The other day I promised to lay out the exact steps you need to do to get the type of business credit I was able to line up recently with my relatively new company. In order to do this, though, it's only fair that I break it down into 2 parts since getting this type of credit requires seemingly "separate" things in place.
Now, before I tell you exactly how this is done, I need to first make it clear why business credit is where it's at. Building personal credit alone won't get you to those unsecured six-figures (and one day seven figures) as I indicated in my last email when I was showing you the difference between my 2 Bank of American unsecured credit cards that I got in the same month: my personal card yielded me a pitiful $5,000 unsecured credit card while my new business's unsecured credit card is $30,000! Big difference!
Why the difference?
Think about it from the bank's perspective.
If you were Bank of America and you were analyzing a personal vs. business credit application, the first think you'd wonder is...what's someone getting a personal credit card going to do with it? Then, what's someone getting a business credit card going to do with it?
When someone wracks up debt on a personal credit card, they quickly get into financial trouble. It many cases, it can become the financial "death" of them within a very short period of time. And it almost doesn't matter how good their personal credit is now. A small (and even temporary) financial off-balance (i.e. loss of job, high medical bills, etc.) can sometimes lead to getting into a lot of debt...and fast.
In business, "debt" isn't only accepted...it's expected! Many businesses use credit to balance cash flow against giving clients and customers extended credit terms (like net 30, 60, or 90 accounts). And business owners need a means of balancing their incoming cash flow which is where credit comes in.
This may seem obvious but one thing you probably didn't know is this: while banks drew back on giving out personal credit ever since our recent banking collapse, they've been virtually forced by the government to keep offering up credit to businesses.
Why is this?
The only difference between the Great Depression in the 1930s and our complete economic demise by 2008 is one thing...and one thing only: credit to businesses.
The reason so many businesses folded in the 1930s to the point where they had to close show (thus offering no employment to people which makes the economy go around) is that banks completely stopped giving out any type of credit to business owners.
When businesses can't stay open for business, they shut down. When people are out of work, they don't get a paycheck. Without a paycheck, they stop buying. Then the economy shuts down.
The government didn't want that to happen...again.
Now, I don't know exactly how it went down but I imagine it played out something like this. Imagine the bank is a lower-echelon thug and the bank is a gangster named Bruno, dwarfing the thug in size.
Bruno to thug: "Come here!"
Bruno drags thug forcefully by his ear into a dark alley, probably around 1am.
Bruno: "Now, I just want to make sure we have an understanding here. We don't want a replay of the Depression so, no matter what, we're going to keep lending money to businesses to keep the economy from collapsing completely."
Thug: "Or else what?"
Bruno: "Or else I'll make your life very miserable."
Thug: "And how's that?"
Bruno: "You don't wanna know. So...do we have an understanding?"
All the while, during the conversation, Bruno was punching his hand the whole time to drive the point home.
And that's how I envision that it went down. Take it or leave it, that's a symbol of how it pretty much went because nobody can quite pinpoint what the threat would have been but suddenly, around 2010, banks not only started offering business credit but they were raining it down on businesses whether they needed it, wanted it, or not!
Of course, there was a single criterion to giving out this money to businesses. Based on the major reason we had the credit collapse to begin with (which was non-qualified individuals getting loans on houses they couldn't afford in the first place), the banks had to be careful with lending out business credit.
And no, it had nothing to do with having business gross receipts (i.e. "business activity"), businesses that were "well seasoned," or businesses with a lot of built up business credit.
And it definitely had very little to do with whether the business had a Dun & Bradstreet profile with built business credit either. (Surprised??)
Unlike the "old days"(just a few years ago), personal and business credit now go hand in hand. You have to boost your personal FICO to about 720 or above ("mid" score) in order to fully qualify for endless amounts of business credit.
Yet surprisingly, this is fairly easy to do!
So, I'll quickly lay out the very simple steps of bolstering your personal credit before delving into the business credit part.
1) Pull your "tri-merge" credit report. I recommend using Experian.com and paying the $39.95 to pull all 3 reports which will include the FICO for each. (Don't fall for the $1 bait-and-switch deal because they'll bill your credit card forever for some monthly monitoring service that you don't need.)
2) Dispute everything that's negative. This includes "hard" inquiries. In this step, you'll also fix personal information including phone numbers and addresses to make sure your account is current.
3) Start rebuilding personal credit at the same time by getting yourself a car loan or lease (if you don't have one) and getting 2 credit cards: these can be secured or unsecured depending on what you qualify for in the present state of your credit. Use the credit cards and never exceed 45% of the total credit line in charging activity. Pay your car payment each month on time. This process will automatically build credit for you while you're chiseling away at the negative things on your credit reports.
4) Keep disputing and disputing and disputing while using other critical strategies to get these negative things removed off your credit reports. The more consistent you are with the process (by disputing every 35 - 40 days), you'll have Triple A credit within a few short months...especially while rebuilding at the precise same time. (That's the key!)
In the meantime, you can start the process of building your business credit at the same time. This also can be done in just a few months.
Here are the steps:
1) Get yourself a corporation. Yes, it helps somewhat that you have some "seasoning" which means the age of the corporation. Two years seems to be the "magic number." So, if you already have a corporation that's 2 years or older, you're ahead of the game. If you don't, that's okay. You can consider getting a "shelf" corporation that's already seasoned 2 years for you or you can start from scratch (incorporating right now) if you have a long way to go with your personal credit (i.e. just filed for personal bankruptcy). By the way, your corporation needs to be in your home state and not in Nevada (unless you live there or you are foreign to the U.S.).
2) Once have your corporate resolution documents (after incorporating), get an EIN (employer identification number) with is equivalent to the "social security number" of your corporation. You can get this number at the IRS.gov website.
3) Open a business bank account with a large bank like Wells Fargo or US Bank. You need your EIN in order to do this.
4) Get your first business credit card. If you're still working on your credit, go to Wells Fargo and get a secured business credit card. They are the only bank that offers this program right now. Otherwise, get something like a Chase Ink credit card or other business credit card that's unsecured if you have at least a 680 mid FICO score.
5) Use the hell out of that single business credit card. Use it, pay it off, use it, pay it off. Keep doing this. All activity will be reported to Experian Business using the company's EIN. Use this card for 6 months and wait until you get a business credit card offer in the mail. (Always fill in the application and mail it in. Never apply online. It's weird but when a human being has to type in your application information, it usually gets approved. When you apply online, a computer makes the decision on your credit worthiness...and they are pretty hard to surpass because one minor "glitch" on your credit report can throw you into a "decline" as far as the computer is concerned.)
Within a year, you'll have tons of unsecured business credit cards, adding up to at least $100,000. By having (and using then paying off) these credit cards, you'll qualify for all kinds of unsecured business loans.
Now, I have one secret for you that a lot of my students have been asking me about for years and it goes somewhat as follows:
"So, if I have $100,000 in business credit cards, how can I tap into that money to use the cash as a down payment since most credit cards don't allow for huge cash advances?"
And I have a secret. And no, you won't show up at a closing with a MasterCard telling the escrow officer to "put it on this card." (It doesn't work that way.)
In the next entry, I'll tell you exactly how to tap into that credit card cash. (I think it'll surprise you.)
See you at the top!