Small business owners work hard. They are the backbone of our economy. They create jobs. Our economy would be in really big trouble without these entrepreneurs. They wear lots of hats. They are almost always great people as well. So they must be experts at knowing the details of credit and they must know exactly what lenders want to see and who the right lenders are for them…right? Well, not exactly. It’s unrealistic to think that a small business owner would know credit details such as how FICO scores work, how many scorecards are utilized with each generation of FICO, what are the main factors keeping them from an 800 FICO score, how can they fix those problems, etc. It’s equally unrealistic to think that a small business owner would know which bank is the best fit for them based on their location, industry, profits, losses, credit, etc. And what about the thousands of non-bank lenders? Do we think a small business would be well-versed on who those lenders are and whether those options make sense for them?
Now that you get the idea let’s discuss the 3 biggest credit and financing mistakes that get made by small business owners.
1. Using credit cards the wrong way. Statistically, according to the Meredith Whitney Advisory Group, 82% of small business owners use credit cards as a vital part of their overall funding strategy. Credit cards are among the cheapest forms of financing that are available to small business owners. After all, where else can you borrow money for 0% for 6-12 months? But the problem is when small business owners use their personal credit cards or use the wrong business credit cards.
If you’re using a personal credit card or a business credit card that reports to your personal credit then each time you use that card you’re negatively going to impact your personal credit. 30% of your FICO scores are determined by your utilization or your balance on your credit cards in relation to your credit limits. Unfortunately, you cannot get around this problem just by using a business credit card because each lender can determine if they report that activity or not to the personal credit of the borrower. For example, Capital One is the most widely used business credit card in the US. They have an aggressive marketing and advertising campaign plus they participate and give generous payouts in the affiliate marketing space (with companies like creditcards.com and bankrate.com among others). The problem is that they also report all the activity for their business credit cards to the personal credit report for their borrowers. Using the right business credit cards is what’s important for small business owners and very few of them do it right.
2. Not treating your personal credit like the asset that it is (or could be). If you’re a small business owner and you want or need to borrow money to start, build, or grow your business then you’re likely going to go through a credit check as part of the underwriting process. If your credit is excellent then you need to be committed to maintaining that as you grow your business. We see people everyday who have spent several months or several years growing their business and now they have a chance to take their business to the next level if they can borrow some money but they have not properly managed their personal credit. As a result they either cannot get their funding or they must pay excessive fees for expensive financing. They didn’t think of their credit as one of their assets. If you don’t think like this then there’s going to come a time when you’ll regret it. This doesn’t mean you cannot grow a business if you have bad credit but give me one good reason why you shouldn’t care about your credit or give me one good reason why you shouldn’t work to improve your credit if it’s not good. The only thing worse than having bad credit is doing nothing about it. If your personal credit is an asset then keep it that way or make it an even stronger asset. If your personal credit is a liability then do something to turn it into an asset.
3. Not building your business credit. Is there any reason why you wouldn’t want your business to have a good business credit profile? Keep in mind one fundamental thing about business credit. It needs to be strategically built. It doesn’t happen as organically as your personal credit gets developed. With personal credit, it gets developed as you live your life basically. Business credit building requires an experts guidance but can create very tangible benefits. We hired a company to build our business credit and we have several non-recourse vendor lines of credit that are very valuable and that we use regularly. Access to capital and the need for financing is a basic need for any growing company so this minimal expense should be built into your business plan as one of the key ingredients. Companies like Corporate Credit Concepts are leaders in this space.
Taking action and execution are a couple of the primary traits that separate average leaders from great leaders. Taking these steps will ensure that your business can borrow money properly and efficiently and ensure that you have the best possible chance of getting the financing you’ll need as you grow. Keep living the dream!