Build a Strong Credit Profile to Increase Your Options When Applying for a Business Loan

Build a Strong Credit Profile to Increase Your Options When Applying for a Business Loan

I'm happy to be here and in fact one of the things that is a highlight of what I do at OnDeck is the opportunity to talk to small business owners that are participating with SCORE which I think is an incredible organization and I hope you all take advantage of the really smart advisers that you have Axis II at SCORE. These are guys and gals who have been there and done that and really know what they are talking about. Today we will talk about one of the things that impact your ability to get financing. There are a number of variables. Building a strong credit complex is something that will make a difference. The world of small business financing has changed. 30 years ago when I was in business it was a lot different than it is now. There are things like crowdfunding available and it is really hard for a lot of small-business owners to get financing compared to what it may have been 20 or 30 years ago. You need to be a little more savvy in the way you approach financing. However there are more financing options available today than ever before including banks and credit unions and traditional financing options. There are things like online lenders like OnDeck and PayPal and go fund me and crowdfunding is a good source for financing needs. What this basically means is that businesses that would not be able to get financing through traditional means may be able to finance you now. For example an local restaurant that has been in business for 3 years and don't necessarily have a perfect personal credit score but

a decent personal credit score, they have annual revenues that are respectable and they are profitable but don't have collateral. These options that are available to you now allow a business that maybe the bank might turn away to get financing. However one of the things you need to understand

to navigate what is the right type of financing is the critical role that your credit profile plays in this decision that lenders are going to make about you. It is dependent upon where you are in your growth cycle as far as what they are looking at.

Let's talk a little bit about that. Every small business owner has basically two credit profiles. They have the personal credit score which is something that everyone is pretty familiar with and they have their business credit profile which fewer people are aware of . One of the biggest misconceptions about a small business credit profile is that it actually exists. It is really important that you pay attention to that. Also it is a badge of honor for some small-business owners to say I have been in business for several years and I have never had to borrow money. They are five years in business and have a strong cash flow and the business owner has average credit , but that might not necessarily be the best approach. Saying that, I am not an advocate of borrowing for borrowings sake. There are a couple of legitimate reasons to borrow. One is you have an opportunity to capture additional ROI on a project and the other is to increase the value of your business.

Not borrowing makes it very difficult for you to get a loan down the road because if there is no data in your business credit profile, the odds are you will probably not get a loan. Let's start with a little bit of information about your personal credit score .

What makes up your personal credit score? 35% is your payment history. 30% is the amount of credit that you owe, in other words the ratio of the credit you use a versus the credit you have access to. Also the length of your credit history. If you are looking at canceling accounts or closing credit accounts because you are not using them , it's probably not a good idea to close the account because that longer credit history makes a difference when the personal credit bureaus look at the type of credit you use and it plays into it about 10%. Credit cards, your mortgage, car payments are all looked at differently and are all different types of credit in the same way that a revolving charge at a department store is different. What the credit bureaus are looking at is are you able to use different types of credit appropriately quick's -- appropriately? New credit inquiries impact your credit score. For example if you apply for every department store credit card that you are offered every month, that has the potential to negatively impact your credit because they look at those inquiries I don't want to see a lot of new inquiries. If you are looking for an auto loan or a mortgage, they take that into account when they evaluate your credit score because they know you will probably look at a number of different options and shop rates and things like that. The biggest question I get is why do lenders want to know my personal credit score if I am applying for a business loan?

That is a really good question. Basically they are trying to determine your credit worthiness.

They want to know the answer to three very important questions. Can you repay a loan? Will you repay loan? What will you do if something unexpected happens? You may have the ability to repay a loan but your track record might demonstrate that you don't do it. These are the three questions you will need to answer in regards to both your personal credit score and your business credit score. I agree that your personal credit score might not be the best indication of your business's credit worthiness. But for most small business owners that personal credit score will fold into the equation.

Now let's talk about your business credit profile. Your personal credit score is typically expressed in a number value from 300 to 800 and regardless of whether you go to Experian, aqua fax or TransUnion, that score will be very similar. It's based on a FICA score -- a FICO score. A score of 720 is very good and a score of 500 is not so good . Your business credit profile is not a single score but a combination of scores and the information it is sharing is information about the industry you are in your business, your address

and those kind of things. It will also look at the credit relationships you have with your suppliers and vendors and will also look at your payment history with any current business loans or business credit card you might have. All those things are ranked and all fold into a complete report than a single score.

There are basically three primary business credit reporting bureaus. There are others but Dun & Bradstreet , Equifax and Experian are the three biggest. We will talk more specifically about Dun & Bradstreet in a few minutes because I have a sample of some of the information that they are using to evaluate you which should be really interesting.

Basically there are two places that credit bureaus get credit data about you from. Your credit history and the public record. It is important to be familiar with the information being collected about you so you can in turn actually make sure the information is accurate and puts your business credit worthiness in the light for the best possible score you can. > You also need to be aware that different lenders are going to look at different information. Depending upon the lender, they are going to rate your personal rate -- credit score more or less than another lender. At a bank for instance they will want to see a credit score in the 700s.

They will go to a low threshold of 680 provided there are other things in place to demonstrate a healthy business , but if your credit score is below 680 you probably will not be able to get a loan at the bank. If your credit score is below 650 , you probably will not find success with the SBA because their credit threshold is going to be about 650 for your personal credit score. Because lenders like OnDeck recognize your personal credit score is not the best indication of business credit worthiness, we don't rate your personal credit score heavily for a go no go metric for whether or not we approve alone. We will go a little lower than the SBA will go along with other online lenders. Your personal credit score will be part of the evaluation and will make a difference in the number of options you have and potentially even the interest rate you might be offered. Your business credit profile will be important. It is important to start building a positive business credit profile as soon as you open up your business and we will talk about that more in a few minutes. Your business cash flow is important. How much you make in annual revenue will be important. Your time in business is important. Also the industry you are in is important because some industries are considered more risky than others and basically the lenders are trying to answer those three questions of do you have the revenue to repay debt? Does your track record indicate you will? And what will you do in case something goes wrong? They look at all those things.

Let's look at the Dun & Bradstreet credit report and talk about some of the things that Dun & Bradstreet reports tell about your business. Gorman Manufacturing company is a fake business that does not exist and just being used for an example but you can see that there are a couple of important metrics that Dun & Bradstreet looks that that are reported to potential creditors. They will give you a PAYDEX score from one through 100 and depending upon how many days past due you typically make repayment to your vendors, suppliers and other creditors. Gorman company has a PAYDEX score of 74. Experian uses a similar ranking . They measure not necessarily all the same things but will give you a score like this. They will also look at your done in -- they will look at your commercial credit score class . They will score the industry you are in and other businesses like you. They will look at their financial stress score. They look at your business to see what level of financial stress your business and other businesses in your industry might be under and they will make conservative credit limit recommendations and they will give you a Dun & Bradstreet rating. So the three indicates this particular business does between $1 million and $10 million of annual revenue, has a credit appraisal of four which indicates limited. Let's talk more about this. > The three month PAYDEX score will be looking at over the last 90 days, what percentage of the credit obligation you have did you pay late?

This particular client it is not 30 days past due but somewhere between prompt and 30 days past due as reflected by the PAYDEX score of 74. The single biggest thing you can do to improve your business credit profile is make sure you pay your credit obligations promptly every month. That will impact your credit profile quite a bit. > They are also going to look at public filings like bankruptcies, judgments, liens and those types of things . If you have a lawsuit, when was the most recent date that it took place? It looks like this particular report is a 2016 report and it looks like everything in this category was a couple of years ago but they want to make sure that you have a good history and not had a bankruptcy . Most lenders want to see a bankruptcy resolved for at least two years before they will even talk to you. If you have liens and judgments on your account it is likely you will have a harder time finding financing. It is not impossible but it will be more difficult.

They will also look at your category of business and if you have anything in the history that could negatively impact your credit and they will look at your financial condition. This particular business is being rated as fair. They are reprinting business.

They will also look at the financial stress of your potential situation. This particular business is getting a financial stress score class of three. It's not a disaster , but there is potential for stress in this business so that will be folded into your credit profile. Then they will look at the PAYDEX trend in relationship to the industry standard. You see in this particular graph that up until three months ago this business was doing a little better than the industry standard but the last three months have dropped down to about what the industry standard is. This type of trend data that they are collecting on each and every business will be reflected in the final product of their business credit profile. >

They are also going to make that comparison to the benchmark because that is the way they evaluate compared to other businesses like you. As we talked about before the Dun & Bradstreet rating of 3A4 indicates this business between $1 million and $10 million and they are a limited category as far as identification. They will show a potential creditor what your annual revenues are and what your number of employees are. Even how many employees

are in your facility versus how many employees work somewhere else. 110 employees of the 125 are on-site.

They will also look at your net worth and your working capital and what is it doing as far as going up or down. In this case the net worth of this company is up by 11.8% from last year.

They are also going to look at your payment activity. What -- if your average credit is 96.873 then the highest credit this business ever had by any single creditor is $400,000 and the total highest credit that this business has ever had at this time

is a little over $2 million. They will look at a lot of information about your business to make a determination.

They also are going to make a credit limit recommendation . For this business they recommend a conservative credit limit up $200,000 and an aggressive credit limit of $400,000. They rate this business as a low risk category based upon the information that we have already been looking at. And the credit score class of this business is based upon being a little higher than the industry. They are a higher risk business based on the delinquent rates of the industry and their financial ratios will play into this. The proportion of their past due balance compared to total amount owed and there is evidence of a couple open lawsuits or judgments and a proportion of slow payments in recent months. That will all fold into this particular credit profile. They are also going to look at this business compared to other businesses in the region you are in as well as how you compare to the industry that you are in. They also look at how your business compares with other businesses with the same number of employees as well as how do businesses that have been around as long as you are have the same amount of years in business as you do you see compared to other businesses in the region this business is doing a little better than the average compared to other businesses in the industry it's doing a little better but not doing quite as well as other businesses with the same number of employees or the same number of business -- of years in business . This is all part of the credit profile that Dun & Bradstreet have when they look at this business and Experian and Equifax will collate data like this to create a business profile. The big question is

if your business credit profile is so important, what do you need to do to make sure you have the most options at the end of the day when you need financing? The first thing is to get to know your profile. Make sure you regularly review your profile and make sure it is accurate and there are not any errors or omissions. I was talking with Levi King and I asked him what do you suggest for the frequency and he said I think you should be in your profile every month to look at what you are doing. I had always recommended every couple of months or once a quarter. They did a survey this time last year and found that those small-business owners who regularly reviewed their credit profile tended to have an increase in their ability to get financing by about 70%. I said that is a big number and seems like an oversimplification. He said it is a big number but I don't think it's an oversimplification. Basically we tend to impact the data that we review the most. By spending time every month reviewing your credit profile, you will take more action that will positively impact that. Getting to know your credit profile is very important as a first step.