Garrett: Greetings and welcome to “Finance Your Own Business: Get on the Financing Fast-Track.” My name is Garrett Sutton I’m pleased to be joined today by my co-author of this book Gerri Detweiler. Gerri, thanks for being on this webinar.
Gerri: Glad to be here Garrett.
Garrett: This has been a great book to write. I found that there are not many books that encompass all the various ways to finance your business, so it’s been great working with Gerri to bring this kind of unique and important information for entrepreneurs together. So Gerri thanks for all your help on this, because you’re the business credit expert and that’s what we’re going to be talking about today. It’s been a great collaboration. So here’s a little bit about myself. I’m a corporate attorney. I’m a rich dad adviser. I’ve written all these great books down there, and our firm Corporate Direct helps entrepreneur’s and real estate investors form entities including corporations and LLCs to protect their business and to advance their business goals. I’m going to go to the next slide in let Gerri introduced herself.
Gerri: I am Gerri Detweiler and I’ve been involved in credit education for more than 20 years now. I’ve done a lot of writing, speaking and also news media interviews on credit. I also worked in Washington DC for a while and was involved in legislation. I’m particularly excited about this project because it really feel like we’re on the cusp of, it sounds very cliché, but a revolution in small business credit and financing. When I look at my career where personal credit was ten twelve years ago, where people really didn’t know their FICO score didn’t know what their FICO score was and didn’t know how to make it better.
Business credit is there and that’s one of the reasons why I wrote this. We are at the edge of a revolution with the crowd funding rules coming out which we’ll touch on a little bit later. It’s an exciting time to get your business started. So let’s dive right into it on this slide. We’re talking about the stages of business credit.
Garrett: Gerri is an expert in this so there are four stages, correct?
Gerri: Correct, and so what we find is that most businesses are at stage one. If you want advance the slide Garrett, that’s where that’s where it’s really about you. You use maybe a personal credit card for your business you might even use your own personal bank account to pay your business expenses you have a credit score. You have a credit report and credit rating but you really don’t have anything that directly related to your business. We do not want you to stay at this level.
Garrett: Right! And we don’t want you to operate personally as a sole proprietorship either. We want you to get to at least the stage to where you can start building business credit. So Gerry, let’s discuss that.
Gerri: So it’s Stage 2. That’s where you’re starting to separate your business and personal credit. So you definitely have a corporate structuring here. We’ll talk about that in a minute. You will have a business bank account, probably a dedicated small business credit card and you start to establish credit references with companies that report to the small business credit bureaus of the commercial credit bureaus. So that you’re building a credit rating on your
Business. Your business can have its own credit rating, and we’ll talk about why that’s a good idea in a moment.
Garrett: Then let’s get people to stage 3. The book “Finance Your Own Business” goes into how to get to stage 3, but briefly Gerry what’s the next stage to get to?
Gerri: Right, so it’s state three. You’ve established credit references in the name of your business, and you are moving away from credit, and financial matters that involve a personal guarantee and instead financing things strictly in the name of your business. This is great for asset protection. It’s great for protecting your personal credit. It’s great for tax reasons. There are just a lot of benefits to having a solid business credit rating for the business itself.
Garrett: Great points and by doing that we get to stage four: robust business credit.
Gerri: Right. And this is where the doors really open. Where you can get credit from vendors. Get, let’s say, items on better terms. So let’s say you want to buy something and sell it over the holidays. You can get it maybe with ninety- or even hundred-twenty-day terms. You turn around and sell it. Bring in the profits and then pay the bills. That’s a great cash flow model. It’s what Wal-Mart does and the big retailers do. It’s where you want to be. It also lets you get credit cards without a personal guarantee. It allows you to finance your business again strictly on the business’s finances and move away from putting your own credit online every time you need to borrow or grow.
Garrett: Right, and by putting your own credit on the line you are personally responsible for that obligation. We wanna get you away from the personal responsibility to the responsibility of the business for these credit items. So let’s talk about the seven steps to building business credit. The first one kind of comes in my bailiwick, Gerri. That is to create the proper business structure. Being a corporation or LLC you’re not going to use the sole proprietorship or a general partnership. You want that entity that is registered with the state, and then you wanna get an EIN which stands for employer ID number. That is a kind of like the social security number for your business. It’s issued by the IRS. You have to have your corporation or LLC chartered to get that number, but with that number you can start building your business credit. So let’s look at the second step here, and that is to open a business bank account. We don’t want you to do business through your personal bank account. We want you to open a separate business
bank account, and Gerri why is that important for business credit?
Gerri: Well, for one thing of course it’s a lot easier come tax time. So you could actually separate business, and what’s personal purchases. So that’s definitely a benefit. Less headaches there, but also because you need to establish financial background or track record for your business.
Remember with good business credit and business financing, when you go to apply they’re gonna look at more than just a credit score. You may have to provide financial information for your business. For example, I don’t know about you, but I’d rather not turn over to a banker all my personal bank accounts and have them looking at every single personal purchase I made if I need to get some financing. So this is a very important step.
Garrett: Absolutely, and it’s important to realize there are two tracks of credit. There’s personal credit, which everybody should know about: your FICO score, how you handle your credit cards, how you pay your utility bills… that all goes on their personal credit track. But we have a second track of credit that we’re developing here, which is your business credit. By doing the business credit track you are not personally obligated for all of the obligations that you’re entering into. When you start a business, you need to think right off the bat, how do I build my business credit? So let’s go on to Step number three and that’s a to get credit with vendors and lenders that report. What does that mean Gerri?
Gerri: Let me just add a caveat to what you just said Garrett: that is so long as you don’t sign a personal guarantee the business credit doesn’t translate your person credit, but a lot of business owners when they start out do sign a personal guaranteed. So we’re trying to show our readers and viewers how to get away from that.
Garrett: Very good point. We don’t want you signing personal guarantees, if you don’t have to. At the start you may have to. It may be a requirement, but you can build your business credit so that someday you can avoid those darn personal guarantees.
Gerri: Right, so in step 3 the next step is to get credit with vendors and lenders that report. Now this is confusing because with your personal credit, it’s pretty much guaranteed if you open a credit card, or you get a student loan, or an auto loan, they’re going to report to Equifax, Experian and TransUnion. That’s pretty much a given with those types of accounts. With business credit it’s a little more tricky. You have several major business commercial credit bureaus. You have the Experian Small Business Division. The Experian has a separate division devoted small business.
You also have Dun and Bradstreet, which produces the DMB report, and they have something called the PAETEC score. Then you have a Equifax, which produces small business credit information, and you have an agency called the small business financial exchange, which says it’s not a credit bureau but it does basically collect credit data from members and allow members to use that to make credit decisions, so it’s like a credit bureau, but you can’t go directly to SBFE to get any information or to get a report etcetera. So with this you’re looking for companies that report, so sometimes it may be a credit card but not all your small business credit cards report to all the commercial credit bureaus. So sometimes its vendors that you’ll end up doing business with. So you have a printing relationship for example where the printer will report your payment history to D&B for example, or you’re leasing equipment and the equipment leasing company will report. If you’re having trouble finding these companies at the end of this presentation we’re gonna show you a free and easy resource where you can track down companies that will report to the commercial credit agencies. Without credit references you can’t build a credit report or credit score.
Garrett: And Gerri did a great job writing about this in your section of the book on this topic, so in the book “Finance Your Own Business” we go into this in much greater detail so know that there’s more great information for you. Let’s go to step number four: Get a DUNS number. What’s a DUNS number Gerri?
Gerri: So this is sort of like your EIN is for your social security number for your small business. A DUNS number is your identifier in the Dun and Bradstreet system. A DUNS numbers really is important. If you want to do government contracting, you’re gonna have to have one, and if you want to do business with a large retailers like Walmart or Target, you’re probably gonna need it. They’re probably going to check your DUNS number and check your D&B report and look at your Paydex score. So this is a free process. We explain the book how to do it the easiest way possible because it can get a little clunky and you could go to the DMV website now and see if you’re already in their system. They may already have you in the system, but if they don’t you’ll need to apply for this number so you have that to get that DMB file started.
Garrett: Great! An important number for all new businesses. So let’s go on to step number five: increase business credit and manage it properly. What are your thoughts Gerri?
Gerri: So here we’re looking at building these references and then being very very careful about how we handle the references. Paying on time is crucial. With a business credit report it’s different than it is with personal credit. It’s much more granular and detailed to build than it is with personal credit. And you know, making sure that you have a breath of different types of accounts. You don’t have to have debt to have a good credit history. That’s true of course no credit and business credit, but you do have to have accounts that report, and you have to have activity, and you have to make sure that you pay on time. With that, you can build an excellent business credit rating.
Garrett: Great! And once you do that, it’s important to monitor your business credit as well as your personal credit. You know, people make mistakes. Some of these accounts may enter the wrong information, so we want to monitor what your business track and your personal track of credit show to the public and to other vendors. What are your thoughts Gerri?
Gerri: Yeah, absolutely. This is so crucial and I wanted to say that even if you pay your bills on time you still need to do this because in my experience over 20 years I’ve heard from so many people who were shocked. They went to refinance their mortgages. They found something wrong on their credit file. Just this past year, Credit.com did a survey and found that about 10% of people who check their credit report found a collection account they didn’t know about, and about 10% found negative information that they didn’t know about. So you need to know if this happens, so that if there is a mistake, you can fix it. Now a little caveat with small business credit, most small business owners have never checked their business credit report, so they do not know if it’s accurate or not but there appear to be a larger number of inaccuracies on business credit. I think one reason is because they’re not checking. Ultimately you are the best judge of whether that information is correct or not. So if you’re not checking it, they don’t know it’s incorrect. It remained incorrect, and, in the meantime, someone else could be getting that credit report, could be
making a decision, they don’t need your permission to check it, so they could be making a decision about doing business with you without you even knowing that they looked at wrong information. This is not something you want to happen to you.
Garrett: Well and we’ve taken all the steps up to step 6. We’ve spent the time and energy to build our business credit. It makes sense that we should be monitoring it to make sure all of our hard work is paying off. So we get to step 7, and here’s where it all pays off: grow your business and expand available credit. Gerri?
Gerri: Exactly, so here again is where you are in a position where you have strong business credit. Opportunities are open for you. If that big order comes, then you are not gonna be panicked and rushed into a very expensive high cost financing solution because there’s nothing available to you. This is a big problem right now, and in fact it’s got the attention of Congress and legislators: where a lot of small business owners, because they aren’t on top of their credit or their finances, they are ending up with loans that are costing them sixty-, seventy-, eighty-percent a year! They don’t even realize with business credit, they do not have to tell you the APR. So people get stuck in these expensive loans. They think it looks reasonable, but when you figure it out on an annual basis it’s a very expensive way to borrow. We do not want that to happen to you.
Garrett: Right we want you to get the business credit that is available to many businesses and affordable rates. We talk about the various types of financing opportunities you can use in
the book, but we want you to build to this point and then use it prudently. So let’s go on to one of the ways we’re gonna get started we. We pretty much have to start with a proper business entity a corporation or LLC. This allows us to keep our business separate from our personal assets. This is really good asset protection. Know that you can have a couple entities. You don’t need to put everything into one corporation or LLC. We can have an LLC that owns real estate and a corporation that runs a business, and keep them separate from each other for greater asset protection. Then when we select the entity that we’re going to operate our business through, that’s the one I like to use to build business credit. If you’re a real estate investor and you own an LLC that holds a duplex for example, you may sell that duplex someday and not need that
real estate LLC. That’s not a great candidate to build business credit through. Instead you would form a separate management company. Build business credit through the management company. You will always have that management company, and be able to use the business credit associated with it. Now with a corporation or LLC, you’ll enjoy tax benefits. You’ll certainly have lower audit rates. If you operate as a sole proprietorship or a general partnership, you have a five times greater rate of being audited than you do if you use a corporation or an LLC. Look at it from the IRS standpoint, if you’re not operating as a corporation or LLC maybe you’re not serious about your business, as a normal person would want to protect their assets. So if you’re using a sole proprietorship or general partnership, the IRS thinks maybe something funny is going on here, and they have great success going after people who do not operate through corporation or LLC. So by creating the right business structure, you really can make more money. You have greater asset protection, and it’s the right entity to build business credit. Gerri, any further thoughts on this?
Gerri: Well, I would just say that it’s very difficult to build business credit as a sole proprietor. One of the things that you’ve said before that I really appreciated is, “when it comes to setting up the right structure, it’s not about how much money you’re making. It’s about how much you could stand to lose.” You know, this is also about asset protection. If you’re operating as a sole proprietor, and something goes wrong, and you get sued, they can reach to your personal assets: your home, your income and other things. You do a great job explaining this in your book, “Start Your Own Corporation,” but that line has always stuck with me.
Garrett: Well, thank you Gerri. You know it’s interesting, if