When Applying for Business Credit, Think of This Acronym

Applying for business credit? Here are four basics to consider. If you or your business are seeking credit and feel a bit nervous about your chances of getting the cash you need, pause for a moment, take a deep breath, and remember this simple acronym.

This very tight, almost non-existent lending market for small businesses invokes many emotions from business owners seeking capital to grow and expand. These emotions run the gamut from despair to downright anger.

If you or your business are seeking credit and feel a bit nervous about your chances of getting the cash you need, pause for a moment, take a deep breath, and remember a simple acronym — C.R.A.P.

C – Credit. Your personal credit matters. It matters more now than ever. Today, lenders aren’t looking for ways to say “yes”; they’re only looking for reasons to say “no.” Their easiest, quickest method is to pull your personal credit history. If your credit score is not in the excellent range, the answer is “no” — before these lenders spend both time and money performing other due diligence on you or your firm.

Lenders want to ensure that you (the borrower) put them first when it comes to allocating the money you or your business has. The best barometer of your willingness to repay your creditors is your personal credit history — period. So, before you begin talking with lenders, pull your credit report. If your score is not in the upper 2% of all borrowers, simply say to yourself, “crap,” and move on.

R – Repayment. Even with a strong credit history, if you can’t demonstrate right now that you can make minimum payments, the answer will be “no.” Lenders don’t care that you think you’ll make a million dollars with their loan proceeds sometime in the future. You have to demonstrate that you have (through personal income) or your business has (through the conversion of assets or from profits) the cash flow to repay the debt facility — right now.

Put yourself in their shoes. Banks and other lenders don’t want to be your partner and take an equity stake in your business. They want to be repaid and earn interest on the money they lend. This is their business and how they make their money. So, before you begin talking with lenders, determine how you intend to pay them back (from income — personal or business) that you earn “now.” If you don’t have income or another method of repayment, simply say to yourself, “crap,” and move on.

A – Assets. This is an asset-based lending environment. Asset-based means more than just having collateral. Lenders want to lend against specific assets that are, for the most part, guaranteed to repay their loans. Assets like business credit card receipts, accounts receivables or purchase orders, or even business property and equipment. Thus, lenders can have first-lien entitlements to these assets. They will control them to ensure that their (the asset’s) cash flow comes through them first.

For example, with accounts receivable factoring, the lender will invoice your customer, requiring that all payments go through them. Thus, the lender is paid first (you get the remaining payment). If you do not have assets, either business or personal, assets that are wholly owned by you and have significant value, simply say to yourself, “crap,” and move on.

P – Persistence. Persistence is the key to getting any loan in any environment. You will hear many “nos” before you hear one “yes.” More than likely, you will hear many “nos” before you hear even one “maybe.” Just stick with it. Each lender has its own lending policies and area of expertise. Some lenders are flush with money to lend, while others are overextended. To get the loan you need, you have to work hard and just persevere. Don’t take “nos” personally — use them as building blocks for the next time. So, if you’re unwilling to put in the time and effort, simply say to yourself, “crap,” and move on.

Understanding Business Credit

What is business credit?

Business credit refers to the creditworthiness of a business, evaluated based on its credit history, payment habits, and financial stability. Think of it as a report card for your business’s financial health. Just like personal credit, business credit is a measure of your ability to repay debts and manage finances effectively.

For small businesses, establishing business credit is essential. It opens doors to loans, lines of credit, and other financial assistance that can fuel growth and expansion. In essence, business credit is the lifeline that can help your business thrive.

Why is business credit important?

Business credit is more than just a number; it’s a key to unlocking financial opportunities. A good business credit score can help you establish a solid reputation with lenders, suppliers, and vendors. This reputation can translate into lower interest rates, better loan terms, and higher credit limits.

Moreover, having strong business credit allows you to further separate your personal and business finances, reducing the risk of personal liability. This separation not only protects your personal assets but also enhances your business’s overall financial stability. In short, a robust business credit score is a cornerstone of a successful and financially healthy business.

Establishing a Strong Foundation

The journey to building strong business credit begins with laying a solid foundation. The first steps are registering your business and obtaining an Employer Identification Number (EIN). An EIN is a unique nine-digit number assigned by the IRS for tax purposes. It’s like a Social Security number for your business. Having an EIN is important because it’s often required to open a business bank account, apply for credit, and file taxes.

To register your business, you’ll need to file Articles of Incorporation (if you’re forming a corporation) or Articles of Organization (if you’re forming an LLC) with your state government. This process officially recognizes your business as a separate legal entity. Once registered, you can apply for an EIN online through the IRS website. With your business registered and an EIN in hand, you can open a business bank account, apply for credit, and start building your business credit history.

Remember, registering your business and obtaining an EIN are just the first steps. To truly establish business credit, you need to create a business credit profile, make timely payments, and maintain a good credit history. By doing so, you’ll build a strong foundation that will support your business’s financial growth and stability.

While the above is meant to provide a bit of humor in these troubling times, the information provided is still good guidance when you are seeking credit for business growth. Therefore, instead of being surprised, shocked, or just downright angry when you get turned down, think about the acronym C.R.A.P. If you spend time ensuring that you’re creditworthy before you begin your search, not only do you stand a better chance of getting the loan you need, but you should save valuable time and energy in the process.

Copyright BusinessMoneyToday.com

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