Credit Profile

 

Business Credit: A Free Summary

Sample Paynet Credit History Report 1

If you read the title and thought, “Whoa buddy, I didn’t even know my FICO score two minutes ago. Now you’re telling me my business has credit I have to manage too?!”, then relax; it isn’t that bad. It is however a little bit of work on your part, but you’re a business owner and you’re used to work.

What is Business Credit?

Business credit is not too much different than personal credit in that it is a compilation of the times you’ve borrowed money and how well you did managing that debt. Personal credit is attached to…well…you. Business credit is attached to your business. If you need to sit down after reading that, go ahead and take a few; otherwise we’ll just roll right along.

Your business credit can be affected by a number of things from tax liens, to late payments on credit cards, to defaults on loans or lines of credit. Even paying late once can cause your score to dip drastically. So make sure you stay on top of those payments as best you can!

Keep in mind that, like your personal credit score, your business profile will see small ups and downs depending on how much you’ve paid off, if you’ve added credit or had a hard inquiry. Don’t worry too much about small fluctuations, they happen.

Sample Paynet Credit History Report 2

Who looks at Business Credit?

You should know that personal credit is reported to three major credit bureaus; Experian, Equifax, and Transunion (If you didn’t, checkout our personal credit post). Similar to personal credit, business credit is reported to three major credit bureaus. There is the one you’ve heard of: Experian; but also ones you may not have heard of like Paynet or Dun & Bradstreet. Mainly, in the equipment finance world, most lenders are looking for your Paynet score if they ask about the business credit. Paynet, for those of you who do not know, is owned by Equifax.

If you have never seen your business’s credit report, I would highly recommend requesting a copy of it. Just like with personal credit, there is always a potential for erroneous or fraudulent reporting. Unfortunately, business credit reports aren’t typically given out for free, but there are a number of sites that can pull all three simultaneously. At the time of writing this, Credit.net would give you a single limited report if you sign up for a free account/trial.

Why does Business Credit matter?

Well for one, the better the profile, the higher the odds of being approved. Who would you rather lend money to? The person who’s paid on time every time? Or the person who is constantly late or even worse stops paying completely? Pretty easy decision, you’d go with the safest option all the way down to the least safe. Lenders work the same way. They want the person most likely to pay on time and in full.

Secondly, it could save you thousands! The riskier you are considered to Lenders, the more they are going to charge you to borrow their money. Everything about you has a level of risk that Lenders look at when considering you for finance. They look at the industry you’re in and the type of equipment you’re buying, as well as credit profile. Having good business credit makes one less thing Lenders have to worry about when lending to you.

Thirdly, with strong business credit you can skip personally guaranteeing a transaction. That’s right, with strong business credit lenders will allow the company to take on the liability rather than you (the owner). Corp Only transactions are typically much more difficult to qualify for so taking care of the business’s profile is important.

Plan for the future!

“But I don’t plan on financing anything right now, why should I care?”, and to that I would ask, “Do you have road side assistance or towing for your car or truck?”…yea, you probably didn’t plan on getting in an accident the day you signed up for, but you had the foresight to see that one day you might need it; Similar principle here.

Maybe your equipment is newer or you think you’ll be flush with cash when you want to replace or add equipment to your arsenal…but new equipment breaks, businesses slow down, and that cash pile you thought you could hang onto is like sand in-between your fingers. Point is, life happens and what you thought might happen then might not be the case now.

Understanding and Fixing your Credit Profile

Have you ever randomly walked up to someone outside of a 7-11 and asked to borrow twenty bucks? If you have, then you’ll probably agree it wasn’t very easy (and in most cases not successful). Why do you think that is? It’s probably because those people don’t know you and because they don’t know, they don’t know if they’ll get their money back. Lenders are the same way, only they don’t get to know you like your friends, co-workers, or family get to know you. Getting to know a person that way would take far too much time. Instead lenders opt for a much quicker way; looking at your past actions as a way to get to know you.

 

One way they do this is by looking at your credit profile. Essentially your credit profile is a make-up of every time you’ve used credit, financing, obtained a loan, got a line of credit, etc. Typically most lenders or financial institutions report to different credit bureaus. They report things like the amount you borrowed, if you paid on time, if you exceed your credit limit (credit cards/revolving credit), when the account was opened, etc. By compiling all those transactions, credit bureaus are able to build a profile of you and assign a score to that; known as your FICO score.

 

So you’re probably asking yourself, what’s a good credit profile look like? And if I don’t have it, how do I get it? The good news is that obtaining a good credit profile isn’t some mystical dark secret, nor is it for the elite or filthy rich; all it takes is a little effort, constituency, and planning.

 

Clearly, if you’re still reading this than you’re either trying to look really busy at work or you’re actually looking to learn something. Either way, we’ll go over some tips below on how to achieve good credit, what lenders are looking for, and how to repair your credit profile if you haven’t been so nice to it.

 

Step 1. Know what’s in your credit profile!

Do you know what your FICO score is right now? Do you know what lending institutions have reported to the credit bureaus? If the answer is no, then pulling a free copy of your credit report is the place for you to start. You are entitled to one free credit report directly from all three major credit bureaus a year (Experian, TransUnion, and Equifax). However, there are many free websites that will allow you to access these reports individually and in real time (I use CreditKarma.com to keep an eye on mine).

But why is it important to know it? Well, there a couple reasons. Now I won’t lie to you, the major reason is so you aren’t surprised by the rate/terms you get if your credit is poor; similarly, you shouldn’t be surprised by favorable rates if your credit is good. If you watch any amount of T.V., you’ve seen the fancy car commercials that promise you the world but have that pesky stipulation: On Approved Credit or Well Qualified Buyers. Knowing your credit score helps you determine if you’re in the group or not.

The other reason is pretty simple…people make mistakes. As we discussed above, your credit report is a compilation of every time you’ve used someone else’s money to buy something. Sometimes the people, “institutions”, reporting to the credit bureaus make mistakes! A run through of your credit report will easily alert you to any erroneous reporting. If you happen to find any mistakes on your credit report, you may contact the credit bureau to dispute it (We’ll save that discussion for another time).

 

Step 2. Handle open collections on your Credit Profile

Once you’ve pulled you report from each bureau (or one), you should know if you have any outstanding debts/collections. Do yourself a favor and pay those off, (if possible) or try to work something out with the company. Otherwise, you’re going to pay a higher rate, if you can even get approved. You’ve got to look at it this way, why would someone give you more money if you haven’t paid back the people who lent you money earlier? They wouldn’t, or they’re going to want to make sure the payoff is worth the risk. The less risky you are, the better your rate or terms are going to be. Paying off your $65 cable tv collection could end up saving you thousands!

 

Financing comes down to two things. First: How likely is the lender to get their money back? And second, What’s that risk worth to the lender. That’s it; when you strip away all the complexities and jargon…that’s financing in its simplest form. Now, as we add in variables to the risk like: credit profile, industry type, equipment type, time in business, amount requested, etc. things get more complicated and complex. However, from these added variables we are able to more accurately quantify risk and access whether someone is qualified to pay back what they borrow.  If the lender is able to mitigate the risk, then they’re better able to get their money back.

 

Step 3. Pay down revolving credit on your Credit Profile

Handled all your collections or just don’t have any? Good! (Congrats by the way!) The next step is to start freeing up your credit. Lender’s like to make sure that all your money isn’t going to paying bills other than the one your trying to take on. Additionally, not having a large amount of your income going to other bills also gives you some wiggle room if you get sick or injured.

 

Step 4. Don’t throw it out!

Just because you aren’t using that card doesn’t mean you should close it; especially if there is no yearly fee for it. Lenders like to see credit history in your credit profile, which you will have trouble building if you close old cards; so make sure you leave the oldest card open. Also, closing cards can actually hurt your credit score as it lowers the available credit to debt ratio. So, if you’re able to, leave those older free cards open and spend a little bit of money on them here and there.

 

Step 5. The hard way isn’t always best

Naturally when you’re looking to get financing, you’re going to shop around for the best rate. Be careful! Every time your credit gets pulled its noted on your credit report; it’s called a “hard pull” or “hard inquiry”. The other type of credit pull is called a “soft pull” or “soft inquiry”. Too many hard pulls on your credit profile is a red flag to a lot of lenders, so don’t be afraid to ask what type of pull your lender is using. Soft pulls do not show up on your credit profile. (Sorry, shameless plug ahead) Working with a broker is a benefit in this situation, among many others, since we pull your credit once and submit that report to our network of lenders.

 

You’re probably saying to yourself, “Ya duh” and you’re right. Most of this is pretty common sense, it’s just hard to practice because well….life. Remember that good credit takes time and you’re not going to get it overnight. Make small changes over a period of time to see big results to your credit profile. Most importantly, do what you can when you can and know your profile so you walk into any deal prepared.

Financing Done Right

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