Establishing Business Credit

[nocompanyguy]

I read an old thread regarding establishing business credit without a personal guarantee. It mentioned that staples might be a good card to apply for. I applied for one and a day or two after I applied, they sent me a letter asking for a pg, but I did not give it and then forgot about it. Two weeks later I got the card in the mail with a $750 limit. I used it wisely and now have an 80 paydex score with D&B. It hasn't helped me yet as I have not applied for credit and I probably will have to give a pg for any loans, but I thought you guys might like the story, as I just found out about my paydex score yesterday.

[Steve B]

O.K. - what's a "pg"?

[Business Attorney]

O.K. - what's a "pg"?

personal guaranty

[alfromla]

yup with this economy no bank with right mind would provide business loans without personal guarantee.

I recommend finding an investor or rich partner :D

[phanio]

Business credit is a great way to get an office supply store card - like your $750 in store credit - but, in actually getting unsecured capital for your business - it is not the best way.

The problem with business credit is that no true lender reports to them (D&B). Thus, if no one is reporting - they (D&B) does not have the most recent information. If thye don't have the most recent information - what they do have is garbage.

Think about this - you don't have to pay experion or equifax to start a credit report - thus, why do you have to pay D&B for one?

I spent most of my career in commercial lending and not one time did I ever pull a business credit report.

Call around to the companies that you seek a business loan from and just ask them if they use business credit. Then, ask them what they actually use to make a decission.

A lot of people with bad person credit get sucked into this business credit world thinking that they can by-pass their poor personal credit - never happens. What happens is that these suckers end up paying thousands of dollars and wasting months trying to build this business credit and it all turns out to be a waste - time and money that could have been used to fix their own credit.

Yes, there are stories out their where someone built business credit then got a line of credit - but, I can guarantee you that their apporval for the line of credit was not based on their business credit. It was based on other factors. I can even guarantee you that should they have not built business credit (paid for business credit) - they still would have gottent eh line of credit.

If you want or need capital for your business - find out what really matters in an approval and work on those issues - like personal credit, income (cash flow) collateral, low debt levels, etc.

[2B-The-Best]

Thanks for the information Phanio about business credit card, because I was going to go that route, but now you saved me a lot of time and money.

[Jacoby]

find an investor or get an interest free business credit card.

[n_touch]

I also went the staples route, but did give them the pg. I am not sure if this was the right way to go about it or not. I also have a few other lines that I use for business and all of them have come with the pg. I do make sure that even though they are based on my credit, that I do not mix any personal purchases with those of the business or vice versa on my personal cards.

[DJ2121]

Not PG'ing a credit line takes quite some time my friend =). For one, your business should be established for at least 2 years...with its own separate office address, phone line (registered to 411) and website just to name a few things. After that, you should register your entity with D&B and pay them their outstanding fees every month. Then you have to build your EIN the same way many of us built our SSN's. Applying for vendor credit, making your payments on time, and being patient =).

If your looking for some quick business credit lines, you are going to have to PG it if you haven't accomplished the above tasks and more.

Don't get discouraged though, some PG products out there for business come with some outstanding terms!

[nealrm]

How about this idea - run you business on a cash basis. There is no reason that you need to by office supplies on credit. The biggest thing that business credit cards will do is hide a cash flow problem. Stay away from debt it will help you in the long run.

[Elsydeon]

Interesting, I hadn't considered business credit when pondering how to get my own business up and running. I was going to go with an investor of sorts.

Thanks for the info, everyone.

[DJ2121]

How about this idea - run you business on a cash basis. There is no reason that you need to by office supplies on credit. The biggest thing that business credit cards will do is hide a cash flow problem. Stay away from debt it will help you in the long run.

I'd like to challenge your theory nealrm. If I may =)

If one never applied for a sears credit card, they would find it quite challenging to become approved for a unsecured credit card with a decent limit. If one were to forgo both of these steps in building personal credit...they would soon find that it is quite impossible to be approved for an auto loan or obtain financing for their first home without a cosigner.

Business Credit works around the same principles as personal credit. If you don't establish a credit profile for your business and show your willingness to repay, you only hurt the future of your business by limiting its available resources to operate, market, or expand. Your competitors may not share this weakness and leave you in the dust.

Just be responsible with your debt. It's important to keep revolving balances from time to time ($80-100 to report the tradeline with D&B). the extra few bucks a month in interest shouldn't break your bank. =)

[nealrm]

On the personnel side, credit cards are not needed. At best, with the balance paid off every month you end up buy 10-20% more stuff than if you pay for items in cash. At worst you buy twice what you need and pay twice for the items. As for cars, would you give a dealer $12,000 for a car priced at $9000 or $50,000 for a car priced at $40,000? Of course not that would be foolish. Yet that is exactly what you do with a car loan. On the other hand, when you walk in with cash, that $9000 car might be purchased for $7000.

Home loans are a little more difficult without a credit history. You need to work with a bank that have underwriters that actually look at the loans and not just rubber stamp based on a number. That means dealing with a local bank and having a 20% down payment. If you have a history of steady income and can show a history of paying your other bills on time, getting a loan will not be a problem.

As for businesses, having a foundation based on debt is like a house built on sand. Any rumbling in the market will knock it off its foundation. Debt requires payments, you don't make payment and loaner will shut you down. When you are in the position of having to make payments, your work options are reduced. Not only is your customer working you for lower prices, you are in less of a position to walk away from a job. You end up taking marginal or bad jobs so that you can make payments on your debt. In addition, when the market changes you are not in a position to react to that change. You are strapped down due to the loan payments.

I know many builders that have gone out of business over the last few years. I also know some that have grown. The ones that grew share a common system. They don't borrow money to build the next house. After a house sells, the profits are used to start the next home and the next is not started until the prior one sells. If you looked at these builders in 2008 you may have thought they should take a loan, build a subdivision, make a huge amount of money. But they didn't follow that line of thought. Today, they are the one that still own their homes, did not go out of business and are thriving. The other - well lets say they had to make some pretty big life style changes.

Read the book "The Millionaire Next Door". There are some very good insights to how those the made their millions feel about debt. I'll give you a hint, none of them said they made millions off of credit card perks or by buying cars on credit.

[Elsydeon]

Interest hurts everyone, but people don't walk around with $9,000+ cash in their back pocket. From a fiscal standpoint, it makes more sense to go that route. But it's difficult to consider it 'practical'.

[Spider]

... On the other hand, when you walk in with cash, that $9000 car might be purchased for $7000...Not likely. It's probable that the dealer gets a commission from the finance company, so accepting $9,000 cash for a $9,000 car earns him less than if the buyer finances it.


... Home loans are a little more difficult without a credit history. You need to work with a bank that have underwriters that actually look at the loans and not just rubber stamp based on a number... Again, not likely. Banks are not in the real estate business, so they don't want to take the house back no matter how much below market the outstanding balance represents. They want to lend to people who are good borrowers and good payers - and if you don't have a credit history beyond the age of 25, it's a good guess you are neither.



... As for businesses, having a foundation based on debt is like a house built on sand. Any rumbling in the market will knock it off its foundation. Debt requires payments, you don't make payment and loaner will shut you down. ..Not quite. Any business of substance has debt, even those with huge amounts of surplus cash. For those overly debt-burdened, it would serve a lender badly to close them down when the only way they could possibly pay is to remain in business!

Unsubstantiated sweeping statements such as these don't help the understanding of money, finance and debt, I'm afraid.



... When you are in the position of having to make payments, your work options are reduced... Now we are beginning to make sense. It is very true that one is more in control of one's situation if one has no debt. However, it is still not correct to say, "your work options are reduced," if the work involves up-front costs, materials purchases, etc., that cannot be purchased due to a lack of funds. A loan, in this case, will expand your work options.



... You end up taking marginal or bad jobs so that you can make payments on your debt. In addition, when the market changes you are not in a position to react to that change. You are strapped down due to the loan payments...This is somewhat true, some of the time, but it is by no means true all the time. Having to take marginal or bad jobs is just as likely to be a result of poor performance in the past as a need to make payments in the present.



... I know many builders that have gone out of business over the last few years. I also know some that have grown. The ones that grew share a common system. They don't borrow money to build the next house. After a house sells, the profits are used to start the next home and the next is not started until the prior one sells...I think we have our adjectives a bit mixed up, here. Certainly, many micro-builders have gone out of business, but those that have survived - as you describe them - have not grown. They built one house at a time before and they are building one house at a time now. That is not growth. And if, as is likely, it is taking longer to sell a spec-built house, they have, in fact, shrunk. Yet, they stayed in business and that is good.



... If you looked at these builders in 2008 you may have thought they should take a loan, build a subdivision, make a huge amount of money. But they didn't follow that line of thought. Today, they are the one that still own their homes, did not go out of business and are thriving. The other - well lets say they had to make some pretty big life style changes...The large builders, who do have loans and do build entire subdivisions, haven't gone out of business, generally speaking. Their workload has been severely reduced in the recent financial malaise, but they are still there, still building houses, still developing subdivisions. It is the small- and micro-builders that have seen the worst of it - those that misused or misapplied the loans they acquired. The problem, as always, is not the loan or the debt - it is the incorrect and inefficient use of money, from whatever source.



... Read the book "The Millionaire Next Door". There are some very good insights to how those the made their millions feel about debt. I'll give you a hint, none of them said they made millions off of credit card perks or by buying cars on credit.Of course, and I'll bet that none of them said truthfully that their business never took a loan and never bought anything on credit. They purchased materials or goods on 30-day invoice and that is 30 days of credit. Why even if you employ someone and pay them weekly, the week's work is on credit until you pay them!

I always recommend people start their business with their own money, and on that I'm sure we agree. But to say or imply that no loans ever is a good way to conduct business, is not good advice, I believe.

[Spider]

Interest hurts everyone...Not so. I earn interest on my investments and savings. Do you not earn interest on your investments or savings?

[Elsydeon]

I was referring to the other end of the spectrum; the one in debt, paying interest, not earning it. Perhaps "everyone" was too broad of me.

[Spider]

Even then, I think you would be wise to reconsider your terminology. Even the person in debt has had the value of the debt from which to benefit. You take a loan and receive a lump sum of money or value. You then repay the loan plus a fee for having borrowed it and benefitted from it. The interest doesn't *hurt* you any more than paying a taxi driver for giving you a ride in his taxi. It is a fee for service rendered.

If you are going to look on any part of legitimate business transactions as *hurting* you, you are going to turn what should be an enjoyable process into a hardship.

[nealrm]

Originally Posted by nealrm
... On the other hand, when you walk in with cash, that $9000 car might be purchased for $7000...
Not likely. It's probable that the dealer gets a commission from the finance company, so accepting $9,000 cash for a $9,000 car earns him less than if the buyer finances it.
That was a real life example. I did exactly that. I know of other that have done similar transactions.


Banks are not in the real estate business, so they don't want to take the house back no matter how much below market the outstanding balance represents
Very True


They want to lend to people who are good borrowers and good payers
Yes and no. Smaller banks that hold on to the loans are concerned about be repaid. They also tend to value this like your job, stability in the community and other factor more than your FICO score. The larger banks (and some smaller banks) sell almost all the loans to the after market. All they really care about is your FICO score. They could care less if you can actually repay the loan.


if you don't have a credit history beyond the age of 25, it's a good guess you are neither. Not true and pessimistic.


if the work involves up-front costs, materials purchases, etc., that cannot be purchased due to a lack of funds. A loan, in this case, will expand your work options.
Does it truly expand your options? True you may get a job that you might have been difficult without a loan but what are the trade offs. With the loan you have additional costs and risk. The additional costs force you to either submit higher bids or accept lower profits. In either case you are out money. Risk involves items like, what if the builder pays late can you still make the loan payment; what if there is a disagreement about the services you provided, will you be pressure to compromise so you can make a loan payment; or what if some jr V.P. that you never met decided the you are a risk and calls the loan due.



If you are going to look on any part of legitimate business transactions as *hurting* you, you are going to turn what should be an enjoyable process into a hardship.
I don't like the term "hurting" either. It is more appropriated to look at if specific actions benefit a business more or less than other actions. In the case of debt, I believe are actions that are more beneficial than borrowing money.

As for being "enjoyable" - I would say that is coming from the lenders point of view ;).