Not too long ago we invited a group of small business experts to a Twitter chat to answer questions about how business credit works and what you can do to build a strong business credit profile. David Bobbitt, President of SCORE, Rieva Lesonski, Editor at Large at Small Business Daily, Steve Nicastro from NerdWallet, Nellie Akalp, CEO of CorpNet, and I answered some of the questions we weren’t able to get to at last month’s SCORE webinar on Understanding Business Credit.
Because there were so many questions that we just couldn’t get to, we got together with some of the movers and shakers in the small business community to answer as many of the questions we couldn’t get to in the webinar. Below are the questions, and some of the answers shared by our group of experts:
What’s a misconception you’ve heard from small business owners about credit?
This is a great question. One of the biggest misconceptions or misunderstandings is about personal credit score and it’s relationship to the business credit profile. Because so many lenders weight personal credit score heavily when evaluating a small business’ credit worthiness, it makes sense there would be some confusion on the topic. Personal credit score is really a reflection of how a borrower meets his or her personal credit obligations and may not necessarily be the best way to determine business creditworthiness—your business credit profile may be a better reflection of that.
That doesn’t mean maintaining a strong personal credit score isn’t important. For most small business owners, the need to maintain a strong personal credit score isn’t likely to go away, but building a good business credit profile is critical as your business grows.
Here are some of the misconceptions others on the panel shared:
Building a strong profile should be a priority from the very beginning. What you do in the first year or two can create options down the road, or make it harder for your business to qualify for loan.
Nellie brings up a great point, the business entity you choose matters to many lenders, but it doesn’t mean you won’t need to provide a personal guarantee when your small business applies for a loan. This is particularly true for younger businesses in the first few years.
Many lenders today don’t require specific forms or types of collateral, but will rather apply a general lien on business assets and a personal guarantee to secure the loan—making it possible for many businesses without specific types of collateral to qualify.
Whenever I have a chance to meet with small business owners, I often ask how many of them know they have a business credit profile as well as their personal credit score? I’ve found a lot of business owners are either unaware or unsure about having two profiles.
Your personal credit score and business credit profile are reflections of how you and your business have handled credit obligations in the past. Lenders look at your past performance to try and predict what you will do in the future. Remember, most lenders want to know that you can repay a loan (which is why they ask about revenue, cash flow, and other financial metrics), will you repay a loan (which is demonstrated by your past credit behavior and why your credit profile is so important), and that they can count on you to make each and every payment in a timely manner regardless of what happens during the loan term.
How can a small business check their credit? What are the differences between the bureaus?
Understanding where your business credit profile stands is very important. The three primary business credit bureaus (though there are others) are Dun & Bradstreet, Experian, and Equifax. They all offer businesses the opportunity to view their current profiles (and encourage them to do so). They are motivated to make sure the information they have in their database is as accurate as possible, so any verifiable error in a business’ profile will be corrected.
Here is some of the advice offered by our panel:
This is good advice. A relationship with the appropriate credit bureau(s) does more than allow you to keep track of your business’ credit profile (which is critically important), it also allows you to view the credit profile of any potential customer you might offer credit to and gives you the opportunity to report on their credit behavior with you.
Dun & Bradstreet has been reporting on how businesses pay their vendors for over 100 years. I agree with Nellie, getting your DUNS number is a good idea in addition to investigating your business credit profile with the credit bureaus.
What are ways to correct info on a business credit profile?
Fortunately, the credit bureaus want to have the most accurate information possible, this suggestion from Steve to build relationships with the credit bureaus is good advice:
Depending upon the bureau, there will be either a moderate fee or no fee at all associated with reviewing your business’ information. It’s well worth the effort and an important part of making sure your profile is as strong as possible.
Rieva’s advice to contact the credit bureau right away, should you see an error on your report, hits the nail on the head:
Because your business credit report is available to all your suppliers, potential lenders, and others, you can’t ignore it. Regularly monitor your profile to make sure it’s accurate and reach out to the credit bureaus any time you see an error.
David brings up a great resource if you’d like to learn more:
How do the credit bureaus obtain a small business’ information?
There are two primary sources of information the business credit bureaus draw from, the public record and your credit history with vendors, business credit card providers, and other small business lenders.
They also pull from the information you provide when you set up your business and file for a business license. If it’s been a year or more since you did that, it’s probably a good time to review you profile. I’d recommend checking at least a couple times each year to make sure your business’ information is accurate.
How is business credit similar to personal credit and how is it different?
Your personal credit score and your business credit profile both report credit history, but they are reporting two different histories. While the process and the way your information is shared is similar, they report different things.
Your personal credit score is a reflection of how you meet your personal credit obligations. How timely do you make your mortgage payment, a car payment, or pay on the balance of your personal credit cards. Your business credit profile, as Steve describes, is a reflection of how you meet your business credit obligations.
You should be aware that a strong business credit profile is not a guarantee you’ll find success with a small business loan—but it likely will make it possible to have more options.
You should also be aware that your business credit profile is available to anyone interested in offering you credit. In other words, it’s not as private as your personal score. And, although the individual bureaus report on your business credit history, there isn’t a universal score, like your personal credit score. Your business credit profile is more a collection of scores and reports that describe your business’ credit use and history.
Can a business credit card help establish credit for a new business? Why or why not?
Building your business credit profile during the first few years of your business should be a priority. A business credit card can be a way to do that, but David’s advice to make sure you’re not overextended is worth listening to.
The key, as Steve and Nellie suggest, is to make sure you make regular and timely payments.
A business credit card is not a magic bullet, but can be an important tool because the sooner you separate your personal and business expenses perhaps the better. Doing so early in your business allows you to build a good business credit profile by using business credit. Using your personal credit to pay for business expenses doesn’t do that. Using trade credit accounts and looking for suppliers who offer 30- or 60-day terms is another way you can start using business credit to build your profile.
Which would you suggest paying down first, personal credit accounts or business credit cards?
If your goal is to establish a strong business credit profile in the early years of your business, because your personal score is an important part of getting started (and, many lenders start there), it could make sense to begin with your personal credit. David suggests you start where you are behind, which is good advice.
If the goal is to strengthen you profile, it makes sense to address the problems in your profile first. Steve suggested you tackle the highest interest debt first.
Depending on the nature of the debt, this is good advice. High-interest personal debt is a great place to start.
Will a bankruptcy make it difficult to get a small business loan?
The short answer is, “Yes.” A bankruptcy will make it more difficult to get a small business loan, but it doesn’t make it impossible.
Lenders are looking for a positive track record. A bankruptcy is definitely a blemish on your track record. Most lenders will want to see a period of time transpire before they will consider a business loan application. Some lenders, as Steve suggests, will want to see seven years of improving track record—other lenders will require two or more years. It depends upon the individual lender’s requirements, but expect to wait at least two years after your bankruptcy has been discharged.
After bankruptcy, you are basically starting over again. Reach out to vendors who might be willing to give you 30-day terms and start building your profile again. You’ll need to demonstrate to a future lender that you can, and will, make your loan payments on time, despite a past bankruptcy.
What are online lenders looking for in a loan application?
Every lender is a little different and the category of online lenders is pretty broad. At OnDeck, we’re looking for healthy businesses with at least a year under their belts, and a minimum of $100,000 in annual revenues. Although your personal credit score will be part of the equation, it is not the driving factor and there are many business-related data points we look at to evaluate a business’ creditworthiness.
David Bobbit is sharing a tool called the Fundability Quiz we created with SCORE that asks 12 straightforward questions that will help you get a feel for where you might find success when looking for a loan. It will ask questions about things like your credit profile, years in business, do you have any collateral, and give you some ideas about where you might find success and where you might need to strengthen your loan application.
Although different lenders require different things, be prepared to share general information about your business, the industry you’re in, how long you’ve been in business, and your cash flow situation. You’ll likely be asked for banks statements and tax returns.
It’s also a good idea to have a clearly identified loan purpose and a specific amount you’re looking for. “As much as I can get,” isn’t the best answer. In a nutshell, the more prepared you are and the better you’re able to demonstrate a healthy business, the better.
What are your tips for a business looking to build a strong credit profile?
It starts with finding out where you are today. You need to become familiar with your credit profile—where it looks good and where you might need to work on it. There are no real shortcuts to building a strong profile. Slow and steady wins this race. Fortunately, you can start to see results in six to 12 months. Our panel’s advice is all worth paying attention to.
The best way to build a strong credit profile is to use the credit you need and make timely payments—starting with the first payment. Doing this, you will build a strong profile over time. A strong profile might not be a guarantee of a small business loan, but it gives you options.
Remember, lenders really want to know the answer to three questions:
- Can you repay a loan? This is why they ask about revenue, cash flow, collateral, etc.
- Will you repay a loan? This is why your credit profile is so important, it allows them to look at what you’ve done in the past to try to predict what you’ll do in the future.
- Can they count on you to make each and every loan payment in a timely manner regardless of what happens in your business over the term of the loan?
If you have questions we didn’t get to during the Twitter chat, feel free to reach out to us via the comments section of this blog. We’ll continue to answer your credit questions there.
The great folks as SCORE are also available to help you better understand and use business credit. You can visit SCORE.org or reach out on Twitter @SCOREMentors.