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2013

by David Tremblay.


There is no silver bullet when it comes to getting a loan to fund your business.  With Small Business lending on the rise, knowing how to approach the process can help you secure a loan more quickly than others in your industry. When it comes down to it, it’s all about Ability, Stability, and Willingness to Pay, limiting uncertainty on the lender’s side by providing a very detailed plan.

 

Respondents were split when asked by our Fall Small Business Owners Report what they believe is the most important factor in receiving a loan.

Small Business Owner Report Graphic

The funny thing is that none of them are wrong.  Most financial institutions look at ALL those things, but in reality, less-than-perfect credit scores or a lack of a previous business borrowing history won’t carry the same weight individually that cash flow does. It’s also important to have a good relationship with your banker, who can provide context if one of those factors comes up short. Figuring out how much to ask for when applying for a business loan is part and parcel of the factors above. Here are a few thoughts on how financial institutions look at those different factors:

 

Cash flow:  Cash flow is typically considered the primary source of repayment for credit. It is important because that’s what repays the lines of credit and loans that banks extend to clients.  Does your business have the financial capacity to support debt and expenses?  Do your assets outweigh your liabilities? Typically a business needs to have between $1.15 and $1.35 of income to support every $1 of debt service, including the new debt being requested. The extra $0.15 to $0.35 provides a cushion for your business to absorb unexpected expenses or a downturn in the economy. It is important for the business to demonstrate more than one year of adequate cash flow history to show consistency in the ability to service debts. The ability to use projected cash flows as opposed to historical cash flows is uncommon.  Inadequate cash flow is a frequent reason why banks are unable to extend new credit to businesses.

 

Image of David TremblayCredit score:  Banks often look at multiple credit scores – business scores, consumer scores of the owners who will act as personal guarantors, and other internal scores based on bank risk factors and relationships. The credit scores of the business and individual owners in and of itself aren’t nearly as important as what is driving them, but the scores still play an important role in predicting creditworthiness.  As Jeannie Kelly also notes in a post running today on the MasterCard Small Business site, important drivers of credit scores are payment history, amounts owed, length of credit history, types of credit used and new credit opened.

 

Track record of ability to repay previous loans:  Relationships are important to banks, whether new or existing. An established borrowing and/or deposit relationship with their bank is often beneficial to the applicant requesting new credit. An existing borrowing and/or deposit relationship can offer immediate insight into the potential creditworthiness of the applicant based on the bank’s established risk guidelines.  When applicants have a proven track record of adequate repayment of previous loans, the decision to extend new credit is often an easier or quicker one to make.  The length of time for a bank to consider a small business to have a proven repayment track record can vary. Two years would be considered a minimum but 5+ years is preferred in order to establish trends that cross different economic cycles. Business borrowing history is less important than credit scores or cash flows but it brings an additional positive factor to the lending decision.

 

Annual revenues:  The gross annual revenues of a business is one factor that helps banks size potential credit needs and guide applicants to the most appropriate products available.  Annual revenue size is an indicator of how marketable the product or service is.  After our established revenue minimum of $250,000 for lines/loans, revenue trends over several years become far more important than the number itself.  Banks also care more about client base diversification to provide cushions in volatile markets. 

 

Personal finances:  Work experience, experience in your industry, and personal credit history are all “character traits” banks will consider. Your personal integrity and good standing—and the integrity and standing of those closely tied to the success of the business—are critically important. Business owners who have demonstrated challenges in managing their personal finances will have higher hurdles to obtaining new credit for their business. Related to this, many banks will ask how much stake the owners have in their business. If leadership is heavily invested monetarily in their own business, the bank sees this as a higher commitment to success, and therefore a higher chance of repaying the loan. To be further prepared for the loan application process, the Small Business Administration website has a Business Loan checklist that goes in more detail.

 

Again, it’s important to develop a strong relationship with your business banker – before you ever ask for credit. If that person understands the story behind the factors above, she can make the process much easier and help you get a yes to your loan request.

 

This month, I’ll be part of a Google Hangout on this very topic, so feel free to revisit this post for an updated start time. Top small business influencers from around the country will be discussing what drives credit decisions.

This article was originally published in Dun & Bradstreet Credibility Corp.'s Credit Resources.


In our second installment of “Five Steps to Business Credit,” we will go over the many ways to build your business credit rating. Because good business credit is essential to financial success, it is critical that you not only understand business credit, but learn how to build it. If your company gets a good rating from D&B®, you may find that more companies are willing to partner with you based solely on this rating. Many companies use D&B ratings to build profitable relationships with their partners.


D&B is the world’s largest credit bureau. It maintains an information database of approximately 200 million companies or more, worldwide, and a staggering 30 million in the U.S. alone. But how is your credit rating determined?


D&B evaluates factors that include your company’s promptness in paying its suppliers and meeting its

financial obligations. In addition, it looks at your business finances, including:

 

  • Cash flow
  • Working capital
  • Net worth
  • Financial resources
  • Corporate finance reports
  • Business filings
  • Judgments against your company

   

Finally, it also considers self-reported data such as interviews with company principals and other company partners, as well as direct investigations. In order to establish a D&B credit rating, you need to obtain a Data Universal Numbering System number, or D-U-N-S® number. You can apply for a free D-U-N-S number online and receive the number in 30-45 days. Once you have the D-U-N-S number, you need to contact your trade accounts to have them add your D-U-N-S number to your credit file. That way, D&B will get a report of your credit history with each vendor each month.


One of the scores that D&B assigns your business is reported as a PAYDEX® score that ranges from 0 to 100.  The best scores are those above 80. (Compare this with personal FICO scores, which range from 500 to 800, with scores more than 750 being excellent.)


Your business can get rewarded for paying early! You may be able to boost its PAYDEX score by paying its accounts before your trade accounts generate invoices. For best results, your business should use five accounts each month. To ensure that you are paying early, get into the habit of sending the company a check immediately after making a purchase on credit.


It’s also important to remember that the four Cs of credit almost always determine the creditworthiness of a business:

  • Capacity: are you able to repay the loan?
  • Capital: what are you worth?
  • Conditions: what external factors impact your business, and how?
  • Character: will you repay the loan?


Once you have established a credit rating for your business, you must also monitor it for accuracy. Check your credit report quarterly to ensure that it contains no errors. Should you find any, report them immediately to D&B – and have documentation ready to support your claim!

By following these simple steps, your business credit report will be up-to-date, an essential factor for business success. For more information on business credit, visit dandb.com or call 1-800-280-0306.

 

 

The information and opinions provided by Dun & Bradstreet Credibility Corp. is provided "as-is" and are solely those of Dun & Bradstreet Credibility Corp. Dun & Bradstreet Credibility Corp. makes no representations or warranties, express or implied, with respect to such information and the results of the use of such information. Neither Dun & Bradstreet Credibility Corp. nor any of its parents, subsidiaries or affiliates shall be held liable for any damages, whether direct, indirect, incidental, special or consequential arising from or in connection with a business's use or reliance on the information or advice offered by Dun & Bradstreet Credibility Corp. You should consult a qualified professional to assist you in determining the most effective business structure for your particular business.

5Steps_Body.jpgBusiness credit is a point of confusion for many small business owners. Business Credit can be defined as the extension of trust through trade terms from one business entity to another in which one party receives something of value immediately and agrees to repay the other party at a future date on agreed-upon terms.  A D&B® business credit report is the qualitative and quantitative representation of a business’ overall financial health and stability through a wide range of predictive and historic business credit scores and can include associated business information.  Dun & Bradstreet Credibility Corp. offers business owners the proactive ability to establish, monitor, and build their own D&B credit profile and business credit scores and better understand how these scores may impact their business.

 

Remaining uneducated about business credit poses potential risk for business owners, while understanding and leveraging business credit can empower business owners in multiple financial situations. Oftentimes, companies examine your business credit to determine whether they want to do business with you. Your creditworthiness may factor into your potential partners’ decisions about things such as whether to extend you favorable credit terms and rates, sell to you, buy from you, lease equipment to you, or to lend you money. 


There are several things that need to be completed before you can qualify for business credit. Let’s go through each of them, step by step.

 

  • Name and Incorporate Your Business. This is an easy step. In fact, most states have made incorporating a business very simple. Companies like LegalZoom offer do-it-yourself guidance for incorporating a business.

 

  • Apply for an Employment Identification Number (EIN). An EIN in your company’s name can be obtained from the IRS by phone, mail, or fax, or online from www.irs.gov. The application process is quick and simple. Once you have an EIN, it will serve as identification for your business for tax purposes (similar to how your Social Security number functions as your personal tax ID).

 

  • Obtain Business Licenses and Permits. Depending on your city and state, you may be required to have certain business licenses and permits in order to do business. For U.S. companies, the Small Business Administration.

 

  • Open a Business Checking Account. Opening a business checking account is an important step toward separating your personal credit from your business credit profile. Banks vary in their offers for business accounts. Look for lower minimum balance requirements and lower transaction costs when evaluating a bank.

 

  • Open a Trade Account. A trade account is an account between businesses that can allow delayed payment for the exchange of goods. A Trade credit is credit that is extended by the supplier to the business acquiring the goods which allows for delayed payment. However, sometimes new businesses find that a trade credit isn’t immediately offered. Many times, businesses need to establish a relationship with the supplier by consistently paying C.O.D. (cash on delivery) for a period of time before the supplier is willing to extend a trade credit. Once a trade credit is offered, businesses should consider taking advantage of it, as trade accounts can be a good way to build your business credit history. While many companies want to start with C.O.D. terms, there are some companies that have been known to extend credit to new businesses, and some do not require any personal credit references. Such companies include:
    • UPS
    • Dell
    • FedEx
    • Staples
    • Lowe’s
    • Home Depot

Most business accounts have Net 30 terms, meaning any outstanding balance must be paid within 30 days of invoice. However, paying early has more perks for a business credit score than a personal one – your business credit score may improve with early payments. A good way to jump-start this process is to charge a small amount as soon as you get the account, then immediately pay the bill.

 

Other Business Credit Builders

Having a well-written business plan may also help you build business credit – even before you begin doing business! Sometimes vendors use a company’s business plan to help them decide whether to extend the company credit to purchase goods and services.


5Steps_PQ.jpgOnce vendors or lenders do extend you credit, it’s critical that your payments are prompt. It’s also important to make sure your vendors report those prompt payments to the credit bureaus. Vendor payment reports are one of the best ways a business can improve its credit history.

Finally, you can start building your business credit by securing loans that are guaranteed by the Small Business Administration (SBA) or other business associations. If you have good personal credit, SBA loans may be the most attractive option. However, you must be seeking a relatively small loan (usually no more than $350,000). In addition, you will need to provide your personal tax returns or other documentation that will support your high personal credit rating.

 

While the intricacies of business credit may be difficult for small business owners to fully grasp, we hope that we have set a foundation for understanding the basics and seeing all the possible ways good business credit can be leveraged in favor of the business owner. For more information on business credit, visit dandb.com or call 1-800-280-0306.



This article was originally published in Dun & Bradstreet Credibility Corp.'s Credit Resources.

 

The information and opinions provided by Dun & Bradstreet Credibility Corp. is provided "as-is" and are solely those of Dun & Bradstreet Credibility Corp. Dun & Bradstreet Credibility Corp. makes no representations or warranties, express or implied, with respect to such information and the results of the use of such information. Neither Dun & Bradstreet Credibility Corp. nor any of its parents, subsidiaries or affiliates shall be held liable for any damages, whether direct, indirect, incidental, special or consequential arising from or in connection with a business's use or reliance on the information or advice offered by Dun & Bradstreet Credibility Corp. You should consult a qualified professional to assist you in determining the most effective business structure for your particular business.

Steve Strauss

5 Tips for Tax Season

Posted by Steve Strauss Apr 2, 2013

There are many reasons you may have gone into business for yourself— maybe you desired more freedom or creativity, or you had a dynamite idea Steve-Strauss--in-article-Medium.pngor a great opportunity. But in all probability it’s a pretty safe bet you did not become an entrepreneur because you liked handling business taxes (unless of course, you are an accountant).

 

The irony is that no matter how you feel about them, taxes are one of those things you have to master if you want to stay in business. You can possibly survive a less-than-stellar location or an occasional lapse in service, but fail to handle your taxes properly and Uncle Sam will make sure that a late shipment is the least of your concerns.

 

And with tax season and its accompanying stresses upon us, it is important to remember that the best thing you can do to prepare is, well, prepare.

 

Here are five tips that can make doing your taxes a little bit easier:

 

1. Digitize your receipts: Do you still keep all of your receipts in the proverbial shoebox, only to spend days sorting through and inputting them into your computer? Well, there are better ways!  Here are two great options for handling receipts:

 

  • Use apps: These days, the ability to have all of your receipts scanned and inputted is only as far away as your smartphone. There are many mobile apps that allow you to take pictures of your receipts and have them uploaded into a spreadsheet in the cloud. I am partial to the one offered by Concur, which was the first to pioneer this kind of technology.  The quality of their product is unmatched, in my humble opinion.

 

  • Outsource it: Shoeboxed has an app like Concur, but they also offer the option of taking care of everything for you— you can actually send them all your receipts, and they’ll scan them for you and send you the digitized files.

 

Click here to read more articles from small business expert Steve Strauss

 

2. Get your income in order: You likely have different sources of income as a small business owner— large clients, small customers, real estate investments and so on. One of the biggest mistakes you can make in your taxes is underreporting income, so you should begin to reconcile your books now. Go over invoices, ledgers, bank statements, 1099s and any W9s you filled out for the year. Make sure you know who paid you how much so you can report it accurately.

 

3. Review your benefits: Don’t forget to take benefits into account— anything you paid out over the year for you and your staff should be noted. This includes payments you made for contract labor over $600, retirement benefits paid to employees, travel expenses reimbursed, trainings you paid for, etc.


April 2 pull quote.png

4. Prepare for the worst: While the chance of the dreaded audit is relatively low for a small business owner (about 2.5% according to the IRS), it still would behoove you to prepare your taxes and records as if you may be audited because, unfortunately, it is a reality. The entire experience can potentially be avoided, or at least its impact mitigated, if you take the proper steps right from the start.

 

Not only does that mean having your taxes and records accurate and in order, but it also means avoiding certain behaviors that can prompt an audit in the first place, such as:

 

  • Questionably high deductions: The more liberal you are with your expenses, the more you raise a red flag.
  • Not reporting income: All income is income. Forgetting to add any of it can land you in hot water.
  • Reporting repeated losses, or very high income: Reporting a loss every year on your Schedule C, or income in excess of $1 million, can also be a trigger. However, if that is your situation, it is fine— as long as you can back it up.

 

5. Speak with a pro: To the extent you have issues and questions as you do your taxes, it is smart to get the advice of a tax professional. Because mistakes on your taxes can be very costly, this is one place where you do not want to skimp. An enrolled agent, CPA, or other tax professional is usually well worth the money, both in actual savings and peace of mind.

 

How do you prepare every year for tax season? Share your stories below.

About Steve Strauss

 

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss

http://www.smallbusinessonlinecommunity.bankofamerica.com/people/Steve%20Strauss/content

You can read more articles from Steve Strauss by clicking here.

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