104: Why Building Credit for Your Interior Design Business is Necessary
Michele 00:01
Hello, my name is Michele, and you're listening to Profit is A Choice. On the podcast today is Keith Knapp. Keith is a nationally recognized speaker and educator in business marketing and credit. We're going to focus our conversation today on business credit. We're going to define what it is, why you need it, how to get it, and how to keep it. This is a very interesting and timely discussion. I know I sure learned a lot and had my eyes open to a few things, and I hope you do to enjoy the podcast.
Michele 0:037
Every day empowered entrepreneurs are taking ownership of their company financial health and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses in the interior design industry, educator and speaker, I coach women in the interior design industry to increase their profits regain online to shape their bottom line and to have fun again in their business, welcome to Profit is A Choice.
Michele 01:06
Hey, Keith, welcome to the podcast.
Keith Knapp 01:09
Thanks, Michele. I'm glad to be here.
Michele 01:11
I was looking through some of the information that you sent prior to our conversation and digging in a little bit about some of the offers and the things that you do. And I'm telling you, I am so excited, simply because where we are right now, business credit, which is what we're going to talk about today is something that we all really need to be aware of. For some of us, our credit may have taken a hit during COVID. And some of the business disruption that that created. And for others, it might be that their business credit went sky high, they did a really great job of managing it. I do Profit First, and I teach my clients all the time, how to save money and how to prepare, but wow, this has been quite a roller coaster, hasn't it? I mean that even with a three-month preparation, it hasn't been enough for many.
Keith 02:01
Oh, yeah. And what we're finding Michele, is that this business credit industry, is something that's been hidden for a long time. And that's why Credit Suite has been so big about getting in out there is our passion one thing. We love entrepreneurs, we love business owners, and we want to do everything within our power to help them succeed. Everything that's going on with pandemic, all the social stuff that's happening at this time, that's always going to come and go. You're always gonna have events like that. And what we find is that entrepreneurs, we're the most resilient people that are on the face of the planet. No matter what's thrown at us, we're always going to find a way to adapt to it, to overcome it, and to keep going. And what we've really focused on is helping business owners to be able to separate their personal and their business assets, and that happens at the deepest level, including the credit. So our whole focus with our our clients and with business owners as a whole is to be able to empower them so that they can separate their their business and their personal credit. They can start getting approved for funding, they start getting lines of credit that's just in their EIN number. So it gives them that layer of security, that protection that no matter what happens, whether it's COVID whether it's, Godzilla attacking or whatever happened there, they're protected. Their personal assets are not impacted by it or necessarily devastated by what goes on with the business.
Michele 03:26
And it's so good to have those separated. I'm constantly begging the listeners not to commingle their funds, and maybe there's an opportunity here. We don't really want to have our credit so commingled, that personally, we're devastated when something happens. Can you start by just explaining what business credit is and why we need it?
Keith Knapp 03:44
Oh, absolutely. That's a great question. Business credit is just like personal credit. It doesn't function the same way, but it's essentially your business, your EIN has a credit profile with the credit bureaus. The credit bureaus that we find are Equifax, Experian, and Dun and Bradstreet, those are the three major credit bureaus. But just like on your personal credit, there's a lot of other bureaus that are out there that have access to it. What your personal credit is taking the information of who the business is, the name of the entity type, how it's filed, how its registered with the Secretary of State, how things are listed on the website, how it shows up on 411. All of that information is basically the identity of the business in the US and how that's portrayed online or how that's portrayed in the public is how that's actually translated over into the business credit space. So what's happening is that you're forming this credit profile without you ever knowing it just like you personally, you may have things that are on your credit that you don't know about. On the business side, there's information that's being submitted about your company, if you're getting lines of credit to report for business. And what we have found over the years is that businesses don't even really know about it. I mean, it's just now starting to come into the forefront of the people's mind of understanding it. But for years, nobody even knew that businesses had credit reports and had scores. And this credit report and scores are directly tied to lending. So getting credit cards, getting loans, getting credit lines, SBA loans, all that stuff is tied specifically to the business credit profile. And that's basically in a nutshell what business credit is.
Michele 05:24
All right, I'm going to just dig in and make sure I understand what you. So if we are working under an EIN in our business, and if under that EIN, we have taken out the PPP loan, an SBA loan, or credit card that we paid off, whether we are trying to build credit for a company or not, or whether we get those reports or whether we don't, it is still being created and captured by that EIN number. The same way that it would be if we were using our social for our personal.
Keith Knapp 05:56
It's not being captured by the EIN. Let's be clear about that. That's a tax number, your employment identification. Think of it this way, credits gotten popular in the past in the past decade or so, but before that, credit was never made for consumers. Just the same way business credit was never made for the actual business itself, business credit, personal credit, all credit reports, and all credit scoring is made for banks and for the lenders. It's a risk assessment to establish what the likelihood is of you defaulting on the loan if they give you money. What happens is that as you're applying for the PPP, or credit cards like, "oh, look, I can get an Amazon business card," or these different accounts as you're running your business. They're reporting it to the Bureau, and if you're using your EIN number, it's tied to that. Now, I think what you're asking, and this is one of the things that we find, is one of the most critical mistakes that businesses making is people are going out, and they're applying for things. It creates an inconsistency in the data. So for the credit bureaus is they're nothing more than aggregators. They're just going out and collecting all this data that's being thrown at them. They've got banks that are sending them information, credit cards, and because you've got loans, a checking account. All this is being thrown out as people are putting the information into the Bureaus. Then they're taking it and lumping it together based on the data that's submitted to them. What we found is when you're starting the business, the first couple of years is volatile. But on top of that, there's just a lot of changes because you may start in your bedroom, then you get a one-room office and start growing. You start building your businesses, which is constantly changing in the first one to five years. As you're out there applying for things, your information may change, your EIN number may still the same, but the address may be different. Phone number may change, your website, your emails, all that stuff contributes to your business credit reports, and what is actually showing up on your business credit reports.
Michele 07:58
I can remember a couple of years ago, some of the data breaches that happened. My husband and I, automatically went in and get monthly credit reports personally, from Experian, Equifax, and all the different ones just to make sure. We reviewed to make sure everything on there is really ours, where the information could sometimes come in, collected and aggregated. It's not always up to date and sometimes with the incorrect information. So we, on the personal side every month, are constantly reviewing our credit information to make sure that what has been captured was really ours. I have never done that for my business. So if I'm understanding correctly, then there is information about my business out there and under my business name. I've been in business 20 years, and I have never understand, but the banks are sending me these lines of credits for unheard of amounts and telling me I can get all this money. I shreded them and threw them away because I don't want them. That means somebody somewhere is looking at my information to even reach out to offer me 10,000 credit cards for my business and all these lines of credit. So tell me where should we be going? This is new to me, to really think about my business credit, I've never had to take a huge business loan. My business was funded because I put money into it right as my husband lovingly calls himself my angel investor all those years ago and I paid it all back. That's probably similar for a lot of my listeners in the interior design space. Many of them if they are not taken out loans for a building or something like that. When they're home-based or if they have had a slower growth progression, many of them have invested their personal funds to get the business off the ground. So this is also maybe new to them. Where do we go to know, just like what the baseline is? How do I find out what the credit score is or the credit information that has been attributed to my company?
Keith Knapp 08:06
And the quickest way is when you can actually get access to credit monitoring through NAB. It will show you because it'll aggregate all the data from Experian, Equifax, and Dun and Bradstreet.
Michele 10:22
Isn't that great?
Keith Knapp 10:23
It is. You can actually get it through www.creditsuite.com/monitoring. We have a special discount link in there but it's through NAB which is the monitoring company.
Michele 10:33
We'll have that in the show notes.
Keith Knapp 10:37
Absolutely and that's the first place to start now. Let's take the example of your startup company or these companies that are getting out there, which might not even a startup, they're having kind of a slower progression. Or let's be honest, they're making their money, they're happy, they're not really worried about growth until stuff like this starts to happen then it starts to escalate the issue. There's a lot of sources that are out there. Now, the public ones you can access through the NAB, you can get it through the monitoring link that was mentioned. But you can even just do searches through LexisNexis that will pull all the public records and all the public data to see how it's all reporting. There's a lot of different resources and places that the information being shared. We're stepping in for people and pulling all together in a report so that they can see exactly what's going on. These are being populated from several different locations and NAB is one of the best places to start. But if you want to look at the individual reports, like you would on credit, it would be Experian, Equifax and Dun and Bradstreet are the three major bureaus for business credit reporting.
Michele 11:47
Yeah, it's always one of those things that I might want to build on or want to know where do I stand, especially for somebody like me, I've been in business 20 years. I just have never needed to use that credit or go after that credit to even delve into it and I'd guess some of my listeners probably have and some have not. For some of us, this is a new thing. How can any business go out and get business credit?
Keith Knapp 12:15
Great question. One of the things that that I always like to define when we're having this conversation is understanding that business credit and business funding are two different things. Because business credit is your credit reports. It's what's reporting on your credit, just like personal credit isn't actually a thing. It's a credit report of people that are loaning you money. To have a business credit report, you would have to borrow money for your business under your business name and the EIN.
Michele 12:54
One is we probably need to be aware of and correct me if I'm wrong, but we probably need to be aware of our business credit score. And the second thing is, if we have taken out some type of business credit, let's say right now, PPP, EIDL, and SBA loans that people are taking out just during this time, if those are under the EIN, we should be on a credit report. If those are outstanding, or even if they're closed, they should still be showing up if we put them out under our business, correct?
Keith Knapp 13:26
Yes, that is correct. When you start to have a conversation about the business credit scores, is something that gets even more in-depth. It's kind of like an onion; you start on wrapping it and find more layers over as you go in. But let's talk about scores for a second. The interesting thing about business credit scores, like personal credit, it is based on a seven-year history. So it's looking and populating data for seven to 10 years and calculating. Then the FICO scoring models going in and using their algorithm to calculate your scores based off that 17-year history. With business credit, it runs through a company similar to FICO. It's called PAYDEX. So when you're looking at your PAYDEX score, it's judged it's rating you from zero to 100. It's a different scoring model, and it's also only judging you on a 12 month period. Because businesses are not people. They function much differently. There's the money, the stability, the financials change, and the change is rapid within a business as opposed to statistically what you've seen on the personal side. So getting your business credit score's is important, but it's also good to know that your credit scores on the business side can change in a month or two. Within a year, you can be in a completely different space than you are right now. So it's a lot faster paced with the business credit scores than it is with the personal, which makes it easier to be able to get some funds and to get your business to a place where you're really fundable.
Michele 14:52
So it's pretty dynamic, it can go up quick, and it can probably go down as quickly as it could go up.
Keith Knapp 14:58
And here's the thing, the majority of is based on your payment history. It's not looking at balances like on your personal credit. If you improve your scores, you're gonna go pay down your credit card. On your business credit, it's all about payments. Let's say, you've got one account reporting, and you're on a net 30 with them, but you're paying them day 31st, day 32nd, it's gonna drop that PAYDEX score. If you turn around in a month and you start paying it on day 20 day 22, your scores are jumping way back up because your payment history looks great, and you're paying it before the actual due date.
Michele 15:34
So even just changing that due date to be one or two days before it is due.
Keith Knapp 15:39
Can have much more of an impact on the business credit side.
Michele 15:42
Interesting! And when we say on the business credit side, we're talking about not only the score, but then the way that our credit is looked at so then that can influence the type of funding or the amount of funding that we can get.
Keith Knapp 15:56
Very good. Yes. I like talking with people who understand the concept of it. This is going to bring us right back into the other question that you asked about establishing business credit. As you're making these payments, one thing that lenders are looking at is what are called different tiers. So there's basically about four tiers of building business credit, and it's based of the ability to get credit. So tier one is we're not going to call them bottom feeders, right? We'll call them just easy. They're they're not picky but it's mostly going to be like net 30 net 22 accounts stuff where you're not going out and going to get this huge line of credit but you may go to qualified and be able to get approved for a net 30 account that's the start reporting. There's a lot of companies out there, so what we always recommend is if you're new and just starting to build and establish your business credit, getting from some places like Uline, or Granger is another good one, or Quill dot com. Those are the power three that we recommend for getting started to establish those trade lines and getting those net 30 accounts. Then your business credit is going to get enough information reported that the credit bureaus are going to start to pay attention to your credit report.
Michele 17:04
Okay, so let's let's think about that because it with interior design, many times we're buying product for our clients on their behalf. And so we, sometimes we have to pay upfront to get the account established, and then we can go on net 30 terms and so even building it with those companies will start to build that credit. Is that the case?
Keith Knapp 17:24
Absolutely. That's the case. Now think of it this way. Like you had mentioned earlier, you said you're getting these big credit card offers, but you're just throwing them away because you don't need the credit. The same thing starts to happen with your business if your business credit profile is set up properly. So your fundibility is set up, you've got your address, everything is properly reporting in a way that's going to make it easy for banks and lenders to fund you. If that's setup right, and then you start establishing the payment history. Get up to three months payments in there with some of these smaller ones like Uline and Granger and well, now you start getting instant approvals for tier two. And it's just a building process because again, your credit is just it's a risk factor. So you're showing, "Hey, I've got the ability to pay these accounts, no problems." Now when you get into tier two, you start to get into, which for interior design may not have a bunch of stuff. You've got United Rentals, Office Depot, Home Depot, which is very good. You get a lot of Fleet credit cards like Kwik Trip and Valvoline. Lowe's is another great one. So that's when you start getting into more of the retail shops. A lot of them are still gonna offer you the net 30 accounts. But those are going to be the ones that as you start to establish the relationship with those net 30 can very quickly turn into a net 60 or it can even get to the point where it starts automatically jumping up to tier 3 and you start to be offered actual lines of credit.
Michele (18:54)
I've seen some of those interior too. It could be sometimes, net 30 net 60, net 90, just based on what it is, but certainly longer terms. Many of us had to start even before we could get net 30. We had to start with just finding somebody to give us a business card. I remember getting the first business credit card, which was not under Michele, that was under Scarlett Thread. And over time with paying off the credit card when you go set up with new vendors, they are asking you about your credit history. They're asking you to tell them three other vendors that you've worked with and what your payment terms are with them. And they're using that information. And then I remember moving up and thinking, I have arrived, they're not making me pay for 30 days and I've already got it right. So I can absolutely see how that progresses. And the same thing happens and again. Keith correct me if I am not understanding this correctly, but for many of the interior designers, they get that initial credit card and let's say it has a limit of $5,000, the more they pay, and the more they buy, the more they keep paying it off, it moves up to $10,000. And then it moves up again, when they can almost prove that they can keep it paid off and keep the credit moving so that it's more revolving. They keep getting more and more and more. And until that happens, many of the designers that I work with might have to pay that credit card every week to clear it out for the amount of product that they're bringing through at the beginning.
Keith (20:23)
Yeah, and when you start getting into credit cards which function almost exactly the same way on the business. When you get into the credit cards, it's a relationship. As you start spending money, they see that you're making your payments, paying it off, you're being responsible with how you're using it, they're going to increase your credit limits. Now, one of the things that I want to take you back to what you said is that when we first got started, you had to go out, you had to start looking, and open up a credit card. Now we've run and talked with banks. We've actually seen the statistics on this; over half of the business loans that are applied for are automatically turned down due to the information that's being reported to the credit bureaus, and it's not information like payment history. It's information like your email address. So if you're out there and you're running a business with @gmail.com at @yahoo.com, that's immediately a fraud flag for a lender. If your address is a home address, that's immediately a fraud flag for a lender, and they're going to automatically turn you down for funding. So what we found is that as we go through and you properly set up your business, I keep going back to that, because it's one of the big keys to all of this is making sure that your business is properly set up. As your accountability goes up, the ability to get approved, just it amplifies significantly because the thing is that that banks and lenders are smart enough to look at the big picture and know that loaning money to a business is actually a little less risky than loaning it to an individual. Because a business has the ability to turn around and make money. They have the ability to have a really good month and be able to pay everything off, so the risk level is actually a little bit less. Then you start getting into net 30 accounts where they're limiting their exposure, but getting approved for those, once you have all everything in order and lined up properly, getting approved for those net 30 accounts is very simple. From there it starts to kind of snowball. Once you get the payment hazards, it's not the problem, but what most people miss is just the proper preparation of price. Because if you set it up right, then the results later on, three months, six months down the road are significantly better and faster if you're taking the proper steps upfront.
Michele 22:44
That is a really good point. We've had other podcasts when we talk about establishing a business and making sure that we're setting it up properly. The good part of it is already be thinking about, which is kind of hard for some of us when we're first starting, but thinking about that funding needs or fundibility or credit needs. So of the four tiers, first is kind of the easy, quick net 30 type of credit. The second tier was you called it a fleet credit card, a little more of the retail, the Home Depot, the Lowe's those kinds of things. The third was being offered a line of credit.
Keith Knapp 23:21
The third is advanced building. Tier three is when you start getting into more of the advanced credit cards. That's when it starts to get a little more niche-y. But that's where you start getting into funding from Lowe's. They'll start loaning you money based on a project or giving you revolving terms and being a little more. I like to make the analogy of it like being in a relationship. Once you're getting to tier three, you're in a very committed relationship with this company at this point. Now, not exclusive, but you're, committed to them, making payments, and they start listening to your needs and what you're looking for, and start working with you on it. You can have that 20s, and it can get revolving, or you can get net 60-90. And the lenders will walk you through that as you start progressing. So you could start with Lowe's account on tier two and then advance it to tier three as the relationship grows, then turn it into just a full blown line of credit as it progresses from there. Now the difference is where most people right now are going, "well, I could just go out to Lowe's, and I can get a credit card on my own because I got the credit." Absolutely, but we're trying to get you a credit card for Lowe's that's not tied to your personal credit. That's why we're going through these steps. That's why we're building this relationship with the bank and doing it just under the company name. Trying to get into that point where Lowe's is going to look at the entity, the company itself and loan the money to the company, not the individual.
Michele 25:05
Okay, so before I ask my next question, what is tier four?
Keith Knapp 25:09
Tier four is just it's really big accounts. It's revolving accounts, but not the top of lending, it's the top of credit. This is where you got your prime credit. Where banks are going to start offering new lines of credit. This is what you would refer to in personal lending, a paper loan and paper lending. Your prime credit cards. Where you start getting into like commercial vehicle financing, equipment financing from here, Apple is one of the vendors that are on here. You start getting into some of the big accounts that show a lot of credibility within your company, but also very flexible on your net accounts. They have a lot of different options for that and revolving as well.
Michele 25:56
Okay, so what are then the benefits of getting credit based solely on the Company Entity and not having it tied to our personal credit or having some personal guarantee on it?
Keith Knapp 26:10
I'll be transparent with you for a little bit because this is why I'm so passionate about this, and this is why I do this. I had a company that had failed because I didn't have access. I had made a critical error in my accounting with contractors versus employees. The state came in found it. They charged me a lot of money, and I didn't have access to the credit that I needed to pull myself out of it, and I lost a company
Michele 26:34
Reminders in that one statement, right? Put your people in the right place.
Keith Knapp 26:41
Yes, make sure that you're working with an accountant who knows what they're doing. There's a lot of stuff that goes into that. But really what drove me to the business on the inside is because looking at it, I realized I could have avoided it, if I would have been focused on setting up my company properly, and having it funded with just the business and the EIN number. As a small startup, it gives you access to capital, which is just huge. Using just those lines of credit, those net 30 accounts, are going to give you room to breathe, to function, and to not feel like you're on a constant cash crunch all the time. The second thing is it's going to add a level of protection for you. As your business credit starts to grow, and you can separate the personal from the business, it's going to give you that peace of mind of knowing that no matter what happens to you, you're protected. So if the company, God forbid something happens and can't function, you're still personally protected, nobody's going to be coming after your personal assets. And it offers long term growth at the end of the day. A great analogy that we'd like to use is, do you think Walmart is actually using their own cash to buy their products? No, they're using lines of credit to be able to purchase products and resell them. Then pay off those lines of credit with the cash that they get from sales. That's how the big corporations are functioning. They are using their business credit to leverage their purchases, and to make sure that their cash flow is maintained to a point that if they have downturns, or a dip in sales, the market crashes, COVID happens, whatever, cash flow can remain consistent and steady. It's not just tied to instant purchases and things. It gives you that ability for long term cash flow projections, for long term growth, and looking at the big picture of your company, so that you can successfully navigate it instead of it having to always be dependent on instantly on a cash cycle.
Michele 28:42
Yeah, you see a lot of it happening for inventory replenishment. So we talked about setting up your business correctly, what are the entity structures that are the best to help us? I would personally think that if we're really trying to separate, setting up a just a DBA with our name is probably not going to be the most effective long term.
Keith Knapp 29:05
Yes, absolutely. Anytime that you're using your name or your social security number for business, you're not protected. You're not going to be able to set up business credit that way because the entity itself is tied to your social security numbers. So anything, we'd like to say LLC, it's better.
Michele 29:25
LLC, S corp, C Corp partnership, something but just not sole proprietor.
Keith Knapp 29:31
Yes. Because the sole proprietorship puts you in that place where you're not really protected.
Michele 29:36
You and your business are commingled at that point.
Keith Knapp 29:39
Absolutely.
Michele 29:43
That's a good point is when we're really thinking about credit and funding, we're thinking about talking to your lawyer, talking to your accountant. It can be different for each person, how you make these decisions. This is for informational purposes only. However, I know that from my experience, choosing LLC is because I needed the layer of protection for our retirement and for everything else. I wanted the entity of Scarlett Thread to be different than Michele Williams. That was the first step to do before I then moved to S corp and other things but so that just a good reminder to look at your own situation. And here's the good thing, even if you're a sole proprietor and you think "I want to grow my business, changed my business, have the opportunity to have business credit and business funding separate from personal", you can still become an LLC, you can change your business entity. Mine has changed over the years, there are rules around it, but it is possible to do that. How long does it take? I know you said that under business credit and looking at your payment history for 12 month of rolling timeframe, but how long does it take to build business credit?
Keith Knapp 30:53
30 days.
Michele 30:55
That's pretty good.
Keith Knapp 30:56
Yes, very quick because again once your infrastructure is set, your fundibility is unpacked, and everything's there, getting approved for those net 30 accounts is very quick and easy. Those are the ones out there that will take a risk bill. It's small because it's limited exposure. Getting approved for the net 30 accounts pretty simple. Tier three and tier four, on the other hand, usually a six to nine-month process.
Michele 31:22
Okay. So we talked about wanting to have business credit separated from our personal just so that we could have the credit based on the business entity by itself. If we are the owner of the company, does the business credit have any impact on our personal credit? Are they tied together at any point?
Keith Knapp 31:41
That's a great question. And the answer is yes. Because your business credit when you're starting out is kind of like a child just, a 18 year old just getting ready to graduate from high school, just getting ready to go out in the world. They don't have anything, no reputation, no credibility, and no proof of anything. So basically, what you're doing as the business owner as the parent of the business, is you're stepping in and saying, "Hey, I'm gonna cosign for you for a little bit." This started within that first six to nine months. There may be some accounts that you're going to need to put a personal guarantee on. We always strive to help people to avoid that, but very often, we see that it could streamline the process to put a personal guarantee on some of some accounts. A lot of times you find business owners who are in a little bit of a cash crunch and need to get those lines of credit, having a personal guarantee on a credit card can jumpstart them, get them some credit quick, and then give them that that ability to breathe, flexibility, and being able to go back to take the previous steps before taking the higher tier.
Michele 32:55
Alright, so we're going in, creating this credit, and looking at our reports. We'll have a link for the credit monitoring, but who else can see your credit report? Who else is looking at it?
Keith Knapp 33:08
Great question. Everybody. It's the lenders, and again, the credit was made for banks, for lenders, for people who are giving money out. Anybody who's looking at your credit who can approve you. When you get into any sort of loan, any of your net 30 accounts, even SBA, they're going to take a look at what's going on with your credit reports. But there's public views that people can see if you actually have credit established for your business.
Michele 33:57
So when they are looking at it what are they just looking for in the score? Are they looking for more information?
Keith Knapp 34:06
They're looking at your business credit report to see if you're worth. Also when you start looking at the marketing side, we're going to take a step back from the main question to help set up the answer for you. The way the credit bureaus make their money is by selling the reports to businesses and the banks, but where they make the bulk of their money is selling the data. That's why credit bureaus are so big and so powerful is because they're aggregating all this data for basically every business across the United States. They're data brokers. When somebody wants to market to a business, they're gonna go in and buy a list. However, the credit score doesn't play into that until you start getting on to the lending side and getting approval. The credit bureaus are going to sell the information to the company, to anybody who's interested. So you could be Comcast and says,"Hey, I want to market to every business in this area that has these certain criteria." You'll buy that list, go out, and market to that list. Those people are looking at those aren't hard credit polls, those are soft polls with no impact on your scores whatsoever. It's just for marketing and promotional purposes. Banks that look at it from an approval standpoint. They're the ones who are going to buy your PAYDEX score and say, okay, "what's the risk factor on this loan x." They're going to be making money from the lenders, and the lender is going to have access. One thing to keep in mind is just like on personal credit, people often get confused because they think that their FICO score and their credit reports are the same thing. They're two completely different entities and they're run by two different companies. So FICO runs your credit score on the personal side, whereas the credit bureaus actually have the data on the business side. The Bureau's are going to have that information, sell that data, then the lender is going to pay PAYDEX to calculate that score. Who's looking at your credit reports? Anybody that you're trying to get a loan from and anybody who's interested in marketing to you.
Michele 36:20
So you mentioned a soft pool and a hard pool. The soft pool, you said was for marketing and it's not affecting the score or anything. It's just pulling in the information. Described what a hard pool is, because I'm assuming that is similar to the personal side, if let's say you tried to get in along 10 places, it's going to show up that you really in need of money if you're applying to 10 different places.
Keith Knapp 36:44
It's basically it's an inquiry and the reason that inquiries are so impactful is when you're looking at any sort of credit reporting, it's an indicator that somebody is out there aggressively and actively looking for money. Let's put it this way, if somebody came to you, somebody that you know pretty well, and they said, "Michele, look, I want to borrow $1,000." And you knew they consistently paid it back, they had a great job and it wouldn't be an issue. You may not think twice about. If you hear that same person, ask 10 other people around you for $1,000, your reluctancy is going up. Why are they asking so many people and if you give them $1000, are these other people giving them $1000. Do they now have the ability to repay you. That's why the inquiry process is so important, because when they see that somebody's looking for money, it changes their risk factor. Sure it takes it takes 360 to 90 days for an account to get reported on the credit bureau and that's after you've used the money. So if somebody is out there getting a lot of credit really fast, and it's not showing, it can have an adverse effect on the PAYDEX score. But once you make those payments quick, and it's based on 12 months, your scores recover very, very rapidly.
Michele 38:04
Can you put a lock on your business credit? We have one on our personal credit after all of that. So for example, when I needed to buy a car last year, I had to call, unlock my credit, let them run it and then I relaunched my credit. Is it possible to do that on the business side?
Keith Knapp 38:20
Yes, absolutely. It functions the same way and actually ran to the three bureaus similarly to your personal credit. Equifax, Experian, because there's still fraud that can happen on the business credit side as well.
Michele 38:31
Okay, just curious how that works despite haven't even checked into my business credit.
Keith Knapp 38:38
That's a great question. Nobody's actually asked me that question before so that was a good one.
Michele 38:42
Yeah. I mean, even when our son went to buy his house, we'd lock everybody's credit. We had some of the breaches because one of our family names were on the on the list. We went through and made sure everything got locked down and we watch it, get reports on it, so that we can make sure that nothing happens. I haven't done that to my business so I wonder if it's even an option. Now if somebody were trying to start right from the very beginning, but let's take a couple of scenarios here. The first is, they're brand new. They have their company set up at a minimum as an LLC, one of the first things they can do to start building that business credit is to work on getting that first tier. The easy quick credit, is that the case?
Keith Knapp 39:35
So yes, that is the case. But before you jump into lending, because everybody doesn't care about credit until it's tied to money and the reason we're doing this is to get approved for credit. The first thing they can do is make sure that they've got a business email address, a website, a business app, an address that's not tied to a residential property. Taking those steps to get fundable is going to be the number one key to eliminate just years and years of frustration. I've talked to people they tried and after looking at tier one because they couldn't get approved for anything and we go in changed a couple things, a month or two later they're getting instant approvals for tier one and tier two because of the age of their business. So once you've got all that set up, the first thing to do absolutely are three that we recommend Uline is it's good, Granger is good quill.com is good. The one thing that needs to happen with those is you can't just have the credit lines, you actually have to use them.
Michele 40:40
Yeah, build the credit history.
Keith Knapp 40:44
Yes, if you don't have a payment history, there's nothing for to report.
Michele 40:48
So I work out of my home and my business address is my home. I personally don't even know if I'm a 1, 2, 3 or tier 4, but I'm getting six figure offers for lines of credits from my bank that I shred. Safe to assume, mine is pretty good, but they know I work from home, my articles of incorporation have my home address on them. Is that really the stickler? Are you talking about going to just get a P.O. Box because our listeners are working from home. I got a website, the business email, I got the S Corp, the articles of incorporation. I got it all but from an office in my home.
Keith Knapp 41:29
This is really where the popularity of something like Regis comes in by setting up legitimate business addresses that they don't actually have to work from. If you set up a P.O. Box, there's actually there's notifications that lets lenders know this is a P.O. BOX. And even the UPS stores, they notify lenders that this is a box inside of the store. When you start getting into Regis and a couple others, we'll put a link in the notes for listeners some of the different places that offer good ones. But having a business address makes a big difference. That is something that we're keeping an eye on. Perhaps with everything going on, that has the possibility of change.
Michele 42:17
People are going to potentially work from home again.
Keith Knapp 42:21
Right, but one of the things that I want to bring to your attention is when getting the credit offers, you also started with your personal credit attached to it. If you don't have your personal name attached to them, that's where they're going to want to see the credibility of the business whether it's self-sustaining.
Michele 42:41
I am definitely getting my own business accounts. But, I haven't I haven't dug into it clearly. What type of businesses should have business credit, should all businesses have it or.
Keith Knapp 42:52
Any business that wants to protect themselves. Every business out there will have some sort of business credit profile. But nobody cares about credit until they need it. Whether it's persona or business, nobody's thinking about it until, COVID hit, Godzilla has attacked the city. What am I going to do from here? So what we're trying to do is educate people. Get out there and get your business credit profile up to date. Start establishing these smaller lines of credit and build your credit profile. So when you do need the big tradelines, if something happens, if you find a company that you want to buy out, buy a property, equipment, or you want to finance it instead of using your cash, you've got the credit available. I tell everybody, "look, you've got a business, you should be paying attention to your business credit, because there is going to become a point in time that you're going to want and need it. Having that option of not being tied to your personal security number is just huge relief but also it builds the value of the business as well.
Michele 44:01
Yeah, on the personal side again as well. We knew at some point that our son was going to buy his first house. So all the way back in college, we tied and put him on our family credit card and let him start building up credit. My husband and I have great credit scores so he was right in there with us. When he went to buy a house, it was transferred to him. We ended up taking our earnings off, leaving him on it, and that gave him the credit to go buy a house but it took him a couple of years of being on our credit card. He is paying his part and us paying our part. But everyone needs to build up that credit because you couldn't just walk in one day, open up a credit card, with having no other credit line to go in and buy a house. They're gonna look at you kind of weird. It's the same kind of thing in the business, you're creating this credit score and your credit history before you actually need it. Because when you need it, you need to already have the history.
Keith Knapp 45:00
Absolutely that is one of the best ways to explain it.
Michele 45:06
Okay, so let me ask this, now that we've worked on our credit, and we have a decent credit score, what is it that we need as a business owner to qualify for a loan or a line of credit?
Keith Knapp 45:18
Great question. When it comes to start getting approved for financing, and get funding, we like to call it the three C's. It means you have cash, credit, or collateral. What lenders are looking for is your SBA, your big banks, the ones that are going to give you the great rates and terms. They're going to analyze those three. Your cash flow, your business credit, and your collateral. You have to have assets. Do you have equipment? Do you have property? Those are the three qualifiers to get approved for funding
Michele 45:49
Okay.
Keith Knapp 45:54
Banks will want to share, they want to give you money. Now, when you get into business lending, business funding, business loans, it starts to take a bit of a turn here because since the mortgage meltdown several years ago, lending on big loans for personal is really tightened up. But on business, you still have a lot of alternative lending sources. So you can be looking at like merchant advance where if you don't have one or two of the C's. If you've got any one of the C's, there's funding out there that can accommodate you. So with merchant advance loans if you've got revenue, loans, things like that, they will look at the cash flow of the business or even just the money that you run into bank accounts. If you have credit, you can start looking at state loans or loans that are going to be tied lines of credit or your payment history and what you've made. If you have collateral, let's say somebody's got a property and they're trying to get approved for funding, the property could be used. But if you want to maximize what you're doing with one name, you need to have all three of the seeds.
Michele 47:13
Now, how does all of that tie in to profitability in a company? You know, I'm all about the profitability and how we're making our money. How does a company need to show that they have positive net profits? Do they even look at that?
Keith Knapp 47:28
Great question. They look at it, but it's not the all determining factor because one of the things that I've mentioned a couple times is cash flow. They're looking at the ability, at what the business is doing from a cash flow perspective because at the end of the day profitability is a movable number, I think is a way to put it. You've got 100 distribution, depreciation, and a lot of different things that goes into what's impacting the actual profit of the company. When you're looking at cash flow, that's looking at it from the 12-month standpoint of going consistently with revenue. Can you afford to pay back this loan based on the revenue, the cash that you have coming into your business? So profitability will play into it, but it plays a backseat to what cash flow does for fundings.
Michele 48:15
So if somebody's thinking about getting a loan because I want to expand my business. I want to buy more inventory, some of these things where cash flow isn't an issue, but they don't have enough current cash to do what they need to do, and they're gonna need a loan. Where do they start? How do they choose which lenders to go talk to?
Keith Knapp 48:38
I always start with looking at your business credit, which is just bringing it back full circle for us. That point is a great place to look and be able to figure out, where are you at? How does your credit, look? Is this something that's going to make sense? Then from there, is sitting down and figuring out exactly what you're going to do and exploring the options. We do a lot of funding for clients but I always recommend you get out and talk to some local banks as well as talking to different businesses about funding because funding is one of those things that sometimes can be a little hidden when it comes to the business side. If somebody just jumps online and Google how to get a business loan, you're going to get the best marketers, not necessarily the best products. You may get a lot of merchant advances. So the first thing is to figure out what exactly do you need it for? Look at it and then figure out what terms that you are going to need. Then the best thing to do is to start talking to brokers, bankers, and there's a link in the notes here, and they can talk to us about their funding options to see what to do from there.
Michele 49:47
Is it better to get a line of credit before you need it or go after it when you need it? How much in advance do we need to be thinking about getting lines of credit?
Keith Knapp 49:58
Now, right now and the reason is very honestly Michele, did you see us going through a lockdown three months ago? Four months ago?
Michele 50:07
No, and like I said at the beginning of the podcast, I always encourage my clients to do the same thing that we do with our home. We've said for years, three months of saving and in my businesses, I've encouraged them based on the size of their business. Three to six months, but we're literally running through those three to six months and not being able to replenish those funds quickly because the hard part is not the first three to six months is the second three to six months.
Keith Knapp 50:38
Right, and that's where having a good line of credit is going to help smooth that out for you. Where you have three to six months of just hard operating costs and being able to look and say, "okay, I can I can survive three months, if I just pay everything out of the out of my bank account," but when you look at it and can say, "I can pay three months out of my line of credit. And then I can float that another three months because I can pay it back," and so now you're looking at six months. So now your cash flow looks like is starting to go way down. You're able to make bigger moves and add some more stability. So if the lines of credit are great because you have them when you need them, they're not something that you have to pay all the time. It's not like an installment loan, where you're going to go out there and have this monthly payment to pay. It's there. It's available cash when you need it. So when you get into these situations, you're not left just hoping the government gives you money or having something that you're able to make it work. You've got a backup plan there to help you through this.
Michele 51:42
Yeah, and just a reminder to the listeners, we're talking about conscientious lending here. We're not talking about going out and getting a line of credit or getting loans that we know full well we cannot pay back, and that's just bad business.
Keith Knapp 51:56
That is a very great point.
Michele 51:59
This is meant to tide us over, to get us through but we need to know that loans have to be repaid. These are not the things that we are getting right now with PPP and those loans. That is way outside of the box. We're talking about more traditional lending and that needs to be taken with the plan conscientiously, knowing that we have the ability to pay it back.
Keith Knapp 52:26
And I always recommend to clients, talk with your CPA, talk with your accountant, make sure that fits into into your business model. That it makes sense and something that's sustainable for what you're doing, because as what you said, this is it's a loan and there's terms and conditions that we all have to complied to.
Michele 52:45
Right and knowing the repercussions of not paying it. The goal here is not to find an unhealthy business but to find a healthy business. And is there anything that you'd like to leave with our listeners as we wrap up? We've gone from credits to lending to how to start it, how to get through it, how to monitor it. What else?
Keith Knapp 53:13
There's so much on this Michele. This is a very big and deep topic. There's a lot of stuff that goes into it. We've actually got a link that they can download, a free guide on how to establish the first steps that anybody can take to set up their business properly to start establishing credit in their EIN without their social security number. We, credit suite, gives away a lot of information. We were constantly giving away free guides. Anything that we can give to people to be able to help because again, we're passionate about this. We believe this is when we know how to bring stability and help to a company by making sure that it's fundable so when you can have access to money when you need it.
Michele 53:54
That sounds fantastic. Keith, thank you so much for your time today and thank you for such a great conversation. And I guess now you know what I added to my to do list but that's okay. I needed to do it anyway.
Keith Knapp 54:07
Well, thanks for having me on the show. It's been a pleasure talking with you.
Michele 54:09
Same to you! Have a great day.
Wow, I learned something new on this episode, and I sure hope you did as well. Being conscious of our credit history and score is important, and you can bet I'm going to be digging into mine more now that I know more. While helping you understand the finer details of your business credit is not my superpower, helping you run a successful business to know how to use the funds you get certainly is. If you're in need of assistance to manage your business and funds, reach out and let's talk. I would love to support you, either in the Designer's Inner Circle or in my elite coaching program, both using the Aim with Intent Methodology. You can get more information at Scarletthread.com and always remember, profit doesn't happen by accident.