How Personal and Business Credit affects your Business

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1 How Personal and Business Credit affects your Business The Business Finance Lounge s Credit Report By Tom Gazaway, President & CEO of LenCred Len redtm BUSINESS CAPITAL FOR STARTUPS AND ESTABLISHED COMPANIES

2 Executive Summary Situation: When starting, building, or growing a business, small business owners have two options in obtaining their financing. One way to obtain your capital that you can use to finance a business is by surrendering a portion of your business to an investor or investors, or giving up an equity stake. Of course another option to obtain your capital is to borrow or obtain debt financing. As it relates to debt financing there is both secured and unsecured financing. Debt financing is the low cost means of financing a business; however, when it comes to debt financing your business and personal credit profile becomes vital. Problem: The root of the problem is that small business owners rarely borrow money the right way and this is so common because nobody is training them on the right and wrong ways to obtain their financing. When small business owners do things like using the wrong credit cards they will damage their credit profiles, limit their ability to get additional financing, miss out on tax benefits, fail to separate personal & business credit, etc. Solution: Your personal credit and business credit are assets that, when managed well, will allow you to grow quicker and more efficiently. You will obtain more financing with good personal and business credit than you would without them, and you ll also get that financing at better terms. Additionally, when they are managed properly, you will maintain a separation between your personal and business credit. Result: When a small business personal and business credit files are managed properly small business owners can acquire working capital and appreciate the 6 benefits of obtaining funding for your small business the right way. Imagine being able to borrow $100,000 or $200,000 or more at the lowest possible cost. Understanding the principles of business and personal credit allows small business owners the ability to seek the right financing options to start, build, and grow their business. 2 How personal and business credit affects your business

3 Introduction Credit is a very important aspect of borrowing money as an individual or as a small business owner. All our consultants are FICO Pro Certified. We know credit inside and out - and that s important whether your credit is great or it s not great because if it s great then you probably don t know your best options and you don t want to be like most small business owners and borrow the wrong way and then hurt your credit profile. It s also important if your credit isn t good. This means you ll need non-bank financing and since we don t do credit repair we may need to refer you to a reputable company who can help you with the credit issues so maybe you can become bankable and get lowercost financing next time. Do you have great credit? That s good and it will help but you may not have quite as many options as you think unless you ve also got a wellestablished business in an industry that s not high-risk and you have lots of revenue and are very profitable. If you have bad credit then the options maybe fewer and the cost of the money you borrow will be higher but there are still solutions for you. We can show you what your options are for borrowing money today and we can show you the path forward so that you ll have more options in the future and better options with lower costs as well. So let us dive into what you need to know about your personal and business credit, with the best blog articles on credit from the Business Finance Lounge. Should you be Building Business Credit? Should we be building business credit for our company? Let s talk about that. First, I want to tell you that I do think most people should If you have bad credit then the options maybe fewer and the cost of the money you borrow will be higher but there are still solutions for you. build their companies business credit profile because, after all, is there any reason why you would not want good business credit for your company? Also, keep in mind that we are a company that focuses on working capital and not specifically business credit building. There s a big difference. The question is, what do you think building business credit will do for you? Over the years we have found that people are confused and misunderstand why you want to build business credit. This section is written for small business owners who are doing less than $10 million in annual revenue all the way down to startup firms with no revenue. Many companies who promote and sell business credit building programs will tell you things that simply are not true about building your business credit. When you build your business credit you are primarily setting up and building your Dun & Bradstreet (D & B) business credit report. It does involve some 3 How personal and business credit affects your business

4 building of the Experian business credit and, to some degree, your Equifax business credit also. With D & B you are largely focusing on what we call vendor credit or trade credit. In other words you ll be opening Net 30 accounts at places like Quill, Grainger, Gemplers, Uline, etc. Then you ll move on to revolving accounts with Here s the result of our process that started over 2 years ago for us. We now have several lines of credit for $25,000 or more with each of the following companies: Staples, Dell, Home Depot, Wal-Mart, Chevron, and Wright Express (gas card). We also have several other smaller open lines of credit at places like Office Depot, Shell, BP, Lowes, Quill, and Sams Club. We never personally guaranteed any of these and none of them ever looked at my personal credit report in order to grant these credit lines. They were solely based on our business credit. This is great but you ll also notice that none of these are visa, vendors like Staples, Exxon, Office Depot, BP, Dell, etc. This process will create tradelines that report to D & B and then create a Paydex score and a rating. This is all a good idea and should be done if you plan on your business being around for the long term. If you aren t sure about this or don t know if you ll be around for the long-term then in your mind you already doubt your longevity and that s something that s tough enough that if you aren t determined to be around then you probably won t be...but, of course, that s a topic for another day. Building business credit is a wise thing to do but it will come with an expense and it will take time. It s not the quick fix to help you get a small business loan in a couple months. Talk to business bankers who work with small businesses seeking loans and you ll be hard-pressed to find one who has ever had a loan denied because the business didn t have a good business credit report. However, it does serve a purpose. 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. master card, etc. so I can only use my Home Depot line of credit at Home Depot. It s not working capital or an unsecured business line of credit that I can use however I want. This doesn t mean it s not great but it s also not as great as working capital in the form 4 How personal and business credit affects your business

5 of a visa credit card or a bank-draft line of credit because my Home Depot card is very limited in comparison. I can use it with one company verses tens of thousands of companies who accept credit cards. Another way we used our excellent business credit report was we recently purchased a phone system for our business. They did not look at my personal credit and based our equipment lease solely off our business credit. That s pretty cool. So it s a good idea to build business credit and it s definitely something that has value but don t make the mistake of thinking that this cool strategy is more than this or that it s something it s not. In my opinion every serious business owner should be building their business credit because, after all, why wouldn t you want your business to have good credit. Consider it a cost of doing business and after a while you ll reap the benefits and be glad you did it! How Much Available Credit Should I Have on my Credit Report? If one of your goals is to have the best possible FICO score and best possible credit profile and if you also want to have the best and most pro-active plan for how to prepare for unexpected credit surprises then you re in the right place. You re about to learn some important information that you re unlikely to hear anywhere else. How much available credit should I have on my personal revolving accounts on my credit report? Personal revolving accounts most commonly means personal credit cards but it can also mean personal lines of credit and certain business credit cards if they are showing up on your personal credit profile (which is what happens with lenders like Capital One, Discover Card, TD Bank, Nationwide, State Farm, and others). It includes all major credit cards as well as your departments store and non-major credit cards. Keep in mind that 30% of your FICO score is determined by the utilization on your How much available credit should I have on my personal revolving accounts on my credit report? revolving tradelines that are on your personal credit report. In a best-case scenario, and something you ll commonly see from people who are part of the 800 Club (800 FICO scores), is that they have over $100,000 in available credit lines for them to use as needed. So, ideally, that s your answer: you would like to have at least $100,000 in credit lines or available revolving credit. I think that this goal is a pretty big challenge for many people so for most people it s a good idea to strive to have a minimum of $50,000 in available credit on your personal credit profile. As a country we ve lost over $2 Trillion 5 How personal and business credit affects your business

6 in available credit during The Great Recession. This is according to Meredith Whitney from the Meredith Whitney Advisory Group. It s very common nowadays for people to have their credit lines either lowered or completely closed and shut down. If you had 8 different credit cards and a total of $120,000 in available credit and one of those credit lines was lowered or closed completely how would that impact you and your credit scores? As long as you re maintaining relatively low utilization on each of your credit cards the answer is that the impact on your credit would be minimal. However, what if you only had 2 credit cards for a total of $30,000 in available credit and one of those credit lines was lowered or closed? In that scenario, it s much more likely that the impact on your credit and your FICO score will be more significant and, of course, not in a good way! It s probably safe to say that I don t think there are very many people out there writing books, blogging, and talking about credit who are doing it in a completely accurate and thorough way. It s a very short list of people who I personally would give my full trust to if my credit life was in their hands. With that being said, if you are someone with less than $100,000 in available credit limits and certainly if you have less than $50,000 - then I would advise you to create a plan for how to change that and improve your credit profile. If you have access to someone with experience and knowledge of how to go about it then I would recommend working with them to create a plan. You do not want to take the app-o-rama approach as it s a good idea to not create a whole bunch of new credit cards at one time (at least not credit cards that will report to your personal credit profile and that s obviously what we re talking about here). You re going to also want to be able to strategically remove any un-necessary inquiries from your credit file before, during, or after this plan and process is implemented. Six consumer credit score Myths There are many misconceptions about consumer credit reports and scores. It is what if you only had 2 credit cards for a total of $30,000 in available credit and one of those credit lines was lowered or closed? important to understand more about these scores, because they are a major part of the approval process for both business and personal credit cards and loans. If you don t have high scores, you will pay more in interest or, even worse, you may not be able to get approved for the funding you need. People sometimes make the mistake of thinking that their personal credit doesn t matter when they are looking for small business loans, a business line of credit, or solutions like unsecured business funding. The main credit scoring model that is used by most lenders is the FICO score so that s the scoring model 6 How personal and business credit affects your business

7 we are focusing on here. These are six credit score myths: 1. Monitoring your credit hurts your credit score. If you sign up for a service that monitors your consumer credit report or you request your consumer credit report, a credit inquiry is placed on your credit report that indicates who reviewed your report. This has no impact on your credit score. You aren t penalized for reviewing or monitoring your own credit. 2. Closing credit card accounts helps your score. In the past, debtors who were over their head in debt were advised to pay off their cards, cut them up and close their accounts. This may be the only solution for someone who can t stop using their credit cards. Closing your credit card account can lower your score, because you have reduced your available credit. One of the key factors, which contributes 30 percent to your credit score, is how much of your credit you have used or your credit utilization. If you close a personal credit card account with a credit limit of $10,000, you have lowered your available credit by that much. For example, before you canceled the card, your total available credit was $20,000 and your balance was $5,000 which was 20 percent utilized (5,000/20,000 *100). Now your available credit has been reduced to $10,000 and your utilization is 50 percent (5,000/10,000 * 100). There is a big difference between 20 and 50 percent utilization, high utilization lowers your score. The lower the better and 20 to 30 percent or below is ideal. 3. Opening a new account does not hurt my score. Opening a new account can lower your score somewhat for a short time frame. Opening up several new accounts within six months, impacts your score more. This is considered negative because you have taken on more responsibility and could become overextended and unable to pay your bills. New credit can impact your FICO score by up to 10 percent. 4. Closing an account removes it from your credit report. Some think that by closing an account with negative information, it will be removed from your credit report and 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 won t harm your score. This isn t true. When an account is closed, it becomes part of your credit history. Your credit history is an important factor in evaluating how well you pay your bills and your credit risk. In fact, payment history contributes 35 percent to your credit score. 7 How personal and business credit affects your business

8 5. A credit score is the same as a credit report. There is much confusion regarding credit scores and credit reports and the terms are often used interchangeably. A credit report is the credit data delivered in a format. Credit scores are statistical formulas that are derived from the credit report. The score is a number that summarizes credit information and predicts the likelihood of becoming delinquent in the future. You must have a credit report to have a credit score, but not everyone with a credit report will have a score. 6. Carrying a balance is good for your credit. Actually, the less you owe on your credit cards, the better it is for your score. The score looks at the amount you owe compared to your credit limit and you want that ratio to be low or below 20 percent. You don t want to be close to your credit limit. The amount you owe comprises 30 percent of your credit score. It is best to pay your account in full each month, which also saves you money in interest charges. Don t make the mistake of thinking that your personal credit profile isn t important as a small business owner. It s rare for a small business owner to not need funding when they are starting, building, or growing their businesses. So you ll probably need - or at least want - a small business loan either now or in the future as your business looks to grow. It s important to treat your personal credit as an asset to your business and the future of your business. How to Get a Business Line of Credit: Evaluating the Deal The first step in any well-planned strategy for getting an unsecured business line of credit (UBL) involves evaluating the deal. Let me explain this. In our program, this process is basically our responsibility once you get us all the required documentation we need. We will evaluate your business along with you and any additional credit partners or personal guarantors involved in your financing. The primary portion of the free evaluation is a thorough and in-depth credit check. It should be done for all owners of the company as Credit cards are a vital part of the overall funding strategy for small business owners. Meredith Whitney, Meredith Whitney Advisory Group well as their spouses. This will allow you to know and understand every angle of your credit situation. Since credit is often the primary element that will determine if you re approved, its importance cannot be over-emphasized. The other thing you need to understand is that 8 How personal and business credit affects your business

9 this process is more than simply checking a credit score. First of all, you need to know all your FICO scores, and NOT a non-fico-based credit score. The only way you ll obtain all three FICO scores is to obtain a so-called tri-merge credit report that is normally available through mortgage brokers and banks. Since this is often difficult to obtain and because your request for your credit reports will then show up on your reports, we do not suggest a tri-merge report. Please DO NOT attempt to remove your inquiries through a letterwriting campaign or credit-reporting agency dispute process. We utilize a combination of myfico.com and truecredit. com. This will give you two of your three FICO scores, and truecredit will give you additional data that s not available at myfico. The three most common problems we see in denied unsecured business credit applications are high use of personal credit cards, too many recent inquiries, and some minor negative items such as late payments. Any of these or a combination of them can be very problematic. But they are almost always problems that can be resolved if you understand how to lower utilization and properly remove inquiries. We normally can do it without the accounts needing to be paid off. The number-one reason why people with excellent credit are denied for UBLs is too many recent inquiries. Don t attempt to remove inquiries if you don t know how to do this properly. It s also something that well over 90 percent of credit-repair agencies do not truly understand. Please DO NOT attempt to remove your inquiries through a letter-writing campaign or credit-reporting agency dispute process. If this is done the wrong way, then it s likely the damage will not be easily undone. So do it the right way, or don t try it at all. The main goals of the evaluation phase are to make sure: your FICO scores are sufficient your utilization meets the lenders requirements the evidence of previous inquiries is not too damaging the age of the file and number of tradelines will match up with lenders expectations the business is seasoned enough, if the lender has seasoning requirements the business is not considered high-risk to your prospective lenders Knowing what you need to know about your credit and your business will also help you understand if you qualify for a larger, bank draft unsecured business line of credit. Or perhaps you are still in your first two years of business or you have not yet hit the $500,000 revenue mark and your UBL strategy should be focused on properly using business and/or personal credit cards. 9 How personal and business credit affects your business

10 Concluding Summary When you build your business credit you are primarily setting up and building your Dun & Bradstreet (D & B) business credit report Keep in mind that 30% of your FICO score is determined by the utilization on your credit cards that are on your personal credit report. There are many misconceptions about consumer credit reports and scores. It is important to understand more about these scores, because they are a major part of the approval process for both business and personal financing. FICO scores are the industry standard and can be obtained at myfico.com. Additionally, finding the right credit monitoring services is important so you can properly monitor the data within your report. The right credit monitoring service will protect you from identity theft and monitor change to your credit report among other things. 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 consumer credit score Myths 1 Monitoring your credit hurts your credit score. 2 Closing credit card accounts helps your score. 3 Opening a new account does not hurt my score 4 Closing an account removes it from your credit report. 5 A credit score is the same as a credit report. 6 Carrying a balance is good for your credit. 10 How personal and business credit affects your business

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 How personal and business credit affects your business