Chris Bjorklund: One of the first things people starting new businesses want to know is how do I establish credit in my company’s name? Sam Thacker, AllBusiness’ finance expert and blogger is here to dig into this topic today. Sam’s a partner in the financial consulting firm Business Finance Solutions based in Texas. Before we get started today, and in the interest of full disclosure, Sam and I want you the listeners to know that we both work as contractors for AllBusiness which is owned by Dunn and Bradstreet, a credit reporting agency for businesses. Sam, would you like to add anything to that?

Sam Thacker: Yes Chris, I’d just like to further say that all of the information that we’re going to discuss today was all information that was derived from public records and public information. None of it was given to us directly by any credit reporting agency so it’s all public domain type information.

Bjorklund: Sam, to begin with, doesn’t building your business credit really start with making sure your personal credit is in good shape?

Thacker: That’s right, Chris. The good foundation for good business credit is good personal credit and the reason for is especially when you’re a new company or a small company, credit grantors are going to be looking at the strings of the personal guarantor on a loan or a lease or a credit card that you might acquire from one of the office supply places or a home-improvement center building supply place. They’re going to be looking at the personal credit of the person who owns the business. So we wanted to start off talking about personal credit and we wanted to dispel a few myths and talk in general about personal credit. So, I guess the first place I’d like to start is by saying that business owners in today’s environment need to be prepared to sign a personal guarantee on any kind of credit that they ask for and the rule of thumb; this isn’t a law, this is just kind of what has happened in the banking and the credit industry over time, is that all shareholders of a business that have a 20% or greater interest in that business are going to be asked to sign a personal guarantee on a loan and that’s whether it’s a bank loan or a lease or some other type of credit card. And it could be that somebody that has less than 20% ownership in a company might be asked to sign if they are much stronger, if their personal credit and their personal financial strength is much stronger than the other owners of the business. So to start out with, we’re talking to all 20% or greater shareholders in a company and one of the things that I would suggest to all of those 20% or greater shareholders is that they look at their credit, their personal credit at least once a year.

Bjorklund: Well, that’s free.

Thacker: That’s free. Now, I would go so far as to say, it’s worth the $25 per credit bureau to be able to go online and dispute the inaccuracies on the credit report. You can order a free credit report once a year but the dispute process involves writing paper, letters, and it’s a much longer process. If you go to each of the three major credit reporting agencies and you order your credit report from them online, then you can also dispute them online and it’s a much easier process. I would even go so far as to say that there are credit reporting agencies that will monitor your personal credit so that if anything changes during the year, they’ll notify you by email, that you’ve had a change and if it’s something that was an inquiry that you did not authorize then you can go fix it right away. If it’s an identity theft issue, you can go fix it right away.

Bjorklund: Those aren’t common either. You’re probably going to find some mistakes.

Thacker: You are very likely to find some mistakes and maybe more importantly, you’re likely to find that the three credit bureau reports do not necessarily report the same information the same way. So let’s talk about what are called FICO scores or credit scores for just a minute because there’s a big misunderstanding about credit reports and FICO scores and there is a company called the Fair Isaac Company and it was founded in 1950 and it came up with a method for scoring personal credit. It was intended and it’s always been intended to be used for buying things like washing machines on credit or cars. If you want to go buy a car on a Saturday or a Sunday and the bank is closed, the credit manager of the car dealership can simply pull your FICO score and if it’s above a certain range, they can know that they can get you financed through one of their sources or your own sources without any difficulty and they can even quote you the price of the credit for that. So a FICO score is a number. It’s a number between 520 and 800 and it is supposed to be a reflection of your overall credit worthiness as an individual. It works well. I would actually argue given the sub prime and mortgage issues where mortgage lenders were making loans strictly based on the FICO score. I would say that the credit scores themselves don’t mean a lot. They especially don’t mean a lot for business borrowers because business borrowers often use personal credit to bootstrap their business and they will oftentimes have a lower credit score but not have bad credit. So it’s important to look at the underlying credit report that goes into making up that credit score and I guess what I would say is if your credit score and again the company that puts it out is called Fair Isaac and they call it FICO, if it’s between 720 and 750, you are likely to not have any problems obtaining personal credit or business credit for almost any purpose, whether it’s buying a home, buying a car, or getting credit issued to your business based on your personal credit score. People a lot of times get fixated on trying to get their credit score as close to 800 as possible. The reality is if it’s 750 or higher, it’s irrelevant because 750 almost any credit grantor will grant credit with a credit score of 750 or higher. So I mean, I’ve met people who say, “Oh, I’ve got a 798” and that’s great. That means that they have managed that credit wonderfully but it just doesn’t really matter much over 750 on the credit score.

Bjorklund: Now before we move on to the next question, can you…let’s see, there’s Experian, you mentioned three credit reporting agencies. There’s Experian…what are the other two?

Thacker: There’s Equifax and there’s TransUnion and the easiest way to find them is to use a search engine on the internet and look for Experian and it’s spelled E-X-P-E-R-I-A-N, TransUnion is two words, I believe and Equifax is one word.

Bjorklund: Okay so if a business owner, Sam, doesn’t have great personal credit report. They’ve gone through those steps. They know what the story is. What can he or she do to improve it, if anything?

Thacker: Well, you can do a lot to improve your credit report and when you’re improving your credit report, typically you are also improving that credit score that is that magic number that everybody talks about. I guess the first thing that I would say is it’s a process that involves patience, diligence, and perseverance to improve your credit report. The first thing you need to do is to start paying all of your bills on time. Don’t be 30 days late on any bill and that will over a period of months, probably six months to seven months to eight months, that will make a big difference. The second thing that I would suggest is to pay down your credit on credit cards to a level where it’s in the 10% range of the maximum credit limit. So if you’ve got a credit card that’s got a $1000 limit on it, what you want to try to do is you want to pay it down to $100, $150 so that it keeps a balance on it of about $100 to $150. Many people when they’re trying to improve their credit, they close accounts. That’s not necessarily a good way to improve your credit. Keep those old accounts open and keep a small balance on those accounts, pay them off every month on time but don’t close them because one of the things that makes up that credit score is the length of credit that’s been open. So if you’ve got let’s say a department store charge card that’s 10 years old and you’re paying on it but you don’t really use it anymore. Go ahead and leave it open, once or twice a quarter maybe, go charge something on it, pay it off and those kinds of things will help improve the overall credit report but the number one thing is you’ve got to pay your bills on time. Another big issue that affects small business owners is what are called inquiries and every time you apply for credit, that potential credit grantor is going to inquire on probably all three of your credit reports and so a record goes on that credit report saying that an inquiry was made by XYZ Leasing Company, for example. Small business owners have to have business credit so they get more inquiries than your average consumer gets. Well those inquiries tend to negatively affect your credit score and negatively affect your credit. So my suggestion is when you’re going out to buy a new piece of equipment or a new vehicle for your business, pull your own credit reports, all three of them, take them into the potential credit grantor and say, “Mr. Credit Grantor, here are my three credit reports. If you are prepared to make the loan or the lease, then I’ll sign your application and allow you to pull my credit but make your decision based on these that I’m providing you.” Now they do have to go pull the credit themselves so the inquiry will show up but what will happen is instead of having 10 inquiries because you’re trying to buy a new piece of equipment for $100,000 for your business, let’s say, you might only have one or two inquiries and that will significantly improve your credit report and the credit score. It’s unfortunate because personal credit reports are not really intended to be business credit reports so business owners have to know some of the tricks like that one. I would suggest that again, every 20% or better owner always have an updated copy of their credit report that’s within six months old and when they do go apply for credit, they show that. Now, if they’re in the process of working their credit, then they can always and if they use those online services too and by online services, I’m strictly talking about going directly to Experian or Equifax or TransUnion directly, not through a company that promises you they’ll fix your credit because that won’t work.

Bjorklund: That’s a very clever piece of advice though that you just passed on in bringing your credit report with you. I love that. So anyway, Sam, we’ve talked about your personal credit and how important that is to establishing your business’ overall credit but how do we establish business credit in the name of the business?

Thacker: Okay, so we’ve talked about how important the personal credit is. The business credit, there’s a number of ways to do this and it depends on the type of business that you obviously are but if you have a good personal credit score and a good personal credit report for all three agencies, then my suggestion is that you go to your local community bank or one of the large banks that will give you a credit card in the name of your business and apply for either a credit card or what’s called then unsecured line of credit and what that means is the banker will not be tying up any of your collateral, any of your business collateral like your vehicles, the vehicles are typically tied up on vehicle loans anyway but let’s say your equipment or your inventory or your accounts receivables. So go apply for…you might have to start small. You might have to start with a $35,000 credit limit at a bank for a line of credit but if your credit score in the 700, 750 range and your business is at least a year old, maybe a little older now in this kind of tighter economy, you are likely to be able to qualify for as much as about $100,000 of unsecured credit from a bank and that’s my first suggestion. My second suggestion is if you have trade vendors that you have to pay, that you go and you establish trade credit with those trade vendors. Because trade credit is typically easier to get than bank credit so let’s say you’re a bakery and you have to buy materials to bake wedding cakes and donuts and bread and everything else you bake in a bakery; you go to your bakery material supplier and you ask for trade credit and you take very good care of that trade credit. You pay it on time, every month. Typically, they’re going to give you terms that are called 2% net 30, so what that means is they’re giving you the opportunity to take a 2% discount if you pay within 10 days of receiving a statement and they’re saying that the money is due within 30 days. So don’t pay it on the 31st day, don’t pay it on the 35th. Pay it on the 29th day or the 28th day. But pay it within their terms and then after you’ve got a couple of trade vendors who are giving you trade credit, you can put together what’s called a bank and trade reference list and I’m going to back up a minute, Chris. The other thing that is highly important to this bank and trade reference list is that your banker who you’re going to list on that bank and trade reference list is somebody that you have some sort of personal connection with. I don’t mean personal connection but business connection with. It might be the branch manager of a large bank or it might be a commercial loan officer in a community bank, but it’s somebody who knows about your business. They know about what kind of deposits you make. They know that you don’t bounce checks and one of the big things that you need to do in establishing business credit is to have a good banking record from the perspective of writing checks that are nonsufficient fund checks where your banker’s got to cover your check or worse. They send the check back.

Bjorklund: Oh, yeah. No bounced checks.

Thacker: Right so now we’re at a point where our business owner has put together what’s called a bank and trade reference sheet and the bank and trade reference sheet shows the banker’s name at the top and it shows the telephone number, contact information of the banker, and then it shows ideally you’d like to have three trade references and those are three trade references that are giving you credit and if you know what those credit limits that they’re granting you are, you’d put that on that bank and trade reference sheet and you can use that bank and trade reference sheet to go out and get other trade credit or to get leases for equipment. Oftentimes, small businesses will not have a business credit report but with a bank and trade reference sheet, a lendor or lessor can get comfortable with making a loan or a lease over $250,000, $300,000. It’s going to take a combination of good personal credit and then that bank and trade reference sheet.

Bjorklund: Sam, will some of these vendors then they’ll begin and the banker, they’ll begin to report your payment history to a credit agency that’s for businesses not just for consumer credit?

Thacker: Some do, some don’t. It is becoming more common and I guess let’s bring up the name of the two business credit reporting agencies. One is Dunn and Bradstreet, that’s the company that is the parent company to AllBusiness.com and the second is Experian Small Business Credit. And that is an arm of the Experian credit agency that handles personal credit. So Dunn and Bradstreet doesn’t handle any personal credit that I’m aware of but Experian handles both small business credit and personal credit. So, my experience as a banker is that most trade vendors are not, unless they’re a large company, are not going to report to Dunn and Bradstreet or Experian. So it may very well be that even though you’ve got good trade credit, your credit is not being reported. Now your personal credit goes into making up that Experian Small Business Credit report.

Bjorklund: So it’s a component of the report on you.

Thacker: That’s correct.

Bjorklund: You and your business.

Thacker: That’s correct and both Dunn and Bradstreet and Experian have the ability for you to go to their website and enter information about your business, the ownership of your business and in the case of Dunn and Bradstreet, you can self-report your financials to Dunn and Bradstreet. In fact, that’s where Dunn and Bradstreet gets most of the balance sheet and income statement information on the businesses that it reports. It’s called self-reporting. Somebody from Dunn and Bradstreet will call the business once a year and say, “Can we update our records?” and the controller or the CFO of the business or owner, if it’s a small business will send Dunn and Bradstreet a copy of their most current interim financial statements or last year’s financial statement and that’s one way that Dunn and Bradstreet goes and rates your credit. It’s based on what you self-report. So you can self-report certain information about your businesses to both of those agencies and now, in the case of Dunn and Bradstreet, you can even self-report your trade creditors who are not reporting to Dunn and Bradstreet and Dunn and Bradstreet will call those trade creditors and put in your file their records relating to that call. So both credit reporting agencies are doing a good job helping small business establish business credit.

Bjorklund: Do lenders look at the two of them any differently or are they viewed about the same in terms of their information that they report about a business?

Thacker: Well, unlike personal…personal credit reports, if you put all three credit bureaus side by side, they will look very, very similar in how they report your data. That is not true in the case of Dunn and Bradstreet and Experian Small Business. They have a totally completely different format and methodology for reporting credit and they report different items. What matters to Dunn and Bradstreet may or may not matter to Experian and vice versa. So they don’t look at all alike and it is important for you to both self-report and monitor your credit for both of those agencies.

Bjorklund: Sam, is there anything else a business can do to establish business credit that you haven’t touched on?

Thacker: Well, again, it’s just like with personal credit, it’s paying things on time. It’s monitoring your credit to make sure that there are no errors. You have to borrow money in order to establish credit. Interestingly enough, some of the wealthiest people in America and some of the most prosperous businesses in America may not have much in the way of credit reports and that is because they don’t borrow money. They don’t have to borrow money so nobody reports. They don’t have to self-report so they don’t and it turns out to be one of those cases where it’s very important to borrow some money especially in the case of if you don’t need it. I hate to say that but that’s one of the ways to establish good business credit. So, if I was going to go out and get that unsecured line of credit from a large commercial bank, let’s say, and they gave me a $100,000 line of credit, that would be what’s called a one-year revolving line of credit and they would expect me to pay on it, interest on it, and they would expect that line of credit to what they call rest at least once or twice a year when there was no balance on it. But as long as I use that line of credit a little bit throughout the year, then I am establishing a payment record that’s good and that’s what matters most is that payment record.

Bjorklund: So to summarize, Sam, you say the key to building good credit is borrowing money and repaying it on time. And that same principle applies to both consumers and businesses and that business owner really can't make this happen overnight and has to be patient especially if they have to clean up their personal credit first.

Thacker: Yes, I would tell any business owner, if their FICO score is below 600, that probably means that they’re in the bottom 30% of all individuals in the United States. It’s going to take two years of diligent work to clean up your personal credit. Now, that doesn’t mean that you can't borrow money during that two-year process because they will gradually get better and better and better and some things will make bigger differences than other things but it is if your personal credit is banged up and in today’s economic situation, there’s going to be a lot of people who had good credit five years ago who may be getting banged up credit today and they’re just going to have to work through it and it does take time to work through it. And then, the other thing again, is to monitor the credit. There’s nothing worse than finding errors on credit reports right in the middle of trying to borrow money for your business or to buy a house or a car or whatever and then taking weeks to clear up those errors on your credit report. So keep your credit report clean and keep your business credit report clean.

Bjorklund: Good advice from Sam Thacker. Sam, thanks for joining us today.