How does credit impact your small business, and how can you use it to your advantage? In this brief video (just ten minutes), I’ll help you understand how to leverage credit to grow your business.
Transcript: Leverage Your Credit To Grow Your Business
(This transcript has been lightly edited for readability.)
Welcome to the Nav webinar “Leverage Your Credit To Grow Your Business.” I’m Gerri Detweiler, Education Director for Nav, and there’s my contact information – you’re more than welcome to reach out to me about questions you have after this webinar.
This is a very brief webinar. Our goal is to give you some simple steps that you can take now to help position your business, whether you need financing now or whether you’re thinking about growing and needing financing in the future.
Step One: Check Personal Credit
So let’s get smart about your credit. The first step I’d encourage you to consider as a small business owner is to check your personal credit. I know the goal is to move away from personal credit and to obtain financing without personal credit checks or personal guarantees. But initially at least, as you grow your business there are lenders who will check your personal credit and they’re probably going to rely on that, at least in part and sometimes fully before making a decision.
Some examples of those:
- Personal and business credit cards.
- Traditional bank loans often check personal credit and love to see that the business owner has skin in the game.
- Microloans— very small loans that may be available through a variety of sources including community development financial institutions.
- Term loans which are just loans for a fixed amount of time for a fixed amount of money. Those are available online as well as through traditional lenders like banks and credit unions.
- And then cash flow loans, cash flow loans will typically analyze the cash flow into your business and offer funding based on your historic cash flow. Those often check personal credit scores.
At Nav, we work with over 30 different lenders of different types around the country. Some lenders go as low as 550 personal credit scores. If you know the general scoring scale, usually (personal) credit scores range from 300 at the low end at 850 at the high end, but many of the lenders will look for scores in the mid 600’s and we have a few that are looking for minimum credit scores in the 700’s. There’s a variety of financing available at different levels of credit.
Step Two: Check Your Business Credit
Your business has its own credit reports and scores but unlike personal credit it’s a little more involved setting up business credit simply because not all lenders or vendors will report to business credit agencies. You might have to get a little bit more proactive than you are with your personal credit.
Some examples where business credit may be checked – vendors and trade credit suppliers. You may get supplies from a supplier, you may work with a vendor, and if you work out terms with them you can get what you need and pay for it later often in net-30, or net-60, or net-90 terms which just means the invoice is due in 30 days, 60 days or 90 days.
SBA loans – some of the most popular loans that are guaranteed by the Small Business Administration do require a credit check that looks at both business and personal credit, and I’ll explain that in just a moment.
Some online lenders check business credit.
And if you want to do business with some of the big companies like Walmart or Target, you’re probably going to have a D-U-N-S number which is an identifier for Dun & Bradstreet, one of the major business credit bureaus, and they may check your PAYDEX for Dun & Bradstreet which is their version of a business credit score that’s very popular. You do want to build business credit before you need it so you can take advantage of those opportunities when they arise.
At Nav, we did a survey of business owners nationwide and we found that business owners who understood their business credit were 41% more likely to get approved for a business loan. Forty-one percent: we think that’s a competitive advantage and we definitely want you to have that competitive advantage.
Now just a minute ago I mentioned business credit in the context of business financing – there’s a FICO score that’s been developed specifically for small business. It’s used to evaluate many SBA loans in the popular 7(a) program but it also can be used by banks or credit unions, or other traditional financial lenders evaluating small business applications.
Here’s how this works. The FICO SBSS score takes a look at your business credit of your business, personal credit of you the owner, and combines the two into a score that ranges from 0 to 300 with 300 representing the lowest risk, or the best credit score that you can get. You can get a good (enough) score with stellar personal credit score and no business credit or vice versa but it’s tough. It’s a lot easier to get a high FICO SBSS score if you have established both business and strong personal credit.
Step Three: Know Your Revenues
If you’re thinking about financing now or in the future, know your revenues. There is a variety of lenders that will look at the revenue coming into your business. They can analyze in different ways, they might be looking for minimum annual revenue, average monthly revenue, they might be looking at the mix of the revenue that you receive or whether you received it from a variety of sources. There are different ways they can analyze it.
Some examples of lenders that do take revenue into account include:
- Bank loans— banks often like to deal with businesses that are at least two years old and have steady revenue.
- Term loans which are fixed amount loans for a fixed period of time.
- Lines of credit where you get X amount of dollars, you can spend as you choose and pay it back over time.
- Business cash advances, that’s where they look at the cash flow in your business and you receive an advance which will be taken out of future revenues your company receives.
- And then invoice financing, when you’re owed invoices but you’re waiting for the company to pay. It could be a very large business or a government contract that takes a while (to pay), you could get money advanced based on those invoices.
Those are all (examples) that will look at the revenue coming into your business.
Step 4: Separate Business and Personal Finances
This ties into step three, and that is that you want to make sure that you have a business bank account. Most of those lenders would much prefer to see a business bank statements than try to sort out what’s due to your business and what’s personal if you’re commingling your personal and business accounts. Having a business bank account is extremely helpful not only when you go to get financing but come tax time you know where everything is so it’s a lot easier to separate it earlier rather than trying to figure it out later.
Another thing you may want to consider is getting a business credit card. If you’re using a personal credit card or if you’re using a debit card for your business, you might as well think about a business credit card. The good news is there are business credit cards that are available to very young businesses. You could start a business today and you may qualify for some of these business credit cards tomorrow. What they’re going to look at is your personal credit score and income from all sources. If you have a day job still, if you have a spouse who works whose income would be available to to pay the debt, that kind of income could be used to qualify for a business credit card.
Most business credit cards— not all but most— do not show up in your personal credit reports unless you default. As long as you pay the bills on time, it doesn’t show up in your personal credit. You see a link here that goes to an article that describes which issuers report to personal and which ones don’t: nav.com/report. This will help you make that decision in terms of choosing a business credit card that doesn’t affect your personal credit.
Step 5: Establish Accounts That Report to Business Credit
This is trickier than you think because, as I mentioned, not all business lenders or vendors do report to business credit. I’ve got a shortlink there (Nav.com/vendors) to an article that will give you the names of 3 vendors that are super easy to start with. They don’t even check your personal credit and they will allow you to buy shipping supplies, or janitorial supplies, or office supplies on terms. They offer net-30 terms (the bill is due in 30 days) and then report that payment history to the commercial credit agencies so that you start to build business credit. This is a great way and an easy way for you to get started building your business credit. In addition, the business credit card issuers that I mentioned earlier, those do report to business credit bureaus as well, so that’s another tool as you start to build business credit.
Step 6: Pay On Time
Once you do get these accounts, you want to pay on time. Payment history is very granular with business credit— much more so than business credit. If you pay just a couple of days late on a business credit account that shows up in your credit, it could show up as a late payment. They use the term DBT or “days beyond terms” in business credit so if you have net-30 terms and you pay on day 32, you are 2 DBT. Nationwide, the average business is 11 DBT. So don’t panic if you miss a bill by a day but especially if you’re building business credit, I would highly recommend you set up a system so that those bills get paid right away, so you’re paying early and you don’t have to worry about any late payment or any possible negative information on your business credit.
Step 7: Fix Mistakes
The Wall Street Journal reported a higher error rate on business credit than there is with personal. My theory is the reason that is is because business owners don’t check their business credit. It doesn’t matter whether it’s your personal credit or your business credit, ultimately, you and I are the only ones who can look at our credit reports and say, “that’s not my account,” or, “I wasn’t late,” or, “I forgot about that.” Ultimately, we’re the ones who can ensure accuracy in our credit reports, so we need to be checking our business and personal credit on a regular basis to make sure the information is accurate, complete and up-to-date.
Step 8: Monitor Your Credit
Business identity theft is a problem. There was a story recently in the news of a lawyer who was a victim of both personal and business identity theft. He actually had to shut down his law firm for a while to deal with the repercussions of business and personal identity theft. Think about the fact that if you’re not checking your business credit, it’s a lot easier for someone to get away with using your business credit fraudulently for a period of time because you don’t know there’s something suspicious going on. Monitoring your business and personal credit can help you not only stay on top of it but also potentially spot fraudulent activity early and intervene before it gets to be too late.
Let me give you a few resources here. At Nav, we offer business and personal credit scores. We’re the first site to offer free business and personal credit in one dashboard and we provide that for free so you don’t even need to provide a credit card number. In addition, we offer lending options that will help you evaluate which options are the most realistic for your business now as well as identify and develop strong business credit so you can qualify for better financing in the future.
Our mission is to reduce the death rate of small business and we do that through the free educational tools and resources that we offer. We’d love to help you.
I’m Gerri Detweiler at Nav. We hope we could be of help to your business. And if I can be of help with your questions, feel free to reach out. Thank you.
This article was originally written on November 14, 2018 and updated on September 9, 2022.