Preview Of What You Will Learn Sections: Introduction...5 Defining Business...6 Personal vs. Business The Value of Good Business...9 Foundation Building 10 Benefits of Good Business Protecting Yourself Four Steps to Establishing Business...12 Step One: Compliance Step Two: Registration Step Three: Acquisition Step Four: Development When to Utilize Your Business...16 Purchasing Properties Covering Unexpected Costs Filling in the Gaps Wrap Up...17 Glossary...18 BBC-V2-011815
Introduction Business credit is a must-have tool in your belt. While private money is the most plentiful source to fund your deals, business credit provides an essential means to supplement it. You may not immediately think about business credit as being an asset, but it is. is a nonphysical resource that gives a business a ton of value. At the end of the day, this intangible asset is an economic resource that can make up the financial foundation of your company. Think of it as your resume. When an employer wants to hire you, you have to prove that you can handle the workload and perform, right? Hiring a new employee is risky for a company. So is handing out a business loan. Banks want to look at your financial resume. What have you done? How have you handled your business? Will you be a risk to take on? Building business credit truly creates a wealth of benefits for a business, including a few unique financial advantages in the market place. So no matter how small your company is, or how far along you are in the process of building your company, building business credit is not something you want to put on the back burner. Unfortunately, most entrepreneurs make that mistake and find themselves with little to no knowledge about how to establish or monitor their credit. These business owners are the ones who fail within the first few years of business from a lack of capital. Lucky for you, you re not going to be one of them. Did you know there are investors buying multiple rehabs on their business lines of credit? 5
Defining Business So, what is business credit exactly? Business credit is essentially your financial business profile. Your credit shows a historical payment history, your debt ratio, and your worthiness of new debt. You should already be familiar with your own personal credit profile. Your business credit profile is created to protect your personal one. We ll talk more about that in this section, as well as what other types of credit you should be aware of within the business credit realm. Personal vs. Business As an entrepreneur, you have a unique opportunity to build, maintain, and acquire credit both individually and as a business owner. Having business credit means that when you are trying to build and grow a business, you won t have to rely solely on your personal credit. Which is why the two sit in completely different buckets, but rely heavily on one another. Personal From the second you accept your first job or apply for your first credit card, your credit is being tracked in your profile. Your profile, or credit report, is what is used to speak to your ability to repay a debt. This information is reported from those issuing credit to what s called a credit bureau. This report is kept throughout your lifetime and is added to with each change of address, job change, and credit application submitted. For instance, if you would like to see if you qualify to buy a car, the car dealership will check your credit report. When this happens, not only is the application submitted for the dealership to view your credit report, the fact that they requested your credit report is also then added to the overall report. 6
Defining Business Monitoring Services You may not be aware when information is being pulled on you and who is pulling it. monitoring services come in handy for alerting you whenever your credit scores changes to help you stay on top of your credit score at all times. It s important to have a well-established personal credit score when attempting to create a business credit report. As you build further and further upon your business credit, your personal credit may be less important for business expenses. But early on, both your personal credit and business credit will be taken into consideration. That is because there is a proven, strong correlation between the personal credit histories of small business owners to the business credit performance, particularly in the early years of the business. What Creates Personal? Your personal credit score consists of five main parts: 1. Payment History 35% 2. Outstanding Balances Carried on Accounts 30% 3. Length of Card History 15% 4. Types of That You Have 10% 5. Inquiries 10% Common Killers of Scores There are several things that can negatively affect your credit score. It s important to keep an eye out for late payments or any other of the following items that can be avoided: Bankruptcies Short Sales Judgments Foreclosures Collections Late Payments Over 30 Days Late Payments Over 60 Days Late Payments Over 90 Days Repairing Bad If you have experienced one of the above mentioned credit score killers, you may need to take the time to improve your poor credit history. Although you can t rewrite history, over time negative credit information can be removed. Delinquencies remain on your credit report for 7 years. Most public record items remain on your credit report for seven years, although some bankruptcies may remain for 10 years and unpaid tax liens remain for 10 years. Inquiries remain on your report for 2 years. To take a more proactive approach, the first step is to know what caused your credit score to drop. Paying your bills on time is the single largest contributor to a good credit score. In addition, you can: 7
Defining Business Minimize your outstanding debt Avoid overextending yourself Refrain from applying for any unnecessary credit Business The purpose of establishing business credit is to separate the business from the owner s personal credit. Many business owners use personal credit to run their business. However, doing so could put you at risk if your business is ever in trouble. It is best practice to avoid using personal credit to finance your business purchases whenever possible. To completely separate the two, you must establish your business as a legal entity that does not hold you personally liable for the debts of the business. We ll talk more about this later. What Creates Business? As your business applies for and receives credit, a business credit report will be established. That report will then act as the primary tool for determining whether or not you are approved for future business credit. When a business issues another business credit, it is referred to as trade credit. This type of credit is the single largest source of lending in the world. Business credit bureaus create your business credit report using: 1. Your business name 2. Your business address 3. Federal tax identification number (FIN), also known as employer identification number (EIN) which you can retrieve from the IRS The business credit bureaus use this compiled data to generate a report about your company s business credit transactions. The major business credit bureaus that compile and provide copies of these reports are: Dun & Bradstreet Experian Business Equifax Business Business USA Volunteers Needed! It s important to know that unlike personal credit, lenders and creditors only report credit information to the credit bureaus voluntarily. Meaning, no one is required to send in information and the credit bureaus may never even receive all or any information about your transactions. You could go for years thinking that you re racking up credit, when in fact, none of it has been reported to the bureaus. This is why it is so important that you keep a close eye on your business credit reports to ensure that your hard work is paying off! 8
The Value of Good Business Building business credit is in every business owner s best interest. Everyone needs access to capital. Even if you are using private investors, you will always need more capital. needs arise whether you are dealing with one property a month or ten. Establishing business credit opens the doors for opportunities that you couldn t otherwise have with other financing methods. The sooner you understand business credit, the sooner you can truly understand the advantage of using it to accelerate your wealth building process. Foundation Building Building business credit is a lot like building a house. You need a foundation. Lack of credit and capital is one of the major reasons why businesses crumble and fall. It is critical to have all of your ducks in a row when attempting to build a strong business, and having a safe and reliable line of credit is certainly one of them. When you are starting out, it can be quite difficult to get lines of credit in your business name. As you acquire more lines of credit, however, you can speed up the process. Remember, all businesses run into times when they need large amounts of money fast. Building a foundation means that you make sure that when that happens, you re ready. 9
The Value of Good Business 10 Benefits of Good Business By building business credit with all the national business credit bureaus, a company increases its financial capacity. This creates an asset that can be used to acquire financing for the business based on its own creditworthiness rather than that of its owners. Here are 10 major benefits of building business credit 1. Increase Loan Approval - Acquiring a business loan is no easy task forbusinesses with poor credit. Building up your business credit history will increase your chances of being approved. 2. Better Approval Terms - Good credit can ensure that you are able to acquire financing when you need it. Insufficient or delayed financing is a common reason for business failure. For businesses with poor credit ratings, top national banks may increase credit card rates up to 9% and 4% on loan rates. 3. Lower Interest Rates - When you are able to have lower interest rates, it will be easier for you to borrow money for equipment, inventory, and buildings. Also, the returns that these investments will produce in future years will be worth more today when interest rates are low. This incentive boosts investments to really help make the economy grow faster. 4. Steady Cash Resource - Saving money by paying bills on time or early and getting the cash discount or reduced financing cost helps to solidify your credit history and ultimately increases your working capital and cash flow. 5. Separates Personal Assets - A major risk that business owners face is using their personal assets as collateral for business transactions. If the business owner fails to make wise financing choices, valuable items such as a house, car, or bank account are vulnerable to creditors claims if the financing is not repaid. 6. Protects Personal - As a corporation, your company is treated as a separate being. With a strong business credit report, you can stop relying on your personal credit report to qualify for financing. We ll talk more about this later. 7. Capital For Expansion - To expand any business, you will need money or credit. By building your business credit, you will be able to fund and obtain equipment and services to expand it. Being able to show lenders and investors that you are credible and successful will ensure them that their money will be used to expand an already successful business. 8. Rainy Day Fund - A disaster can strike without warning. You ll need to keep a cash cushion. How much money you have tucked away for a rainy day will determine how resilient your business is to economic lumps and bumps. Unexpected expenses can creep up on any business owners. Rainy day funds help owners to ride out the crisis without falling behind on bill payments and lapsing into debt. 9. Large Capacity - Businesses have 10 to 100 times greater credit capacity compared to personal credit. As a creditworthy business, your company will be in a position to qualify for financing based on factors strictly related to the business. 10. Increase Company Value - A creditworthy business has a powerful advantage in financing ability. Because this asset is fully transferable with the business, it makes it very attractive for a potential buyer or investor. 10
The Value of Good Business Building business credit truly provides remarkable benefits for a business and gives unique financial advantages in the market place. With this asset, a business can secure lines of credit, lease equipment, finance a company vehicle, and obtain business loans and credit cards without putting personal credit at risk. Finally, it s important to remember, the greater the business credit, the greater the worth and potential return you will receive if you choose to sell the business in the future. Protecting Yourself As mentioned earlier, one of the largest pieces of added value a business credit profile can provide you is the security in knowing that you and your assets are protected. Unless personal and business (investment) income and assets are kept separate, personal assets including cars, homes, and savings can be at risk from malicious and frivolous lawsuits and the reverse in the case of divorces or lawsuits and judgments levied against individuals. As a business owner, you should be able to limit if not eliminate the use of personal credit checks. When your company has its own credit ratings, you are able to. This will prevent you from having to marry personal credit, personal debts, and personal assets with your company. Keep in mind that if you are a sole proprietor or a business owner with fewer than 20 employees, your personal and business credit scores are closely linked in the eyes of banks and other lenders. So it s important to take steps to protect both. Take the steps to monitor, evaluate, and protect your credit standing just as you would protect any other business or personal assets. 11
Four Steps to Establishing Business Step One: Compliance The key to establishing a business credit profile and score is to find companies that will establish credit for your business without using your personal credit information and then report the payment experiences to the business credit bureaus. By reporting the information to the proper agencies, they ll help you establish your business credit profile. Before this can happen, however, you will need to follow these key four steps to get started. The first and most important step to building business credit is to comply with the requirements. Failing to be in compliance with the credit market can raise red flags with both credit bureaus and grantors. In order to establish your business credit profile and score, you must have these three things: 1. Business Location - you must have a physical business location in order to build any business credit. This address cannot be a P.O. Box, virtual office, or mail service facility. If an improper address location is listed, you can be flagged by the credit bureaus. 2. Business Phone - a separate phone number must be obtained for your business and listed with directory assistance. The phone number should be answered in the business name during normal business hours (Monday through Friday, 8am to 5pm). If you are unable to answer the phone number during these hours, you may use an answering machine that holds a message including your business name. 3. Entity Record Book - If you have filed your business in a state other than your home state; you must foreign file in your operating state. To do so, contact the Secretary of State in your home state in order to obtain the proper paperwork to complete this task. You will also need to obtain a Certificate of Good Standing from the state of incorporation for your entity. 12
Four Steps to Establishing Good Business Step Two: Registration Registering your business ensures that you can actually be tracked through the credit bureaus. Business credit is tracked differently than personal credit. You will need to have your business name, physical address, and either your Federal Tax Identification Number (FIN) or Employer Identification Number (EIN). When you form a corporation or LLC to operate your business, you should obtain an FIN or EIN from the IRS. You can apply for an EIN number at the IRS website. Once you have an EIN, it will serve as identification for your business for tax purposes (similar to how your Social Security number functions as your personal tax ID). Getting to Know Your Bureaus It s important to know which creditors report information and which Bureaus they report to. The largest credit bureau is Dun & Bradstreet. A D&B business credit report is the qualitative and quantitative representation of a business overall financial health and stability through a wide range of predictive and historic business credit scores and can include associated business information. They use a scoring system called the Paydex Score. The Paydex Score is a numerical value, ranging from 0-100, which measures the credit history of a company. The target score is 75 or above. A score above 80 is achieved by consistent on time payment and multiple years in business. To collect your Paydex score, visit: www.mycredit.dnb.com Step Three: Acquisition Your next step is to begin acquiring credit. There are four tiers of financing available to small business owners. It is important to be familiar with each tier and to develop a strategy that cleverly uses these tiers. Business credit relationships can be established through the following four tiers of vendors: Tier 1 Vendors The vendors in Tier 1 will typically extend credit to any operating business, even if that business is new, does not have any prior credit history, or does not personally guarantee their purchases. Most credit accounts in Tier 1 are Net 30, meaning you will receive an invoice for your purchase and have 30 days to pay in full. No interest is charged, but there is a fee for late payments. There is no grace period when using business credit accounts. This makes it even more important to pay the invoice in full before it is due. Examples Include: FedEx HD Supply Seton 13
Four Steps to Establishing Good Business Tier 2 Vendors The vendors in Tier 2 have some business credit requirements. Once you receive your D&B report with at least an 80 Paydex score and trades reporting, you can qualify to continue with the credit building process and should begin to apply for Tier 2. Revolving store credit lines are in the initial Tier 2 category. Examples include: Home Depot Office Depot Staples Understanding Revolving Revolving credit is when a customer pays a commitment fee and is allowed to use the funds as needed. The bank guarantees a maximum amount that can be loaned to the business. Along with a commitment fee, there are interest expenses for corporate borrowers. Sometimes these accounts can be obtained or a special interest rate of 0% for the first 12 months. Tier 3 Vendors Tier three is business financing and bank lending. Vendors in Tier 3 are more recognizable, but have stricter credit requirements. You must have at least an 80 Paydex score and 5-6 trades reporting on your D&B profile before you are given access to Tier 3. There are two types of vendor accounts: Net 30 and revolving. Examples Include: Sears Best Buy New Egg Helpful Tip! Paying early has more perks for a business credit score than a personal one your business credit score may improve with early payments. You can jump-start this process by charging a small amount as soon as you get an account, then immediately paying the bill. Tier 4 Vendors As the highest tier of vendor credit, Tier 4 credit has the strictest requirements. You must have 7-9 trades or more reporting on your D&B profile before you can move on to this tier. In the fourth tier of commercial credit the private investors, venture capitalists and other investors are found. This level of credit is generally reserved for larger companies that have been around awhile and can provide investors with detailed financial statements and projected growth strategies. 14
Four Steps to Establishing Good Business Working With Specialists Through our years of experience, we ve found that a lot of investors need help with their credit. NCH Capital, Inc. specializes in building business credit and securing lines of credit for early stage growth companies. NCH provides unlimited step-by-step guidance and coaching support for those needing it. For more information, visit www.nchinc.com Step Four: Development Once vendors or lenders begin to extend you credit, it s absolutely imperative to be on top of your payments. It s also important to make sure your vendors report prompt payments to the credit bureaus. Vendor payment reports are one of the best ways a business can improve its credit history. Develop your business credit even further by securing loans that are guaranteed by the Small Business Administration (SBA) or other business associations. If you have good personal credit, SBA loans may be the most attractive option. However, you must be seeking a relatively small loan (typically under $350,000). In addition, you will need to provide your personal tax returns or other documentation that will support your high personal credit rating. Helpful Tip! Many of the rules for building and maintaining good credit apply to both personal and business credit. 15
When to Utilize Your Business Purchasing Properties Business credit can literally change the ease at which you do real estate transactions. You can close deals without someone looking over your shoulder. You can control the speed that you close deals. Most importantly, you are able to control more of your time by learning how to do it the right way. There are three main ways that you will find yourself using business credit. When you purchase a property, to cover any unexpected costs, and to fill in the cash flow gaps as you are buying and renovating properties. Let s talk a bit more about each one. Using a hard moneylender or private funding for your deals is a staple in the real estate investment world. This finance option is key when a mortgage loan becomes impractical, or even impossible to obtain. With good business credit, you can typically get your hands on funding fairly quickly, which would allow you to jump on a good deal before anyone else has the chance to. Covering Unexpected Costs As previously mentioned, you can never quite know when an unexpected cost could arise to throw your finance plan for a loop. For instance, you may find yourself in a sudden position where you have to relocate your office building. Not being able to do this quickly and seamlessly because of finances or credit could send the company into deep trouble. The key is to have the tools you need to get you back on your feet whenever you fall. Filling in the Gaps In this business, there are often times of highs and times of lows. As investors, we are typically paid in lump sum amounts. Therefore, we need some kind of supplemental cash flow in order to fill in the gaps and keep things moving. You may find yourself seeking additional funds for repairs, materials, and items like appliances. Many times you will be better off utilizing business credit for financing rather than encumbering properties with more liens or larger loans. This provides more flexibility in selling, and leaves additional equity in case the market turns for the worse. 16
Wrap Up The key to establishing a business credit profile and score is simple know the process! #1 Comply With Requirements #6 Monitor Accounts Regularly #2 Understand Reporting BUILDING BUSINESS CREDIT #5 Pay All Bills on Time #3 Begin Acquiring #4 Use Your Monthly 17
Glossary Business - credit specifically extended to a business (as opposed to a consumer). Also known as a business loan. Personal a line of credit extended for personal or household use Trade - credit extended to a business by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment, or other valuables without paying cash on the spot, you re using trade credit. Usually when the goods are delivered, a trade credit is given for a specific amount of days - 30, 60 or 90. Revolving - a line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customer s current cash flow needs. Commitment Fee- a fee charged by a lender to a borrower for an unused credit line or undisbursed loan. A commitment fee is generally specified as a fixed percentage of the undisbursed loan amount. Paydex Score- The Paydex Score is Dun & Bradstreet Credibility Corp s unique dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on trade experiences reported to D&B by various vendors. FTIN or EIN- Federal Taxpayer Identification Number (TIN) and Employer Identification Number (EIN) are defined as a nine-digit number that the IRS assigns to organizations. The IRS uses the number to identify taxpayers who are required to file various business tax returns. SBA Loans - The US Small Business Administration 504 Loan or Certified Development Company program is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings and machinery, at below market rates. Bureau - a company that collects information relating to the credit ratings of individuals and makes it available to credit card companies, financial institutions, etc. 18
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