CEO at Novae, helping business owners establish business credit scores then leveraging the scores to access cash and credit.
If you are an entrepreneur and want to start or grow your company without giving up any equity early on, you will need access to business funding. Maintaining 100% ownership of your business is key to maintaining your vision. Having a solid credit score often makes lenders more comfortable with your potential financial behaviors, and they are therefore more likely to approve you for loans or lines of credit that may be essential to start or expand your business effectively.
Building a business credit score separate from your personal credit score is one of the most beneficial business decisions you could make. Do you know what a business credit score is composed of? Do you know what increases the possibility of you getting an approval versus being turned away? Understanding the following factors will help you establish a solid business credit profile that will allow you to gain the funding you need to succeed.
1. Structure
Have you registered your company with the Secretary of State where you are operating, or have you been operating as a sole proprietor? If your business isn’t incorporated, you are either taking money for a product or service in your own personal name, or you have set up a DBA (doing business as) with a bank and are probably registered as a sole proprietor.
Most lenders prefer not to make loans to sole proprietors, and you cannot receive a business loan without being an actual business. This means you will not be able to develop a business credit score until you are incorporated. Not to mention, if you're not incorporated and don't have a business bank account, for all intents and purposes, your entity is not recognized as a true business.
Successfully structuring your business is the first step in building your business credit score. There are ways to do this yourself, or you can hire a company like mine to lay out the game plan for you. Whatever you decide to do, you should start this process today.
2. Financials
It is critically important to have professional bookkeeping services for your business. Most lenders will require to see documents like a year-to-date (YTD) balance sheet, YTD profit and loss (P&L) statements, and even YTD cash flow statements. Typically, lenders will also request that you provide these documents for at least the previous year as well.
If you don’t have a good record of these numbers and statements, it’s almost certain you won’t get the funding you are looking for. There are many companies that offer affordable bookkeeping services online. As an alternative, there are also a few popular software companies that allow you to do your own bookkeeping, and they provide tutorial videos and support.
The business credit reporting agency Dun & Bradstreet will request your financial information as well to provide a clear picture of any financial risk you could pose to lenders or other businesses. Although this is not required, if your financials look great, this will benefit you tremendously in building your business credit score.
3. Payment History
Most people are familiar with how payment history affects their FICO score with their personal credit profile. Payment history is also important for your business because it will determine your Paydex score, which is the score calculated from your business credit profile.
Lenders, and even other companies, can review your Paydex score to determine if they are willing to extend credit, loan money or even work with you. If you haven't already, make sure you get a DUNS number. This will start your journey of building your Paydex score.
It is recommended to pay all your invoices or business bills early. Paying on time can get you a satisfactory Paydex score, but paying very early can make that score even better. Lastly, make sure that you are contracting with vendors that report to Dun & Bradstreet and the other business credit bureaus like Experian SmartBusinessReports and Equifax Small Business Enterprise. One or two of the three is acceptable, but if your payment experiences aren’t reporting to any of them, don't expect those experiences to help your business credit score.
4. UCC Filings
One of the first questions you should ask a prospective lender before you apply for a loan is if it will apply a universal commercial code (UCC) filing on your company. UCC is a legal notice a lender files with the Secretary of State when it has a security interest against one of your assets. A blanket UCC filing means a lender has access to all your assets if you default and also potentially indicates your business type to be higher risk than normal. If there is an option to get a UCC-1 filed versus a blanket UCC filing, it will help.
Also, to mitigate these concerns, you should negotiate UCC filings according to your situation. For example, I had a client that was looking to get SBA financing and was approved up to $100,000. The client decided only to take $25,000 after we informed him that any amount above $25,000 would place a UCC filing on his business credit report and may affect his ability to get approved for a line of credit he was planning for in the near future.
There are other factors affecting your ability to get credit. These are just a few critical items to give you an idea of what you are facing as you start this journey. These decisions could be the difference between having the funding you need to thrive and not having enough funds for your business to just survive. Your ideas may be great, but you have to have the money to fund them. Your credit is important, and if you're an entrepreneur, building your business credit is imperative. Here's to your future success!
The information provided here is not legal, investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
