I recently read an article on MSNBC.com entitled “Small business owners face credit squeeze: Entrepreneurs say banks remain extremely wary of risk”. I find it quite absurd that top news sites continue to publish such articles stating facts about the problems; the economy’s state, the ongoing credit crunch, and the lack of capital available to entrepreneurs and small business owners, without publishing any solutions to these problems.
Reading such articles as an entrepreneur and small business owner would have me running for the hills (if I didn’t already know what it takes to access business credit today). This type of information is quite disheartening to say the least. We are a Nation of entrepreneurs and small business owners, who sit smack dab in the middle of a global economic frenzy; there is no question about that! We see it in the media and read it everywhere, and have been for a long time! What I would like to see is a Nation pulling together to help one another; a media that would provide educational tools, a publication that poses solutions not just horrifying statistics.
This particular article listed a few case studies one of which was:
“Yi Ping Lai runs an online business, Heart to Heart Gifts, which sells toys and decorations ranging in price from $6 to $100 for girls up to six years of age.
Last year, her sales passed $1 million. With the downturn, her revenue will end up about 50 percent lower this year. But she will still turn a profit, she says.
In August, she got a letter from her bank canceling her $55,000 business line of credit. She said the bank cited routine credit checks that had reduced her credit score.
“All of those credit checks were for legitimate personal reasons,” Yi said. “For instance, I move apartment and my landlord ran a credit check on me. I tried to explain that to the bank. But they said I was now a risky option for them.”
The bank later restored $20,000 in credit. But Yi said she is being hampered in developing a new product line.
“I need that cash flow for my business,” she said.
Susan Lamping, a senior community loan officer at the nonprofit CDC in San Diego, helped Yi obtain $35,000 in credit.
“Financing is extremely hard to come by and many businesses can’t get help through the banks,” she said.”
This is a perfect example, this is where a solution should have been added (but wasn’t).
If you read this scenario and pay close attention to the details surrounding her credit reduction, you will see the exact problem Yi Ping Lai is encountering, and no, it is not an issue on the creditor’s side, it is actually a mistake Yi Ping Lai is making. Yi Ping Lai is personally guaranteeing the business credit she is applying for. This is a very common mistake made in the business world.
We entrepreneurs and small business owners have got to keep up with the times!
We have got to stay current!
We have got to continue to educate ourselves!
This is a new day and age of business.
What was typical protocol 5 years ago is long gone! And it is not because the funding is gone. There is money out there. It’s just not being acquired because the application criteria has been “upped” and more importantly, personally guaranteeing anything that has to do with your business MUST MUST MUST be a thing of the past for so many reasons!
The #1 reason to not comingle your personal assets with your business:
There are no laws to regulate business credit, which means if you are personally guaranteeing any business credit loans, you are personally responsible for payment on these loans.
If you cannot withstand this economic downturn, and must close your doors; all of the money’s owed via credit cards, loans, vendor or trade credit that is personally guaranteed for your business is still PERSONALLY GUARANTEED! Meaning, YOU still have to repay that debt. YOU are personally liable for any funds you guaranteed even if it was allocated to a failed business, PERIOD.
Here are a few more reasons to separate your personal credit from your business credit:
- To grow business credit it is absolutely imperative for you to clearly separate your business credit from your personal credit. The rules and regulations for business credit are infinitively different from the rules and regulations of personal credit.
- When you use more than 50% of the limit on any personal account, your personal credit ratings decline. However, you can max out business accounts with no negative repercussions to your business credit ratings.
- Normal business credit usage will cause your personal credit scores to drop dramatically if they are combined.
The solution to Yi Ping Lai’s problem is quite simple but still such a mystery to most entrepreneurs and business owners; she needs to separate her business profile from her personal profile.
To qualify for business credit, you must complete several steps in the correct order.
The best time to establish credit is when you don’t need it. If you have a financially stable business with no credit lines available to you, figure out what you need to do to acquire a line. Think of a credit line as a safety net for your business. You hope you’ll never need to use it. However, if the current economic forecasts continue to down slope and we remain in this very unpleasant financial fiasco through 2010, you very well may be happy to draw on a line of credit to get your business through some rocky times.
Business credit is the main way companies evaluate whether or not they want to do business with you – and on what terms.
Building business credit is much more straightforward than building personal credit. However, if you do not follow the steps in order you run the risk of red –flagging your business for life, leaving you with no means to grow your business without compromising your personal credit scores by using personal resources to support your business.
“How can she do this?” you ask.
Well, I’m glad you asked that very important question, because the answer is detrimental in today’s world of small business.
1. Yi Ping Lai must first get into compliance, meeting all the basic criteria any vendor or lender would be looking at.
- There are more than 6000 aspects of a business a vendor or lender may or may not look at when contemplating an approval.
- Think of it this way; if you were to ask me to borrow $1k, the first thing I would ask you is what is your name, where do you live, what is your phone number? Vendors and lenders do the same thing. They will check to see if you are a real business, they may look online, they may phone 411, and they may check on your business license or licenses, and so on and so forth.
2. Yi Ping Lai must then begin to build her business credit profile, one that is separate and apart from her personal profile. She must deal with vendors who will base approval strictly on her business and not ask for a personal guarantee.
3. Once she has gone through this first level of business finance she now has trade references shown on her business profile, which means she can then move on to the second level of business finance. This level will allow her access to higher lines of vendor credit.
4. If Yi Ping Lai continues to remain in compliance and completes the first two levels of business finance accordingly, she will then have a business that is bankable!
Sounds easy enough… however there are very few business owners who actually take the time to understand the mysteries surrounding business credit.
Perhaps if we all begin to enlighten our own networks the word will spread faster, and maybe just maybe we will begin to see success once again the world of small business!