If you have a business, you should check your personal and professional credit score. You can do this for free at nav.com (scroll to the bottom of the page and click on “Business Credit Scores & Reports”). Over 60% of businesses use their business credit score or a combination of their business and personal credit score to obtain financing (Source: Federal Reserve Small Business Credit Survey 2020).
Obtain a Federal Identification Number (FEIN) and use a consistent start date on all your documents. File documents to become a legal person or file a DBA (Doing Business As) with your county. It is very important to have a business bank account and try to leave a balance of at least $ 1,000 in it at all times. They watch how many deposits you have because they don’t like to see a business depending on just a few customers. Also, try never to debit your bank account, even if you have a line of credit to protect yourself.
The most critical elements for obtaining financing are the ability to repay debt, business and personal credit rating, strength of the business and of the guarantor (which is higher if you have been in business for at least 2 years. ), guarantees and up to date of financial statements. Lenders will want to see 1 to 2 years of financial data (business and personal tax returns), a plan for the use of funds (accounts receivable, inventory, equipment, real estate). Depending on the loan application, a financial forecast of how the loan will generate income and profit is also good.
All loans will require personal collateral (so a good personal score is important) and collateral. Collateral can be anything in the form of physical assets (i.e. equipment, machinery, real estate, and inventory) or ancillary assets (accounts receivable). If collateral is an issue, there are other avenues to follow (SBA, personal assets such as home equity or commercial property equity). A credit institution will require at the strict minimum an “all assets” deposit. Each lending institution will have different lending policies which stipulate the required collateral. The longer you have been in business, the more personal and business credit you use, and your financial strength (both personal and professional) can also determine the type of collateral required for a business loan.
There are different types of loans such as lines of credit, term loans, SBA loans, and commercial real estate loans. SBA loans are loans guaranteed by the Small Business Administration. These loans are not made by the SBA but by individual lenders such as banks or credit unions. The special loans that have been granted since COVID-19 are an exception to this rule. There is a guide called “Is an SBA Loan Right for You?” The Quick Guide ”on score.org and the link is https://www.score.org/resource/is-sba-loan-right-for-you-quick-guide. Just because you can’t get an SBA loan from one lender doesn’t mean you can’t get one from another lender. Lenders may have additional restrictions besides the SBA.
The creation of business credit is important as it can affect interest rates, insurance / surety bonds, government contacts and certain types of financing. The top 3 commercial credit bureaus are Dun & Bradstreet, Equifax and Experian. If you want to learn more about improving your credit score, go to score.org and watch the recorded webinar titled “Smart Credit Strategies for Small Business Owners”.
It is very important to make sure that you have a good personal and professional credit rating. Please contact SCORE on score.org for mentorship or view the many articles and webinars in the SCORE Library.
Sharon Schappacher is a volunteer business mentor in the Tip of the Mitt chapter of SCORE. She has accounting experience and is involved in the hospitality industry and various other businesses. To request SCORE’s free and confidential mentoring services for small businesses, call (231) 347-4150 in the Petoskey area or (989) 731-0287 in the Gaylord area.