A GUIDE TO BUILDING SMART BUSINESS CREDIT

Transcription

1 A GUIDE TO BUILDING SMART BUSINESS CREDIT Establishig busiess credit ca be the key to growig your compay DID YOU KNOW? Busiess Credit ca help grow your busiess Soud paymet practices are key to a solid busiess credit profile Separatig Busiess Credit ad Persoal Credit ca greatly mitigate your risk There are 4 keys to buildig busiess credit Credit applicatios ca be made easier by followig a few simple steps

2 INTRODUCTION You may thik that busiess credit has limited applicatio for your busiess that it matters oly whe you re tryig to secure fiacig. I reality, busiess credit is a powerful tool that ca help you save moey, establish valuable commercial relatioships, ad, ultimately, grow your busiess. That said, busiess credit may ot be easy to uderstad, ad establishig it ca be difficult. The goal of this guide is to demystify the topic ad provide clear, cocise advice o how to develop busiess credit that works harder for your busiess over the log haul. BUSINESS CREDIT BASICS Let s start with the way you pay. Do you ru your compay usig a combiatio of supplier fiacig ad persoal credit maybe addig a equipmet lease or commercial loa ito the mix? Do you have a few suppliers that exted paymet terms, but you buy office supplies o a persoal credit card, ad have the telephoe accout listed i your ow ame? Havig a robust history of steady paymets to a variety of creditors boosts the borrowig power of your busiess ad puts other compaies at ease about extedig credit to your firm. Beig icosistet i maitaiig soud paymet practices may result i missig importat opportuities to build a solid busiess credit profile. Whereas havig a robust history of steady paymets to a variety of creditors boosts the borrowig power of your busiess ad puts other compaies at ease about extedig credit to your firm, says small busiess legal ad fiacial expert Barbara Weltma, author of The Ratioal Guide to Buildig Small Busiess Credit. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

3 SEPARATING BUSINESS AND PERSONAL CREDIT It s importat to maitai a busiess credit profile that is distictly separate from your persoal credit profile. Buildig separatio betwee the two ca help your busiess develop the credibility that matters to baks, suppliers, ad other creditors, accordig to Weltma. A busiess credit profile that icludes multiple, positive reports from fiacial istitutios, vedors, utilities, telephoe accouts, lessors, ad other operatioal credit accouts i your compay s ame shows that your busiess pays its creditors i a timely maer. Maitiaig separatio ca also protect your persoal credit profile should a fiacial mishap occur i the compay, ad, coversely, ca help isulate your busiess from aythig that might have a adverse affect o your persoal credit. UNDERSTANDING CREDIT REPORTING BUREAUS Your credit bureau report is at the heart of buildig busiess credit. Credit reportig agecies collect credit data from a wide rage of sources. This iformatio is used to create a profile that illustrates how your busiess has historically met its fiacial obligatios, which helps prospective creditors decide whether to take a chace o extedig credit to your compay. Most bureaus make it easy to report this data, ad stadards vary by bureau. I some cases, busiesses are able to report iformatio about themselves. But i a effort to maitai data itegrity, some bureaus use oly iformatio that has bee verified by a third party, a practice that esures ubiased reports ad helps level the playig field for all busiesses. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

4 The majority of baks, credit card compaies, ad other fiacial istitutios report paymet patters to credit bureaus o a regular basis. However, to make sure you re fully covered, it s a good idea to ask suppliers ad busiess parters to do the same, advises Lita Epstei, author of The Complete Idiot s Guide to Credit Scores. Why a busiess credit profile matters A good busiess credit profile serves two primary fuctios: it helps your compay more easily gai access to the credit it eeds at better terms, ad it ca help you uderstad more about the compaies with which you do busiess. Leders, suppliers, ad parters ofte review busiess credit profiles to help them determie the risk ivolved with extedig credit to your compay. This helps them gauge how likely your compay will payi a timely maer. I short, it helps them decide whether or ot to do busiess with you. By the same toke, you should examie the credit profiles of other compaies i order to evaluate the fiacial stability of a prospective customer, supplier, maufacturig facility, or other busiess parter. A good busiess credit profile helps your compay more easily gai access to the credit it eeds at better terms, ad it ca help you uderstad more about the compaies with which you do busiess. Although it s ofte overlooked, otes Weltma, evaluatig a prospective cliet s commitmet ad ability to make paymets is a critical step to take prior to extedig credit. May small busiess owers are so excited to make a sale that they do t do their homework, she adds. Remember, it s ot a sale util you get paid. Uless you like to work for free, you eed to make sure you get the ecessary profile iformatio up frot. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

5 ESTABLISHING BUSINESS CREDIT So what does it take to build your busiess credit profile? The followig best practice guidelies offer a perspective o the fastest, most efficiet way to get it doe: Borrow ad pay. Some busiesses thik that the oly way to establish busiess credit is to ope a busiess credit card. While that makes sese for some compaies, securig credit terms from suppliers or takig out a commercial loa ca offer similar beefits with fewer dowsides. Payig accordig to agreed-upo terms is the first step i establishig good busiess credit. It is just as importat to cosistetly moitor your compay s credit profile as it is to moitor your persoal credit profile. Be visible, (i.e., esure that your good behavior is reported). Ufortuately, uless your creditors are reportig timely paymets to credit bureaus, a good track record wo t help your busiess credit profile. Ask suppliers ad other busiesses that exted credit or paymet terms to your compay to cosistetly report your paymet history. May bureaus have a optio to do so through their websites, or the compay ca cotact the bureau s customer service departmet for assistace. The more positive reports there are i your compay s profile, the more comfortable other compaies or creditors will be doig busiess with you. Moitor your compay s profile. It is just as importat to cosistetly moitor your compay s credit profile as it is to moitor your persoal credit profile, says Weltma. You ca order your busiess credit report from each bureau for a fee, which varies by bureau. It s a modest ivestmet that will help you spot ay issues i the file ad address or correct them. I additio, active busiess credit moitorig ca alert you to ay fraud beig perpetrated i the ame of your busiess. Be sure to check your credit profiles well i advace of applyig for ew credit so that you have time to address ay iaccuracies or problems prior to submittig your loa or other credit applicatio. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

6 Act like a busiess. Eve the smallest operatio ca beefit from a positive busiess credit profile. Agai, your busiess accouts (telephoe, utilities, leases, loas) should be established i your busiess ame. I the early stages of a busiess, you may eed to persoally guaratee paymet, but the more established your busiess credit history is, the more likely it is you ll be able to egotiate ad secure good credit terms without those guaratees. KEYS TO CREDIT APPLICATIONS As your busiess grows, you ll probably eed to complete credit applicatios for your suppliers, vedors, ad other creditors. These applicatios ca be key to securig lower iterest rates, higher credit lies, ad gaiig the fiacig flexibility you eed to grow your busiess (ad cotiue to build a strog paymet history). Cosider the followig guidelies before you complete a credit applicatio: Credit applicatios ca be key to securig lower iterest rates, higher credit lies, ad gaiig the fiacig flexibility you eed to grow your busiess. Evaluate your ow busiess credit. It s always a good idea to review your busiess credit profile before applyig for ew lies of credit. As discussed above, your busiess credit profile icludes a wealth of iformatio that prospective creditors will use to make decisios about the amout ad terms of your credit lie. Such iformatio may iclude paymet history, tax lies, judgmets, collectio activity, ad iquiries from other prospective creditors. Try lookig at your profile through the les of a creditor, reviewig such iformatio as: Trade paymet history. Does your compay have a history of payig its bills o time, or are you routiely late? Late paymets i the past may simply be the result of a temporary cash flow cruch, but if your compay regularly lags i payig bills, creditors may ot see your busiess as a good credit risk. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

7 Credit balaces. Is your compay usig a high percetage of its overall available credit? This may be a reaso to seek additioal credit, but it may also be a warig sig that your firm is overexteded. O the other had, are balaces relatively low compared to credit limits? This may idicate good fiacial maagemet. Track record. How log has your compay bee i busiess? Startups may be riskier debtors tha compaies with log histories of payig bills o time. Red flags. Review your firm s credit report for lies or judgmets. Oe or two such reports may ot be deal-breakers, but they may require you to explai what happeed. If there are items that eed explaiig, be up frot. Perhaps your busiess had a short-term, cash-flow cruch; or you lost a key employee, which led to some black marks o the report. It s better to address them tha to igore or hide them. Get good refereces. Your busiess will ofte be asked for credit refereces. Be sure to cotact your refereces ahead of time to ask for their permissio to be icluded o credit applicatios. Failig to do so could make the cotact less iclied to give you a positive referece. There may also be a issue that you are t aware of such as a overlooked ivoice or other problem that, if reported, could reflect poorly o your busiess. Try to provide three to four refereces. It s likely that prospective creditors will ask them: How log they have doe busiess with your compay? What is the maximum credit lie they ve exteded to your busiess? How log does your compay typically take to pay a ivoice? Have there bee times whe your compay has t bee able to pay o time? Fill out the form completely. Whe completig the applicatio, be sure to provide all of the iformatio requested. Skippig sectios could lead to delays or eve result i your credit lie beig deied. If you have questios, cotact the creditor to get them aswered. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

8 CONCLUSION: GROWING YOUR BUSINESS WITH GOOD CREDIT PRACTICES As you ve read, good busiess credit has a impact o more tha just a loa applicatio; it ca be at the core of fuelig the growth of your busiess. It provides access to the fudig ad paymet terms you eed to expad ad, perhaps most importat, build trust i ay busiess relatioship. Employig good busiess credit practices does t have to be cofusig or challegig. Maitaiig a distictly separate busiess credit profile, stayig curret o paymets to creditors, esurig that your good paymet history is reported to the credit bureaus, ad moitorig your busiess credit profile to detect issues or fraud ca help your busiess grow. Additioally, whe you fid yourself i a positio to exted credit to your customers, you have the same opportuity to use the commercial credit tools outlied above to limit your risk. Good busiess credit has a impact o more tha just a loa applicatio; it ca be at the core of fuelig the growth of your busiess. It provides access to the fudig ad paymet terms you eed to expad ad, perhaps most importat, build trust i ay busiess relatioship. THINK LIKE A BANKER: THE 4 CS OF BUSINESS CREDIT To make the most of busiess credit, it helps to thik like a loa officer. Baks have four key criteria that they typically use whe evaluatig a busiess s creditworthiess the Four Cs of Busiess Credit (Character, Collateral, Coditio, ad Capacity). Differet baks will weight these factors accordig to their ow A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

9 practices, but it helps to put your best foot forward i each of these areas whe presetig your busiess as a potetial borrower. 1. Character. Leders ad creditors wat to be sure that they re doig busiess with reputable compaies ad ot puttig themselves at risk of fraud or other egative activity. If your busiess or persoal credit profiles show spotty paymet history, lies, judgmets, or other red flags you will eed to be prepared to explai those factors or accumulate a loger period of steady paymets before seekig ew credit. 2. Collateral. A fiacial istitutio may eed to secure a loa based o somethig of value to your busiess. It may take the form of busiess equipmet, ivetory, or other assets the busiess ows. Some leders will seek persoal guaratees ad may look for persoal assets, such as real estate, to secure the loa. The more collateral your busiess has, the easier it geerally is to get the moey or terms you eed. 3. Coditio. A solid busiess credit profile idicates a strog fiacial history, (i.e., a busiess i good coditio). To show your busiess i the best possible light, work with your vedors, suppliers, ad other creditors to esure that they are reportig your timely paymets to busiess credit bureaus. This will help tell the story of your busiess robust health. Leders ad other creditors may look at the persoal credit scores of owers or parters i the busiess, so be midful of those profiles as well. 4. Capacity. Before extedig credit, leders wat to kow that your busiess geerates eough reveue to meet the paymet obligatios. This will be easier for established busiesses with a history of sales tha it will be for startups. If your busiess is ew, provide iformatio about projected sales ad expeses, alog with a explaatio of how you arrived at those umbers. Be realistic; leders may compare your projectios to idustry stadards. If you overestimate your expected sales ad uderestimate expeses, that ca be a idicatio that you may ot have doe your fiacial homework well. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN

10 Give yourself time to prepare i advace of meetig your leder, ad be ready to aswer questios about each of these four categories. Look at your busiess with a critical eye, so that you ca aticipate potetial stumblig blocks, ad be prepared to aswer tough questios from your leder. Beig prepared ca mea the differece betwee approval ad rejectio. BUSINESS CREDIT RESOURCES As creditors icreasigly rely o busiess credit profiles to make real-time decisios about credit terms, it is more importat tha ever for your busiess to build a solid credit profile with a robust history of timely paymets. By itegratig state-of-the-art techology ad superior data, Experia s Busiess Iformatio Services is a importat resource i helpig you build your busiess credit. Experia is a leader i providig data ad predictive isights for busiesses, helpig them mitigate risk ad improve profitability. The compay s busiess database provides comprehesive, third-party-verified iformatio o 99.9 percet of all U.S. compaies, with the idustry s most extesive data o the broad spectrum of small ad mid-sized busiesses, icludig yours. Lear more about your curret profile ad how to make it a forceful tool i buildig your busiess by visitig us at experia.com/mybusiesscredit. A GUIDE WHITE TO BUILDING PAPER TITLE SMART EXPERIAN BUSINESS 2011 CREDIT EXPERIAN