How Businesses Obtain Credit

Workshop Goals In this workshop, you will... 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.

What Is Creditworthiness? Lenders consider several factors when assessing creditworthiness: Have you paid past financial obligations in full and on time? Has your spending been prudent and within your personal budget? Do your habits over time reflect financial responsibility? Do you have stable personal income and/or business revenue to pay all your financial obligations? Has your business been in existence and generating revenue for a few years? Do you have a history of follow-through, such as staying at a job or building your expertise?

The Five Cs of Credit Capacity Your personal ability and your business’s ability to repay the loan currently and in the future Capital The funds that you have personally invested in your business, including profits that have been retained in the business Collateral Any personal or business asset that the lender can take in case you cannot pay the debt Character Your personal and professional history of delivering on commitments Conditions The purpose of the loan and also the financial prospects in your industry, the economy, and any other external factors that might affect your business

Case Study: Sew Right Jovena is a 46-year-old entrepreneur who wants to expand her small sewing business, Sew Right. She started the business as a hobby from her home and began by selling to her friends and family. Two years ago, her daughter made a website for the business, and sales skyrocketed. Jovena was able to start paying off her personal loans from the income. Jovena has three credit cards: one business and two personal. She pays her credit cards and her personal loans on time. She always pays more than the minimum balance, but she has never paid off any debt in full. She owns a car that she has had for eight years and rents an apartment. Jovena hasn’t had other employment since having children 15 years ago.

Case Study: Sew Right ? Consider Jovena’s credit card history. Which “C” or “Cs” will her credit card history affect when a lender is considering whether to give her a loan? ? Consider the number of assets that Jovena owns. Which “C” or “Cs” will her asset ownership affect when a lender is considering whether to give her a loan? ? How might Jovena’s employment history affect her creditworthiness? ? How might her personal loan debt affect her creditworthiness?

Other Considerations by Lenders Background or general questions Management and employee questions Business operations questions Financial questions Personal questions

Business and Personal Credit Scores How do you find your business credit score? Dun & Bradstreet (D&B), Experian Business, and Equifax Business FICO Small Business Scoring Service (SBSS), which pulls from your personal and business credit scores How are they similar? Both business and personal credit scores are used to decide if a business or person: Is worthy of a loan Will repay the loan How are they different? Where they draw information from The score ranges

What Is in a Business Credit Report? Business and organization information SEC filings Credit history about assets Additional business ownership Commercial credit score Potential risk for failure

Steps to Good Credit Building Good Credit Maintaining Good Credit Pay bills in full and on time. Keep credit card balances low. Ensure that your financial statements for the last three years record healthy financial behavior. Maintaining Good Credit Have and use a business credit card. 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.

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)

What Are Its Characteristics? SBA Financing Is a loan from a bank, and SBA guarantees a portion of the loan. Includes mentorship from SBA and help for borrowers to qualify for good interest rates and financial plans. Enables borrowers to obtain loans up to $5 million. What Are Its Characteristics?

SBA Loan Products Basic 7(a) Loan Program Maximum loan available: $5 million Fully amortizing government-guaranteed loan Loans are offered for working capital, expansion, and equipment. 10% down payment by borrower, 90% bank loan SBA Express and Veteran Program Maximum loan available: $350,000 and guarantee 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 or facility expansion. Down payment as low as 10%. 504 Loan Program Maximum loan available: $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

Alternative Sources of Funding Community Development Financial Institutions (CDFIs) Nonprofit funding organizations Work at the community level to provide business mentoring, financing, and technical assistance For borrowers who may not qualify for traditional loans Many lenders have special programs for businesses owned by Native Americans, women, minority groups, and people who are economically disadvantaged.

Remember... Summary Creditworthiness for small businesses is measured using the 'Five C's,' which are Character, Capacity, Capital, Collateral, and Conditions. If you're running a new or small business, it's likely your business won't have much of a credit history, so lenders will rely on the business owner's personal credit report and score when deciding whether or not to approve loans to your business. In order to apply for small business credit, you may require a variety of legal and financial documents.