addition your files will not show your personal debts or personal financial obligations.

What’s even more exciting is if you own several companies each of the businesses will have its own credit capacity giving you unlimited financing potential.

FICO® Credit Score vs. Paydex

Now I know there are many different scoring models out there but the most widely used on the consumer side is FICO® so for simplicity let’s cover that one.

The FICO® scoring system has eighty-eight negative rating factors that can hurt your personal credit score and only six positive ones. What’s even worse is you only have control over five of them so needless to say you’re fighting an uphill battle on the consumer side.

However, one of the main business credit bureaus known as Dun and Bradstreet issues its own business credit score known as paydex. This score is primarily based on how your business pays its bills and it’s much easier to understand and maintain compared to FICO®.

As you can see business credit will always trump personal credit and if you are just starting to launch a business or run an existing one now is the time to utilize one of the best kept secrets in the business world.

Build Business Credit, Optimize Personal Credit

3. October 2017

Your business bank rating is a yardstick that business lenders use to measure your ability to service debt (aka make your payments).

Your business bank rating is created from the average daily balance is your business checking account over the prior four calendar months. It is very simply for you to know what your bank rating is by looking at your last four monthly bank statements and calculating what your average daily bank account balance has been for each of those months, adding the four months together, and dividing them by four.

This process will provide you with a number and let's say that number is $10,000. Ten thousand dollars has five digits and therefore your bank rating is is the five (5) range, and the number begins with a one (1) so therefore your rating starts with a "low". Now you know that your bank rating is a "Low-Five", where "Low" means it begins with a 1, 2, or 3 and "Five" means that it contains 5 digits.

If your average daily balance over the four months had been $50,000 your bank rating would have been a "Mid-Five" or if the number had been $8,000 then your bank rating would have been a "High-Four". Started with an "8" so it is "High" and contaned 4 digits so it is a "Four".

If your bank rating is not at least a "Low-Five" then most lenders will view your business as a high risk of default and most likely not having the long term ability to repay the loan, so you will be declined.

Most business owners do not know that bank ratings exists, how to calculate them, or how they are used. Therefore your business bank rating can become the main cause of your business being declined. 

Build Business Credit, Business Credit Scores

1. October 2017

When it comes to financing, we like to reference what we call the 4 C's of lending. Understanding each of the 4 C's and why they are important to you will give you a better understanding of what is required for financing approvals with and without a personal guarantee. 

Here they are:

1.     Credit history –Lenders will look at your business credit history. How has your business handled credit in the past?

2.     Credit history- Lenders will look at your personal credit history. How you handled personal credit in the past.

3.     Cash flow- Does your business have any verifiable revenue. If so, this dramatically helps your chances to obtaining financing without a personal guarantee.

4.     Collateral- does your company have any collateral or assets? If so, this dramatically helps your chances to obtaining financing without a personal guarantee.

As long as your company has at least ONE of the 4 C’s in place, you will have financing opportunities available to you. If you don’t have any of the 4 C’s, then don’t worry; we will help you build business credit history. You will have the option for two types of financing, financing WITH a personal guarantee and financing WITHOUT a personal guarantee.

Financing with a personal guarantee will always have lower rates and better terms, financing without a personal guarantee will have much higher interest rates and not as flexible terms.

When it comes to lending without a personal guarantee, you will need to have a solid business credit file that is in compliance as well as either verifiable cash flow or collateral for your company. As you continue building your Business Credit Asset™ and growing your company’s revenue more and more lending options will be available to you.

Build Business Credit, Business Loan Approvals, Small Business Financing