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How Businesses �Obtain Credit

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In this workshop, you will…

Workshop�Goals

Learn how small businesses build and maintain credit.

Explore how creditworthiness is measured for small businesses.

Examine the connection between personal and business credit.

Identify the documents you'll need for small business credit applications.

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Why Is Business Credit Important?

Poll Question 1:�Similar to your personal credit score, your business credit score helps determine how well your business can be trusted to handle money. Which of the following may be affected by your business credit score?

Ability to qualify for a business loan
Insurance premiums
Terms of a line of credit
Establishing partnerships
Attracting investors

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Poll Question #1 – Answer

Poll Question 1:�Similar to your personal credit score, your business credit score helps determine how well your business can be trusted to handle money. Which of the following may be affected by your business credit score?

Ability to qualify for a business loan
Insurance premiums
Terms of a line of credit
Establishing partnerships
Attracting investors

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Lenders Want to Know

Do you pay your bills on time?
Do you stay within your budget?
Is your income steady and enough �to repay the loan?
Is your business already running �and making money?
Have you demonstrated stability in work and business?

What Is

Creditworthiness?

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The Five Cs of Credit

Capacity

Capital

Collateral

Character

Conditions

Can you repay now and in the future?

What personal funds and profits have you invested?

Personal or business assets you �can use to repay the bank if you default.

Your history of following through in life and business.

Do external factors favor the success �of your business?

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Which of the Five Cs is This?

Poll Question 2:�You own a small embroidery and custom printing business and have some expensive equipment. A portion of the loan will be used to purchase a new machine to embroider leather. Your equipment would be considered:

Capacity
Capital
Collateral
Character
Conditions

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Poll Question #2 – Answer

Poll Question 2:�You own a small embroidery and custom printing business and have some expensive equipment. A portion of the loan will be used to purchase a new machine to embroider leather. Your equipment would be considered:

Capacity
Capital
Collateral
Character
Conditions

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Which of the Five Cs is This?

Poll Question 3:�You run a bait shop near a popular fishing area. Your main competition in the area recently retired and their store closed. This would represent:

Capacity
Capital
Collateral
Character
Conditions

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Poll Question #3 – Answer

Poll Question 3:�You run a bait shop near a popular fishing area. Your main competition in the area recently retired and their store closed. This would represent:

Capacity
Capital
Collateral
Character
Conditions

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Which of the Five Cs is This?

Poll Question 4:�For three years, you’ve had a food truck that serves local businesses. When you started, you purchased the truck with savings but bought the equipment with a credit card. You still carry a balance but have paid on time for three years. This demonstrates:

Capacity
Capital
Collateral
Character
Conditions

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Poll Question #4 – Answer

Poll Question 4:�For three years, you’ve had a food truck that serves local businesses. When you started, you purchased the truck with savings but bought the equipment with a credit card. You still carry a balance but have paid on time for three years. This demonstrates:

Capacity
Capital
Collateral
Character
Conditions

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Other Considerations�by Lenders

Background or general questions
Management and employee questions
Business operation questions
Financial questions
Personal questions

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Business and Personal Credit Scores

Tips to Improve Your Personal Score

Pay all bills on time.
Keep a low balances on credit cards.
Do not take on too much debt.
Stay at the same job and address for a long �period of time.
Read and understand your credit report; make written inquiries on items you believe are incorrect.

How are they similar?

Both business and personal credit scores are used to decide if a business or person
qualifies for a loan
is likely to repay the loan
has a history of making sound financial decisions

How are they different?

The agencies that track them
The score ranges

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Strategies to Build Your Personal Credit

Poll Question 5:�Which of the following strategies can you use to build your personal credit?

Keep credit balances low
Ignore your credit report
Obtain a credit card
Only use cash for everything
Pay bills on time

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Poll Question #5 – Answer

Poll Question 5:�Which of the following strategies can you use to build your personal credit?

Keep credit balances low
Ignore your credit report
Obtain a credit card
Only use cash for everything
Pay bills on time

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Top Reasons Scores Go Down

How to Improve Your Score

Why Scores Go Down

Late payments
Collections
Bankruptcies
High debt compared to income
Too many credit inquiries within the �past year
Charge-offs/severe delinquency
Using most of your available credit or �maxing out your cards

Pay all bills on time
Keep a low balances on credit cards
Do not take on too much debt
Stay at the same job and address for a long period of time
Read and understand your credit report;�make written inquiries on items you believe are incorrect

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Business and organization information
SEC filings
Credit history regarding business assets
Additional business ownership
Commercial credit score
Potential risk for failure

What is in a Business Credit Report?

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How Might Lenders Use Business Credit Scores?

Poll Question 6:�Which of the following ways might a lender use �a business credit score?

Decide if a business is creditworthy
Establish a history of financial responsibility
Determine the size of a loan they can give �the business
Approve or reject loans
Assess their risk in lending money to the business

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Poll Question #6 – Answer

Poll Question 6:�Which of the following ways might a lender use �a business credit score?

Decide if a business is creditworthy
Establish a history of financial responsibility
Determine the size of a loan they can give �the business
Approve or reject loans
Assess their risk in lending money to the business

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Locate Business and Personal Credit Scores

How do you locate and understand your credit score?

Personal credit scores range from 300 to 850. You can access your score for a fee at www.myfico.com
Business credit scores range from 0 to 100. You can access your score for a fee from

Dun & Bradstreet at businesscredit.dnb.com

Equifax Business at equifax.com/business/business-credit-reports-small-business
Experian Business at sbcr.experian.com

Another business credit score is the FICO Small Business Scoring Service (SBSS) score, which pulls from your personal and business credit and ranges from 0 to 300.

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Steps to Good Business Credit

Maintaining Good Credit

Building Good Credit

Pay bills in full and on time.
Have and use a business credit card.
Keep credit card balances low.
Ensure that your financial statements for the past three years record healthy financial behavior; for example, maintaining enough �cash on hand to meet your obligations.

Receive a Data Universal Numbering �System (DUNS) number.
Subscribe to a credit-reporting service, �and ensure information is accurate and �up-to-date.
Borrow from lenders who report to the �business credit bureaus.
Establish trade lines with vendors and encourage them to report your good credit behavior back to the credit bureaus.

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Build and Maintain Your Credit

Poll Question 7:�The Davies have a small moving business. They specialize in helping companies take down and reinstall their computer systems when they change location. Their business is profitable, but they have not established business credit. Their personal credit is okay. They pay on time but carry a large balance on several cards. What would help them qualify for a business loan?

Join the local SBA
Increase their advertising budget
Get recommendations from past clients
Pay down their credit card balances
Add a business credit card

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Poll Question #7 – Answer

Poll Question 7:�The Davies have a small moving business. They specialize in helping companies take down and reinstall their computer systems when they change location. Their business is profitable, but they have not established business credit. Their personal credit is okay. They pay on time but carry a large balance on several cards. What would help them qualify for a business loan?

Join the local SBA
Increase their advertising budget
Get recommendations from past clients
Pay down their credit card balances
Add a business credit card

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Build and Maintain Your Credit

Poll Question 8:�Cynthia Yang makes custom jewelry with precious stones and metals. Her Instagram and Pinterest accounts have huge followings and sales are steady. Her personal credit is solid. She has a business credit card but never uses it. She pays her suppliers on time, but they do not report to the credit agencies. In about a year, she would like a loan to expand her business. What steps will help make her more creditworthy?

Increase usage of her personal credit cards
Encourage her vendors to report her on-time payments to the credit bureaus
Advertise in more places than on social media
Take all of her profits for personal use
Use the business credit card and pay off balances monthly

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Poll Question #8 – Answer

Poll Question 8:�Cynthia Yang makes custom jewelry with precious stones and metals. Her Instagram and Pinterest accounts have huge followings and sales are steady. Her personal credit is solid. She has a business credit card but never uses it. She pays her suppliers on time, but they do not report to the credit agencies. In about a year, she would like a loan to expand her business. What steps will help make her more creditworthy?

Increase usage of her personal credit cards
Encourage her vendors to report her on-time payments to the credit bureaus
Advertise in more places than on social media
Take all of her profits for personal use
Use the business credit card and pay off balances monthly

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Business Loan Application Checklist

Business credit application
Personal credit report
Personal tax returns
Business tax returns
Business financial statements
Personal financial information
Collateral information
Sales contracts/purchase orders
Business lease or loan agreements
Business license
Disclosures if you own other businesses or your business has partners
Business plan (a plus, but not required)

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SBA �Financing

What Are Its Characteristics?

It is a loan from a bank, and SBA guarantees a portion of the loan.
It helps borrowers qualify for good interest rates and financial plans.
It enables borrowers to obtain loans �up to $5 million.
It includes mentorship from SBA.

Characteristics of �SBA Financing:

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SBA Loan Products

SBA Express and Veteran Program

Basic 7(a) Loan Program

Max loan: $5 million
Fully amortizing government-guaranteed loan
Loans are offered for working capital, expansion, and equipment
10% down payment by borrower; �90% bank loan

Max loan: $350,000 and fees waived
Business operational for at least �one year
Line of credit or fully amortizing loan with a partial government guarantee
Expedited application processing and �quick turnaround
Loans are offered for working capital, equipment, business acquisition, and real estate purchase/facility expansion
Down payment as low as 10%

504 Loan Program

Max loan: $5 million
Loans are offered for owner-occupied real estate acquisitions, construction, and �heavy-equipment purchases
10% down payment by borrower; 40% CDC; 50% bank loan

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Alternative Sources �of Funding

Nonprofit funding organizations�
Provide business mentoring, financing, and technical assistance at the community level�
For borrowers who may not qualify �for traditional loans�
Many lenders have special programs for businesses owned by Native Americans, women, and other �minority groups

Community Development �Financial Institutions (CDFIs)

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Remember…

Summary

Creditworthiness is measured using the “Five Cs”: Character, Capacity, Capital, Collateral, and Conditions.

If you're running a new or small business and your business doesn’t have much of a credit history, lenders rely on your personal credit report and score.

To apply for small business credit, you �will need to provide a variety of legal �and financial documents.

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