Sound Credit Advice for Small Business Owners

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    How do you keep your business afloat if you are under-capitalized?

    It has always been said that owning a home is the American dream. Millions of small business owners will argue, however, that owning one's own business is really the American dream.

    While being your own boss offers its rewards, owning a business is not easy. Without a doubt, entrepreneurship has its obstacles which, if not navigated correctly, can keep the dream from being fulfilled. One of these obstacles can be the lack of access to financial resources.

    Just as a credit card company will look at your credit score before extending you credit, business lenders rely on a similar credit scoring system to determine your ability to borrow money for your business. But until you've developed business credit history within the various business credit reporting agencies such as Dun & Bradstreet, Experian Business, and Business Credit USA, lenders will be reluctant to extend business credit to you. It is for this reason that your personal credit history and personal credit score is so important.

    As a small business owner, there are usually three reasons why you need to borrow:

    • The first and most common reason is to purchase assets such as inventory and would be repaid once the new inventory is converted into cash as inventory is sold to customers.
    • The second reason is to replace or repay other types of credit such as money you may have borrowed from credit cards, unsecured lines of credit, or private investors.
    • The third reason is to replace equity. If you wish to buy a partner's share in your business or need to repay monies borrowed to start your business and don't have the cash to do it, you may consider borrowing.

    Again, if you have been in business for less than two years and have not established credit in your businesses name, then prospective lenders will review your personal credit worthiness and decide whether or not they will lend to you based on your personal credit history and personal credit score.
    If you have not already done so, you should perform a "Credit Audit and Verification" on your personal credit file to ensure accuracy of your credit history as well as remove those inaccurate and negative items that you will find. In fact, a study conducted by the PIRG (Public Information Research Group) out of Washington, D.C., revealed the following;

    • 25% of credit reports surveyed contained serious errors that could result in the denial of credit, such as false delinquencies or accounts that did not belong to the consumer.
    • 54% of credit reports surveyed contained personal demographic information that was misspelled, long out dated, belonged to a stranger, or was otherwise incorrect.
    • Almost 8% of the credit reports were missing major credit, loan, mortgage, or other consumer accounts that demonstrate the credit worthiness of the consumer.
    • Altogether, 79% of the credit reports surveyed contained either serious errors or other mistakes of some kind.

    All of these items work to suppress your credit score and when it comes to applying for unsecured lines of credit, business credit cards, and other loans that will ensure your business survival, the higher your credit score, the lower the interest rate you will pay. But even more importantly, it may stop you from actually obtaining that approval that would continue to allow your business to grow and ensure its long term success.

    The latest statistics from the Small Business Administration (SBA) show that two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years. In short, a significant percentage of new business start ups do fail. Again, if you have not established business credit, how do you keep your business afloat and possibly sinking forever?

    You need capital and in the beginning, that capital will be obtained by your personal credit history and your personal credit score. Having insufficient operating funds is a common mistake for many a failed business venture. Business owners underestimate how much money is needed and they are forced to close before they've had a fair chance to succeed.

    For this reason, it is imperative to ascertain how much money your business will require to survive and you must take into consideration the fact that many businesses take, at the very least, a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs.

    To this end, the attorneys at the National Association for Credit Responsibility and Advocacy (NACRA) can help. Through NACRA's "Credit Audit and Verification" process, we have realized a legal means for addressing flawed consumer credit reports. The difference of having an experienced consumer law attorney working for you through this process is invaluable and will make all the difference in your life, your business, and your financial future moving forward.

    About the Author; Luis O. Rodriguez is the Founder and President of the National Association for Credit Responsibility and Advocacy (NACRA), a consumer advocacy organization dedicated to helping consumers recover, rebuild, and then maintain their good credit and good name. He has been interviewed for many consumer articles and websites including Creditcards.com and CCHWallStreet.com.

    You may contact him direct at lou@nacraonline.org