Understanding the Mystery of Business Credit
Regardless of industry or the economic state the Nation is in, the secrets I am going to share with you are the keys to starting and maintaining a successful business.
The best part about understanding business credit is that you can immediately implement the processes into your business giving you the chance to get your company qualified for the Small Business Stimulus Package! That’s right! You CAN qualify for bailout funds!
The number one way to avoid the credit crisis is to understand why companies fail.
In 2008, there was a 49% increase in small business bankruptcies; that is a sobering statistic!
Discover the root of the problem.
Learning from others’ mistakes will help you to recognize what not to do.
Extensive research shows there are 5 top pitfalls to business failure:
5. Starting the Business for the Wrong Reasons
4. Poor Management
3. Lack of Planning
2. Over expansion
1. Insufficient Capital
A business owner having insufficient operating funds is not surprising. Business owners tend to underestimate how much money is needed and they are forced to close before they even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.
“It is imperative to ascertain how much money your business will require; not only the costs of starting, but the costs of staying in business. It is important to take into consideration that many businesses take 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.”
When it’s all said and done, you need capital for your business. But keep in mind, your capital needs will change over time, which is why you as a business owner need to build a strategy for capitalizing your business from the beginning. This is where most business owners drop the ball. They come up with great concepts, good marketing, and hire the right people, but they ultimately fail because they never planned for their capital needs.
Think of capitalizing your business as digging a well.
The wise business owner won’t dig a well that satisfies short-term needs, but will dig the well as deep as possible or at least lays that groundwork for doing so.
At a high-level, there are at least five layers of your businesses financial well. It starts with the personal assets of the principals. To me this is the worst possible layer, but the most commonly used. Next we move on to friends and families, which are also commonly exploited sources of funding. Beyond that we have credit, loans and investors.
While there should be some order to this, usually business owners are all over the map when it comes to the deeper layers of the well. They usually get lost in the process or they spend a ton of time going after something they are ill-prepared for.
The biggest tragedy is when business owners wait until it is too late to look for capital. They usually end up out of luck. The reality is no one wants to give you money if they know you need it. Your best bet is to dig your well, when you don’t need the water.
The number one lesson you as an entrepreneur or small business owner must learn and know is: the capital you need to survive doesn’t have to come from your bank account only.
Think of it this way: Capital = Money
* Your Money tends to be limited, it intrudes on your personal life needs and desires and it risks the loss of previous successes.
* Other People’s Money has wider sources, deeper pockets and gives you the ability to separate personal and business Life.
So what exactly is business credit?
BUSINESS CREDIT = OTHER PEOPLE’S MONEY
BUSINESS CREDIT = TIME TO TURN INVOICES TO CASH
BUSINESS CREDIT = ABILITY TO HANDLE THE UNEXPECTED
Business Credit is also known as Trade Credit or Corporate Credit. It is the single largest source of lending in the entire world, even more then bank loans to businesses. Business credit is when one business sells a product or service on credit terms to another business. There are tons of businesses that extend credit terms because it allows them to sell more goods and services, their clients want credit and their clients need credit.
So why is business credit such a mystery?
Why is business credit so widely used, so widely misunderstood and so hard to achieve?
Here are just a few reasons:
* No one ever talks about it!
* No one ever told me that everything I ever put in my business name was attached to my personal profile… even worse no one ever told me that my business would affect my personal credit score!
* There are no laws protecting the business rights from inaccurate information on a business credit report.
* There is a lack of information provided by business and the government.
* There is a lot of research on who are companies that offer credit, on who the companies are that report positive trade experiences, not just negative, on companies who don’t require a personal guarantee and on companies that don’t require a personal credit check
* Finally, it can take hundreds of hours of research to find all this, which results as a direct cost to your business in time and lost revenue potential.
Knowing the differences between personal credit and business credit will really determine the need for separation.
Personal Score is determined by:
* 35% Payment History
* 30% Balances Owed
* 15% Length Of Time
* 10% Types of Credit
* 10% New Credit
* # Recently Opened
* # Recent Inquiries
* Time since recent Open
* Time since last Inquiry
Business Score is determined by:
* 100% Payment History
* Not all vendors Report
* VERY Interpretive by Bureau: ‘High Risk’ & ‘No Credit’ Lists
Why do you need business credit?
First of all there is 10-100 times more credit available than with personal credit. Generally, interest rates are lower with business credit. There are major tax advantages. Your business credit is not reflected on your personal credit report. Having business credit will protect personal finances and assets. Last, flat out… having business credit will enable you to grow your business the right way.
Your goal should be to be to develop access to credit without having to resort to loans and other forms of financing that will require more stringent qualifications or even potentially take stake in your business or profits. Not to mention, when you are issued business credit, these lines of credit are revolving. Meaning you can use it again and again! Loans and alternative financing are a onetime shot; once you use the money… it is gone.
You need to start you quest for capital by calculating your cash requirements. Break it down by asking yourself: How much capital do I need and what do I need it for? The more you know about your cash requirements, the better the decisions you’ll make about where and how to source the capital that you need.