WANT TO IMPROVE YOUR BUSINESS CREDIT & FUNDABILITY?
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Published By Janet Gershen-Siegel at November 14th, 2017
Need to fund your startup? We can show you how to get cash without having to sell off a good chunk of your dream.
Do you understand how to fund your startup without giving up equity? As a new organization, by definition, you have no or little business credit history, so it can be challenging. But don’t worry! Here are some ideas which work.
You have got to get your startup off the ground, and that means you need developmental capital.
You may want to try a company like Kickstarter. However, make sure you read through the fine print, as many crowdfunding websites demand you give all the funds back if you do not make your objective by the conclusion of the crowdfunding campaign.
Note: Indiegogo has a flexible funding option. Also, crowdfunding websites take a percentage of the donations, and they normally press to have you deliver on your commitments.
Donors can become weary of crowdfunding spiels. Straightforward startups may not do so well. Crowdfunding tends to work best for scenarios where the contributors can directly connect with the product or service, so product lines which aren’t quite on the shelves yet, or artistic undertakings, may do well. But basic gizmos which never really change won’t draw in brand ambassadors and, by extension, probably won’t get donors too excited.
Trade credit is when you get credit from a starter vendor. Pay them on schedule, preferably early. This counts towards your credit score, and helps it more than anything.
An additional option is the microloan, which you can’t even get from a regular lender. In its place, you get a microloan from a microlender. Try the Association for Enterprise Opportunity to locate a nearby microlender. A microloan is just what it sounds like; it’s not a lot of money. Still, if your business only needs something like $500 – $35,000, then a microloan could work.
Another alternative is invoice factoring, where your company gets a percent of the cash from pending invoices fronted by the factoring company. The factoring company then goes directly after any company which owed you cash, and collects on it on their own.
Therefore if a retailer owes your startup company $1,000 on a twelve-month payment basis, you might hand that invoice over to the factoring company to get something like $950 in a week. The factoring company would then collect the total from the retailer.
This allows you to extend credit or negotiate longer-term payment plans in exchange for other, more advantageous terms. So this can be deals such as getting a seller on board with your new startup. You can do so without keeping a bunch of what are essentially IOUs for months at a time.
But keep in mind, this option works best if you are already up and running. For a very early stage startup, it’s probably not going to work.
What does it suggest when we claim a company is fundable? It’s time to start thinking of your business – and business credit in a whole new way.
Let’s get that fundable meaning out of the way from the very beginning.
Fundable: of or capable of being funded; deserving of being funded.
Here, fundability also implies – able to be funded by a loan provider or a credit provider.
This is what credit providers and lenders wish to see. But let’s step back for a moment.
You’re a business owner. And like every other business owner, since the start of time, your business needs money.
There are a few ways for companies to get money. In general, the main ways for corporations to get money are to:
For the purposes fundability, only #5 matters.
Lenders and credit providers want to see if your corporation is a good credit risk. They wish to know that you can pay them back.
Complicating issues is the problem of fraud. Per a 2009 Experian report, “fraud-related costs for U. S. businesses are more than $50 billion annually.”
As a result of so much fraud, loan providers and credit providers examine credit applications very meticulously.
They look for all types of ways to tell you and your business no when you come to them for cash. For banks and the like, business legitimacy makes all the difference in the world. No legitimacy, then no funds. It’s that simple.
As a result of their alert checks for fraud, banks and credit providers check many different facets of your credit or financing application. They look at numerous aspects of your corporation, as well, and even at you, the owner.
Your objective is to abate their fears of fraud. And the way to do this is by getting rid of every factor they might potentially see as a reason to say no to offering you money.
Fundability all starts with your industry.
Some industries have a tougher time getting funding of any sort.
Generally, restricted and high risk industries have some things in common. There may be high risks of injury at work. Or the industry may engage in a great deal of cash transactions.
This is the concept of congruency, and it arises over and over. Business credit reporting bureaus and lenders check your company meticulously. One of the main ways they do this is by strictly looking for matching records.
As a result, if your records do not all match, it turns up as if missing. Missing records trigger a rejection, as a lender assumes fraud on its face. It is essential to make sure each record, all over, is identical.
It goes beyond industry. It’s also corporate name, address, phone and fax numbers – everything! These must look the same all over, like in IRS records; documents with Dun & Bradstreet, Experian, and Equifax; all licenses required for your corporation; and incorporation documents.
Copy/paste this info; don’t chance it with retyping.
Check out our best webinar with its trustworthy list of seven vendors to help you build business credit.
Adding a risky business type into your business name causes funding denials. There is nothing deceitful in keeping the name of a high risk or restricted industry out of a company name.
It is best practices to keep a record of every single place where your corporation has a listing. Then correct them every time things change.
Check out our best webinar with its trustworthy list of seven vendors to help you build business credit.
A professional website is a must. A small business needs a professional-looking web site. It must have hosting from a provider like GoDaddy. Do not use Weebly or Wix. It must be your domain, not domain.wix.com. Use Upwork for people who can help you get set up. Get a professional logo from Fiverr.
Look at the more successful competitors in your space. You don’t need to copy another website, and it isn’t in your best interests to do so, anyhow. Yet feel free to copy from a few of their better ideas. If those concepts work for them, then they might help you, too.
Showcase the owners of your corporation. Clients and leads want to know who they’re dealing with.
Congruency is a requirement here too.
It’s like the exclamation point in Yahoo! Don’t do this, if you can in any way help it.
Because there are likely to be people inputting your company name into internet browser address bars. Adding special characters makes it harder for them to do that.
Do not put the name of a high risk or restricted industry in your business name! There is nothing deceptive or deceptive about this.
Check your name with your Secretary of State – it may have to be unique.
Any site must be searchable. Don’t make search tough on clients and prospects. Because when they go to another website to find what they want, they may not return.
This must be an actual physical building. It must be a deliverable physical address. It can never be a home address or a PO Box. Don’t use UPS mailing addresses. Some lenders don’t approve and fund unless this requirement is fulfilled.
Lenders and credit providers recognize these are actually post office boxes. And they see these as being non-legitimate ‘addresses’, the same as post office boxes.
Lenders check USPS and places like Google Maps to see if you’re using a home address. If you are, you usually get an immediate decline. Never use a home address on your application.
If your area does not have virtual offices, talk to regional entrepreneurs. A virtual office space must have CMRA privileges. This means the facility is registered with the US Postal Service as a commercial mail receiving agency.
In the same vein as the caution against a PBSA, you need an actual physical address versus a mailing address.
Your company must have its own phone number. It must be toll-free.
Once again, congruency is an outright necessity. It must only be used for your company.
A cell or home phone number as your primary business line can get you flagged as un-established. But VOIP (voice over internet protocol) is all right.
Your voicemail greeting should, at an absolute minimum, inform the caller who they have reached and when you’re open again or at least can return their call.
You must list your business telephone number on 411. You can do so on ListYourself.
This is necessary for most credit providers, lenders, vendors, and even insurance providers to approve you. Check your record to see if you’re listed. See to it your info is accurate.
As always, congruency is vital here.
The amount of time you have been in business is an indication of integrity and fundability to lenders and credit issuers.
This is when a corporation starts. So the quicker you incorporate, the better.
A bank or credit provider doesn’t consider your company to truly be in business if you’re missing crucial licenses.
You need a separate business bank account. This is to keep funds separate from personal accounts. Commingling personal and business funds and expenses is a recipe for an IRS audit. The easiest way to keep it all separate is to have separate bank accounts.
The date you open your business bank account is the business’s opening date, far as lenders and business CRAs are concerned. This is because the business CRAs have seen many companies try to do an end-run around time in business requirements by buying shelf corporations.
A shelf corporation is a corporation with value only in its age and nothing else. Business CRAs see the practice as deceptive.
To open a business bank account, the business owner must submit added documentation versus a personal account. This includes business registration paperwork. It can often (not always) include proof of having an EIN.
A business bank account lists both the owner and the business. It may require a certain minimum balance to avoid maintenance fees. Fees in general are higher than for personal business bank accounts.
Congruency is a requirement, as in all other areas.
Banks keep credit ratings which help them decide if to loan your business money. Partly, these ratings are based upon your historical actions with reference to your corporation bank account.
A rating of Low-5 is normally believed to be the minimum rating for funding. This requires a deposit of at least $10,000 into your company bank account. Keep it there for at least 3 months. On top of that, make consistent deposits.
Writing checks with insufficient funds (NSFs), or keeping negative balances can spoil your bank score. A constant, maintained minimum balance of $10,000 can, for the most part, make these a thing of the past.
A business entity defines issues of liability, and it makes a difference when it comes to taxes.
The best business entity for fundability is a corporation. Corporations are legally separate from their owners. The choice between a C-corporation, an S-corporation, or an LLC is yours. Speak with an attorney or a skilled tax specialist to discover which is the best possible choice for you.
A sole proprietorship says the business owner is it when it concerns liability and tax obligations. There is no true separation between owner and business.
Any complete corporate name should include any documented DBA filing you use.
But if you are a sole proprietor, the best thing to do is to incorporate. If you have already filed a DBA, you still have to move onto a corporate business entity. Only look at a DBA as an interim step on the way to incorporation.
Check with your Secretary of State to assure they have all the necessary details for your company. Make certain that you are in good standing with them, and your entity is active. You must submit annual reports and pay a fee yearly to stay active.
A foreign LLC is a limited liability corporation developed in one state but then registered in another state. It isn’t an LLC developed outside of the United States. A separate registration is essential since laws between states vary.
A corporation must choose a registered agent they indicate on the Articles of Incorporation. The agent accepts service of process. They get legal and tax documents on behalf of the corporation.
Congruency is a requirement here, as it is in all other areas.
This counts toward time in business. The longer ago, the more fundable your corporation is.
Visit the IRS website and get a free EIN for your corporation. This is also where you pick a business entity like corporation, LLC, etc.
To open a corporate bank account at all, you need an EIN, so get this out of the way first. Use IRS form SS-4. Fill it out, and mail or fax it to the appropriate office. The form has this info.
Apply for your EIN as soon as possible, so you have it for filing tax returns and making bank deposits.
Congruency is a necessity on your EIN application, as it is in all other areas.
Business email addresses must be professional, something like [email protected]
Company email must be on the same domain as your firm. Do not use generic free email solutions like Gmail, yahoo, or msn.
As everywhere else, congruency is a necessity for email records.
A firm must have every license essential for running. These licenses all must be in the perfect, exact business name, address, and telephone numbers.
This means not only state licenses, maybe also city licenses. Consult your Secretary of State’s office for the state where your company is incorporated. If you do business in more than one state, then check their Secretary of State offices too.
Congruency is a requirement on your business licenses, as it is in all other areas.
Fundability often depends upon company credit.
The most significant and best-known corporate credit reporting agencies (also called CRAs or bureaus) are D&B, Experian, and Equifax.
This bureau is strictly focused on business credit.
A PAYDEX Score from Dun & Bradstreet runs from 0 to 100. This score has a basis in payment details on report to the agency or to data-gathering firms partnering with the CRA.
Comparable to Dun & Bradstreet and Equifax, Experian additionally gathers details available in various public records together with info from collection agencies, credit card firms, and various other databases.
An Equifax report depends greatly on how your business interacts with various banks and traditional lenders like credit card providers.
These companies accumulate data and offer it to the business credit reporting agencies.
CreditSafe offers alternative credit, where they base some scoring on utility and rent payments. These payments are normally not taken into account by other CRAs unless they’re late. CreditSafe reports these payments whether positive or negative.
These can include power, gas, water, and phone. Other third-party payments like Credit Suite, CRM, and software can be included.
LexisNexis is where a lot of loan providers get data from. This is info relating to likelihood to pay, or not. Lenders compare LexisNexis information to what you put on your financing application. If the application and LexisNexis do not match, then the lender denies you a loan. They see incongruity as fraud.
The SBFE is a not-for-profit entity collecting data on small businesses from its members. The members are the owners, and they are loan providers. The information is then used to assemble thorough credit info used to make credit decisions.
This is where CRAs and LexisNexis get details from. This detailed info covers a large selection of information about you. A funding application is denied for any inconsistencies.
FICO uses its SBSS (Small Business Scoring Service) Score to integrate consumer bureau, monetary, application, and business CRA data. FICO then validates their SBSS models for deals like credit line transactions, term loans, and commercial card obligations up to $1 million. Their idea is to evaluate how your small business pays off all sorts of loans.
Business credit providers use the FICO SBSS score as a tool to choose if they should authorize a loan to your corporation. The SBA uses this score to authorize or approve firm loans. It comes from both business and consumer credit history.
CRAs use identification numbers to designate your company.
The BIN (Business Identification Number) comes from Experian’s BizSource.
Start at the D&B website and get a free D-U-N-S number. If there is no D-U-N-S number, then there is no record. Your D-U-N-S plus three payment experiences gets you a PAYDEX score.
Check out our best webinar with its trustworthy list of seven vendors to help you build business credit.
This is the single most important driver of corporate credit scores. In turn, this affects fundability profoundly.
Late repayments impact a business credit score for years. If you pay corporate financial obligations off, as fast and completely as possible, you can make a very real difference in credit scores. No other aspect of business management more directly influences business credit scores.
If the business owner has bad consumer credit, lenders commonly get a UCC blanket lien if they do provide business financing. A UCC blanket lien is a note on your credit report. It says the bank has an interest in all your firm’s assets up until you repay the loan completely. Therefore, there may be dire effects if you default.
The same is true for any type of lien. A lien isn’t quite the same thing as collateral. The property which is subject to the lien is the collateral.
UCC filings, liens, bankruptcies, and court cases are a matter of public record. Lenders and credit providers consider them when deciding if your corporation is fundable.
Trade accounts come from credit issuers which give you starter credit when you have none. Terms are often Net 30, versus revolving.
The more trade accounts, the better. In general, at least 5 – 8 are necessary to move onto credit cards which are harder to get. But pay attention to your highest credit limit.
This is an important figure for credit issuers and lenders. For example, unsecured financing can result in a loan of 5 – 8 times the amount of your highest revolving credit limit account. So by definition, the higher your highest credit limit, the more you can get from this form of financing.
In addition, some credit issuers want to see a particular high credit limit before they issue credit to your business. In general, a few high credit limit accounts do more to enhance business fundability than a large number of very low credit limit accounts.
This should correlate more or less directly with time in business.
Without your business’s financial data, lenders and credit providers wonder if they can trust your statements about your business’s financial solvency.
Opening and responsibly using business credit accounts can help you enhance your available credit and credit rating. The key is to use your credit.
Closing accounts has a direct impact on overall credit history. Once a card in good standing is closed, it falls off a credit report eventually. Once it’s gone, the history which went along with it is gone, too. A card in good standing can be closed by the card owner or by the credit provider if the card owner hasn’t been using the credit. This is different from a card closed in poor standing, where that info sits on your credit report longer.
By closing accounts, you tank the average age of your accounts.
The most important issue with company data is to be absolutely sure it is consistent everywhere.
Congruency is a requirement in your company CRA records, as it is in all other areas.
Many credit providers and loan providers not surprisingly want to see corporate financial statements.
These include if your business is making a profit, and financial estimates for upcoming quarters.
Some alternative loan providers offer credit lines for $50 – 150,000. They often only want tax returns versus all income paperwork. If over $100,000, you must to provide a P&L and balance sheet. Approval amount is often 10% of annual sales per firm tax returns.
Common business financial statements include your income statement, statement of retained earnings (also called the statement of owners’ equity), company balance sheet, and statement of cash flows.
It dramatically and positively affects fundability to have these documents prepared or at least audited by an accountant or an accounting company.
This must be the same as your years in business, even when your business loses money.
These should be proportionate with the kind of income and expenses expected from the owner of a business of your size, age, and industry.
If tax payments are slow or late, then banks and credit issuers believe your payments to them could follow the same pattern.
In particular for newer businesses, credit issuers and lenders want to see personal financials.
NSFs show you’re overextending yourself. But responsible financial stewardship and on time filings help with fundability.
These show a bank or credit provider how you manage funds.
Are your reported income and expenses commensurate with the sort of earnings expected from the owner of a company of your size, age, and industry?
This is all monthly debt payments as divided by gross monthly income. This number is how lenders and credit providers measure your ability to pay creditors and pay back what you borrow.
Whether payments are current, and if you have a criminal record, affect fundability.
Like business credit reporting agencies, there are CRAs for personal credit.
Experian and Equifax report on business and personal credit. TransUnion only reports on personal credit.
These companies collect data and provide it to the personal credit reporting agencies.
Some banks and other credit issuers use ChexSystems for more data on your personal credit habits.
Lenders use LexisNexis data to cross-check loan applications. They want to see if loan criteria are met. They want to see if what you claim on your application jibes with the records. And they want to know if it’s likely your business will fail.
This score contains payment history, amounts of owed, length of credit history, credit mix, and new credit. Together, the first three elements comprise over ¾ of your FICO.
It matters as much as business credit history.
Any accounts over limit can tank fundability as they show a lack of financial responsibility.
Are the authorized users on your accounts strangers paying to piggyback on your credit? That’s just barely this side of legal and often a prelude to fraud. Most credit issuers and lenders see it as proof of intent to commit bank fraud.
In a short sale, you try to sell your home for less than you owe. But this can only be if the lender agrees. If the house sells, the lender keeps the proceeds. Often, homeowners must be 90 or more days late for the lender to consider it.
Lenders report a short sale to TransUnion, Experian, and Equifax as a charge off, settlement, deed-in-lieu of foreclosure or loan settled for less than the amount due. The way a lender reports the short sale can significantly impact the damage to your credit score.
A short sale drops your personal credit score as much as 100-150 points. The higher your credit score to start, the more it falls.
Short sales can stay on your credit report up to seven years. But foreclosure and bankruptcy harm your credit score even more.
If you pay your debts off, it is a plus for fundability.
Both can negatively impact fundability.
The larger and later your late payments are, the worse. The same is true if you have a lot of late payments.
If you have fewer than five, your file may be seen as “thin” which can negatively impact your credit scores and, in turn, fundability.
In general, major retailers and banks on a report correlate with a longer and more favorable personal credit history.
A shorter credit history is generally not seen as favorably as a longer one.
More than two recent inquiries is seen as proof of credit shopping, which harms fundability.
Credit utilization rate is the credit in use, then divided by total available credit. Keep this ratio at about 30% or less. Experian checks utilization rate both overall and per credit card.
Even the process of applying can affect fundability.
How are you submitting your application? What does your lender or credit provider prefer?
Your most recent three months’ worth of bank account management loom large. This is due to a number which banks keep but don’t publicize, the bank rating.
A bank rating is a measure of the average minimum balance as maintained in a business bank account for three months. A $10,000 balance ranks as a Low-5, a $5,000 balance rates as a Mid-4, etc.
Be sure to keep a minimum Low-5 bank score (or, an average $10,000 balance) for at least three months. Without a minimum of a Low-5 score, most banks assume a business has little to no ability to pay off a loan or a business line of credit.
In particular, an application presented in person allows for a dialogue and negotiations.
Don’t try for a very large loan the first time around. You probably won’t get it. By proving financial responsibility, lenders are more likely to loan to you, and to loan you more.
Many lenders prefer working with certain industries. It pays to ask. If the bank is more comfortable with your industry, then it helps your fundability cause.
Without ownership documents, fundability nosedives.
Keep records consistent. Set up your business legitimately, with a domain, phone numbers, address, etc. Get all ID numbers, and register with the IRS. Set up your business bank account for fundability. Keep business financials organized and prepared by a competent professional. Get your personal credit ‘house’ in order. Then, you can more easily fund your startup.