Two Tales of Personal Credit in the Business World
As much as I talk to clients about the need to establish business credit, the topic of personal credit is still front and center when it comes to business credit building.
Why is that, you ask?
In reality, the credit landscape has changed quite a bit in recent years due to the fact that most creditors are no longer offering business credit without a personal guarantee.
In other words, your personal credit standing is an essential factor when it comes to securing capital for your business.
So much so, that the request for a personal credit report is the first thing I train new funding advisers to request from our new clients seeking financing.
In fact, weak personal credit is one of the number one reasons many small business owners avoid seeking the credit or capital needed to grow their business.
Now that we've addressed the elephant in the room, let's look at a few simple steps you can take with your personal credit which will accelerate your ultimate goal of building credit for your business.
Step 1 - Don't Bury Your Head in the Sand
I urge every one of our clients to review their personal credit report as often as possible (even if there are blemishes) so they remain aware of any changes in credit status.
I recommend using a monthly credit monitoring service that will alert you with instant updates on any recent changes to your report.
My personal recommendation is creditchecktotal.com (A company owned by Experian) which provides a true FICO 8 credit score. It's only $1.00 for a 7-day trial and $29.95 per mo. thereafter. That said, if you call them and ask if you qualify for a discount they will likely reduce your monthly subscription by fifty percent which is only $14.97/Month (Which is steal for true FICO credit monitoring from Experian).
Step 2 - Restore & Optimize Your Profile
Once you have a copy of your credit report, if you notice any negative items or areas of concern, now is the time to start working on them.
When it comes to challenged credit, you have a choice to make as a business owner to restore your credit on your own, or hire a company to do the work for you.
If you only have a few negative items and time permits, disputing these items yourself may not be a bad idea. However, if there are several negative items on your credit profile and the time taken away from your business (and family) is prohibitive, it may be wise to seek the assistance of a professional credit repair company.
Now that you've removed the negative items on your credit report, it's also important for you to understand how to optimize your credit score.
To avoid writing a book on the subject (which I'm sure has been been done on at least a few occasions), I will provide a simple, yet effective outline of two basic strategies to increase your credit scores.
Make your payments on time. As obvious as this may seem, I cannot overemphasize the impact that just one (recent) late payment can have on your ability to secure credit. Although a single late pay may not affect your score very much, the best business lenders and creditors frown upon late pays (especially those within the last twelve months), and may not extend credit even if you have just one recent late pay.
To avoid the accidental late payment, setup online bill pay for all of your recurring monthly expenses to ensure that this doesn't occur. Also, by setting up auto-pay, you establish a precedent for timely payments and the onus is on the creditor if you ever need to dispute a late payment.
Make sure you have revolving credit (i.e. credit cards, charge cards, etc.). The need for revolving credit is an essential part of your credit mix and can boost your credit scores tremendously. Once you've established a revolving account, charge the card up to 30-60% of the limit on items you would normally pay cash or use your debit card for (gas, eating out, movies, etc.). The following month, pay the balance down to 10-20% of the credit limit. The next month, pay the balance off in full. Continue to repeat the process of charging the card to 30-60%, paying it down to 10-20% the next month and paying it off the following month and watch your scores rise. This practice communicates to the FICO scoring system that you can properly manage your credit balances, but you also have the financial resources to pay off the balance at any time which will result in a significant boost in your credit score.
Step 3 - Be Prepared Before You Apply
One of the least talked about steps to applying for credit is the process of preparing for a loan. In too many instances, I've seen small business owners apply for credit at the wrong time or based on situations outside of their control. Here are two client scenarios (which I often encounter) that highlight the importance of preparation prior to applying for a loan or credit. The first example took place when an unsuspecting business owner (Later he became a client) walked into his local bank to make a deposit. As he turns to leave, a pleasant bank representative asks if he would like to apply for a business line of credit. "It will only take about five minutes", she says with a smile. He politely accepts her offer in hopes to secure much needed capital to expand his business. Not ten minutes later, she tells him that he'll receive the results of his application in the mail (which is the banks code for a declined application). As he leaves the bank he has a glimmer of hope, but deep down he senses that his application has been denied.
In another case, a business owner with her hair on fire continued to submit rapid fire applications in an attempt to secure a loan to meet payroll. Unfortunately, one of her long time clients didn't pay a large invoice on time and the CFO was on vacation. This put her in a financial bind as she hadn't anticipated a cash flow shortage which ultimately cost her several inquiries on her credit report and the need to take on a high interest loan to keep the doors open.
Bottom line, neither of these client properly prepared themselves for financing and it cost them both time and money. And although personal credit may not have been the only factor that prevented them from securing the capital they needed, it certainly played significant role.
In closing, always be aware of your personal credit standing at all times, restore and optimize your credit if needed, and make sure you're properly prepared before applying for any type of business loan or credit.
About the Author Kylon J. Trower is 20+ year serial entrepreneur with a background in residential and commercial lending, business credit development and financing. Most recently, he's built a national network of financial professionals dedicated to preserving the lifeblood of our economy, the American small business sector.
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