The Blessing & Curse of Starting a Business with Good Credit Don t Make These Common Mistakes that most Small Business Owners Make

Transcription

1 The Blessing & Curse of Starting a Business with Good Credit Don t Make These Common Mistakes that most Small Business Owners Make By Tom Gazaway, President & CEO of LenCred Len redtm BUSINESS CAPITAL FOR STARTUPS AND ESTABLISHED COMPANIES

2 Executive Summary Situation: Many business owners start their businesses with a lack of understanding of what their credit and borrowing options are. They don t understand how they can (and can t) borrow money. It s often worse when the business owner has excellent credit and thinks that he or she has loan options that simply don t exist. Then they fall into the trap of thousands of other business owners and they make bad decisions, obtain the wrong funding (or no funding), use their credit cards incorrectly, and make it difficult or impossible to get additional capital as they grow their business. Problem: One of the most common problems faced by business owners is that they borrow money the wrong way and then damage their credit as they grow their businesses. They do things like use the wrong credit cards and then they join thousands of other business owners who have made the same mistakes. The result is that they cannot get additional funding in the future to continue to grow their businesses because of the damage to their credit profiles. The problem is often worse for people who start their business with good personal credit Solution: The solution is simple. Business owners who start their businesses with excellent credit need to understand what kind of loans and lines of credit are available to them. Since 80% of small business owners will use credit cards and credit cards will at least be part of their funding solution they must not make the common mistakes that most business owners make with their credit and credit cards. Result: When someone starts a business with excellent credit and avoids the common mistakes made by most business owners then they can obtain business funding with no collateral, no financials, low rates, and most importantly they can protect and preserve their excellent credit. This makes it much easier to obtain things like SBA loans and unsecured lines of credit later after they ve grown their business. 2 The Blessing and Curse of Good Credit

3 Introduction It has been said that resources are important but resourcefulness is invaluable! Many a business owner has struggled to survive and grow when the owner had poor credit and was unable to get financing. We all know that story. How can I start my business or grow my business when I don t have the credit and financing to market my product, manufacture my product, distribute my product, and so on? We would all agree that it s tougher when the odds are to your disadvantage and when your financing options are with more non-traditional sources that are higher cost than the normal options of credit cards, SBA loans, HELOC s, etc. But we re not here to talk about that. What about the business owner with great credit who is about to start or just started their business and they want and need financing? The world is your oyster right? What a blessing for you! I mean, after all, you never had a problem getting a mortgage. In fact, you may have got several mortgages and you always get the best rates and lowest fees available. And you ve bought a few cars in your day too and occasionally you finance them simply because the rates are so low. Why not! You have credit cards and whenever you ve needed a new one you ve been approved because, after all, you ve got great credit. So your entire life you ve got whatever you wanted because you ve got great credit. So why will it be any different now that you re starting a business? Well, you may want to buckle up and hang on for this ride. We ve already said it s a blessing for you to have great credit but for many that Well, you may want to buckle up and hang on for this ride. We ve already said it s a blessing for you to have great credit but for many that has also proven to be a curse. has also proven to be a curse. The world of business credit and financing is a long way from that life you ve lived up to now. Did I say it s a long way? Let me illustrate. I went to college at a small school in the beautiful city of Santa Barbara, CA. In fact, my school was in the Montecito section of Santa Barbara. If you ve never heard of Montecito there s a lady named Oprah who has a home there and it s right around the corner from a guy named Michael who is no longer alive but was known as the King of Pop. When I graduated I moved from Santa Barbara, CA to Camden, NJ. So if you re not familiar with Camden, NJ it was named by CBS News as the 2nd most dangerous city in the U.S. That move from a wealthy southern California community to a poor Northeastern city was about as far as east is from west and about as night and day as you can get. So think of your move from home mortgages, 0% auto financing, and great credit card offers to the elusive world of business credit and financing 3 The Blessing and Curse of Good Credit

4 like my move from Santa Barbara to Camden! Small business credit and financing is about knowing your options. In other words, do you know what your options are based on things like your credit, collateral, your industry, geographic region, company revenues, your profits, etc.? All these things impact what you can and can t do. A client with an established business with established revenues, good profits, and excellent credit is going to have some options that a startup company in Ohio where the owner has marginal credit doesn t have. Then there s your industry. A doctor or lawyer is going to have options that a construction company or real estate investor simply doesn t have. Are you a better fit for a local, regional, or national lender? Local lenders are great but they rarely lend without collateral and if you ve got good credit wouldn t it make sense to at least consider some borrowing options that don t require you to pledge precious collateral? Will you need things like financials, a business plan, a proforma, and a host of other documents just to get to the underwriter? Having excellent credit is a blessing and it does mean you ll have more financing options (than someone with bad credit) but that list of financing options is still not a long one. The reason it s also a curse is that many small business owners who have good credit make the mistake of thinking they have options for financing that they don t really have. We re talking about good and intelligent and responsible people. These are also people who have done a good job managing their loans, credit cards, and credit in the past so sometimes they don t realize why they need help with understanding the business credit and lending terrain and they can fall into the trap of thinking they can do it on their own. In the space of business financing you must decide if you want your funding through debt or equity or, in some cases, a combination Having excellent credit is a blessing and it does mean you ll have more financing options (than someone with bad credit) but that list of financing options is still not a long one. The reason it s also a curse is that many small business owners who have good credit make the mistake of thinking they have options for financing that they don t really have. of the two. Refer to our report, The 16 Ways to Get Money for Your Business, if you want to know the 16 most common ways small business owners obtain their financing. Do you want to give up ownership and control of your business by bringing on an angel 4 The Blessing and Curse of Good Credit

5 investor or would you rather borrow the money and retain your ownership and control of the business? For you as a business owner it is all about knowing what those options are. Then it s about taking action on the one or more options that are available to you. Do you know the famous quote from Theodore Roosevelt? He said, In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing. I talk to business owners every day and this is so true. When you re taking action then you will make mistakes and then you adjust and learn from them. However, when you re not moving forward and you re constantly thinking about what to do then you never get going and you cannot succeed at your task or, ultimately, at your business. The formula is actually quite simple. 1) Know your borrowing options 2) Select which option or options are best for you 3) Decide if you can get that funding on your own or if you need the assistance of a trained and experienced financing professional. So let s quickly cover the most popular and widely used forms of financing for companies just getting started. This means anyone who has been in business less than 2 years and may have not got started at all. As we get into these most common forms of startup financing we have to talk about the elephant in the room it s the one thing small business owners never like to talk about. It s the question, what happens if my business fails? Statistically we all know that most businesses don t last and they ultimately fail. We don t ever want that to be your focus but as you start and grow your business you have to know what would happen in the worst case scenario so we ve included those answers in this section. Friends, Family, & Fools Known as the 3 F s it is very common for business owners who need several hundred thousand dollars or millions of dollars to use this option in addition to other options. Pro: Very common form of startup capital. According to seasoned attorney and tax accountant Mark Kohler it s important to execute this properly and document everything accordingly. Documentation is the key says Kohler even if it s your brother in law and especially if it s your brother in law. Con: The downside may be obvious if the business fails then running into an investor who lost money because of you isn t exactly the coolest thing in the world. Uncle Louie may not be your favorite uncle anymore if his investment doesn t work out like you planned it to. HELOC s or Home Equity Lines of Credit These may not be very popular or common anymore but they are one of the 5 The Blessing and Curse of Good Credit

6 cheapest and lowest cost options as long as you have lots of equity in your home and have good credit. Pro: HELOC s have amazingly low rates and are far more valuable than loans since they are lines of credit that have lower monthly payments and can be used repeatedly. Awesome option. Con: Well, since the economy and real estate market crashed on us in 2008 good luck getting one of these. The downside is that if your business doesn t work out then you re risking your primary residence losing the where else can you get low-cost financing for startups with no collateral and no financials and they even give you 0% interest for 6-12 months or more! Brock Blake, CEO of Lendio.com home you and your family live in would have to rank pretty high on the not so cool list so be cautious. If the business fails and you walk away from this debt then the whole family is going to have to pack their bags. 401k/IRA financing Also known as ROBs or Rollover as Business Startups. Extremely common practice for franchisees that are opening a franchise. Pro: Rollover your existing 401k or IRA and use it to infuse liquidity into your new company with no debt. How has your 401k performed lately and would you rather put those funds to work in your new business? No monthly payment. Very attractive option. Con: Well, this one isn t pretty but you always have to look at the risk when you acquire financing. If the business doesn t work out you ll likely lose your nest egg you worked hard to accumulate. SBA Loans Time-tested and they have been around for a long time. They are possible if you re a startup but definitely a challenge and if you can t show a strong work history in the same industry your business is in then it s best to not consider this an option. Pro: Although they are rare, if you can obtain an SBA line of credit the fees for the lines of credit are very low (not compared to consumer financing but compared to other options for your business). Con: Ok, where do we begin hard to obtain, better have collateral, very difficult to get approved, takes a very long time, loans and not lines of credit (most of the time), closing costs are high for loans (low for lines of credit) you get the idea. If your business fails you ve got three main issues: you could lose your collateral you pledged, you ll have some late payments show on your credit report, and you re almost guaranteed to never be able to get another SBA loan in your lifetime. Credit Cards Pro: Most business owners use credit cards. Brock Blake is the CEO of Lendio.com, a two time Inc 500 honoree and a well-known 6 The Blessing and Curse of Good Credit

7 financing company for small businesses. Blake says it like this, where else can you get low-cost financing for startups with no collateral and no financials and they even give you 0% interest for 6-12 months or more! Con: If your business fails and you miss payments or don t pay back the money you ve borrowed then you ll have some late payments on your credit report and get some calls from collectors trying to get paid. You don t lose any collateral. This is the best of the worst case scenarios. The banks have a write-off and take the loss but your friends and family don t lose their money and you don t lose any of your precious collateral. credit cards. Most people are unaware of the true benefits of using credit cards the right way and they fall into the trap of not using the right credit Your cash or savings Pro: No monthly payment Con: If your business fails then you ve lost your own money and your savings. This alone, for some people, is riskier than any other option - except maybe the 401k/ IRA rollover option where you would also lose your own money if the business failed. If you re not sure about this then ask yourself what wealthy people do. They have more money and more savings than most of us but they don t use their own money normally when they can use OPM (other people s money). Statistics from places like NFIB, SBA, and the Meredith Whitney Advisory Group tell us that about 4 out of every 5 small business owners use credit cards for their business. According to Whitney, it s a vital part of the overall funding strategy for small business owners. The problem is that most business owners don t do a good job of using credit cards the right way so that they protect and improve their credit files as they use their Credit cards are a vital part of the overall funding strategy for small business owners. Meredith Whitney, Meredith Whitney Advisory Group cards as they build their businesses. Here are the primary benefits of proper credit card usage and of course you ll miss out on most or all of these benefits if you don t have the right plan and strategy for using your credit cards: Accessing additional capital without needing collateral, financials, business plans, etc. True Separation of your personal and business credit Cash-Flow friendly monthly debt service in other words low monthly payments 7 The Blessing and Curse of Good Credit

8 Minimize the interest expense Maximize tax benefit Protect, preserve, & improve your personal credit as you grow your business Kris Roglieri is the founder of Commercial Capital Training Group and a 20 year veteran of business finance. Roglieri says, It s ironic Without the help of a credit and lending expert it s unlikely that a small business owner would know how to go about taking advantage of all these benefits. Cort Christie is the founder and president of Nevada Corporate Headquarters. He s been working with entrepreneurs and small business owners for over 20 years. In addition to setting up corporate structures for their clients, they help them build good business credit and obtain capital also. Christie knows you re not going It s ironic that the most popular and most commonly used business credit card in the United States acts just like a personal credit card and will damage your credit basically as you use it. Kris Roglieri, Founder Commercial Capital Training Group to stop business owners from using credit cards but also advocates for the proper usage of credit cards. As Christie put it, the credit and lending environment for small business owners is much like the legal landscape. If you had a legal matter, you would probably hire a qualified lawyer to represent you. One of the reasons so many people don t get their funding nowadays is that they re not working with a qualified credit and lending expert who understands all the nuances of small business credit and borrowing. that the most popular and most commonly used business credit card in the United States acts just like a personal credit card and will damage your credit basically as you use it. Credit cards are commonly used and they are a great tool when used properly but it s nearly impossible nowadays to expect the average business owner to know how to properly acquire and use the best credit cards to ensure they can always continue to borrow money at the best rates and terms in the future. Your excellent credit is definitely a blessing and I m sure that the army of millions who don t have excellent credit would surely trade with you anytime. I hope you ll take advantage of that blessing and not let it become a curse. It starts with knowledge and knowing your options. Don t make the 8 The Blessing and Curse of Good Credit

9 mistake of thinking that you can do something that doesn t exist. There s not a lender out there who will bring you a bag of cash and say, you ve got good credit so just pay me back when you get a chance. I trust you. We don t make the rules so we can t create something that doesn t exist. The purpose of this report is for us to be a resource and help you make good decisions based on what the credit and lending environment offers. We hope this report helps you make the right decisions and that you won t make the mistake that so many others have made and let the blessing of excellent credit turn into a curse. In conclusion, here are some questions everyone should ask themselves as they look to make their credit and borrowing decisions and finance their businesses. *Do I clearly know how many options I have to finance my business and what are they? *Since 80% of business owners use credit cards then what is your plan for this and do you clearly know which lenders to avoid, where to go, and how to preserve or improve your credit profile as you acquire your funding? *Have I thought about the risk and what will happen if my business fails and am I obtaining my financing accordingly? 9 The Blessing and Curse of Good Credit

10 Concluding Summary Borrowing money for a business is a completely different experience and process than consumer borrowing Borrowing money the RIGHT way begins with knowing what your options are and being committed to protecting and preserving your credit as you build your business. Otherwise you ll fall into the trap that hurts most business owners who make these mistakes and then find out later after it s too late that you can no longer get funding to continue your growth. Your excellent credit can be a blessing as you start and build your business or it can be a curse. The choice is yours! Almost all business owners use credit cards but most don t use them the RIGHT way! The formula is actually quite simple. 1) Know your borrowing options 2) Select which option or options are best for you 3) Decide if you can get that funding on your own or if you need the assistance of a trained and experienced financing professional. The credit and lending environment for small business owners is much like the legal landscape. If you had a legal matter, you would probably hire a qualified lawyer to represent you. One of the reasons so many people don't get their funding nowadays is that they're not working with a qualified credit and lending expert who understands all the nuances of small business credit and borrowing. Cort Christie founder and president of Nevada Corporate Headquarters 6 most common startup financing options 1 Friends, Family, & Fools 2 HELOC s or Home Equity Lines of Credit 3 401k/IRA financing 10 The Blessing and Curse of Good Credit

11 About the Author Tom Gazaway is the founder and CEO of LenCred. He is widely known as the country's foremost expert in unsecured lending solutions for small business owners. Tom is affectionately known as the "credit geek" for his knowledge and insightful understanding of FICO scores and the FICO credit scoring system. He is an instructor and frequent guest with a variety of groups and organizations throughout the United States on the topics of personal credit, business credit, and many topics surrounding small business financing. Tom has written for Small Business Trends (SmallBizTrends.com), Dun & Bradstreet Credibility Corp (dnb.com), Service Core of Retired Executives (SCORE.org), and has written many reports, white papers, and ebooks about small business credit and financing. He has extensive training and over a decade of experience in a variety of debt creation and debt management strategies that allow his clients to protect, preserve, and improve their credit profiles as they obtain funding. He is a Certified Credit Expert Witness (CCEW) and also has his FICO Pro certification and is one of the few people in the country who holds the combination of credit certifications he has. Tom grew up in Marshalltown, Iowa and received his B.A. degree in Economics & Finance from Westmont College in Santa Barbara, CA. Currently, Tom lives in Blackwood, New Jersey with his wife Melanie and their three son's Aiden, Zander, and Micah. Len redtm BUSINESS CAPITAL FOR STARTUPS AND ESTABLISHED COMPANIES lencred.com East Coast Office Midwest Office 602 Little Gloucester Road Suite 8 Blackwood, NJ SW I Street Suite 102 Bentonville, AR At LenCred we help both new and established business owners to obtain the capital they need to start, build, and grow their companies so they can achieve their business goals and dreams. We are the developers and authors of the 6 Benefits of Borrowing the RIGHT Way and we are the nation's leading experts in helping small business owners borrow money without collateral. Call us today or visit our website and ask for a free consultation to see what your options are and find out how you can get the funding you need for your business. 11 The Blessing and Curse of Good Credit