Understanding Business Credit and Maximizing Small Business Start Ups

Small businesses in the US are the cornerstone of America. According to the US Census Bureau about three quarters of all US businesses do not even have a payroll system as most are self employed or operating unincorporated businesses. In fact, there are over 4.6 million small businesses that operate with fewer than 10 employees.

According to the stats put out by the Small Business Administration (SBA), seven out of ten new employer establishments survive at least two years and 51 percent survive at least five years. For those companies that do fail the top reasons for doing so include poor management, location, insufficient capital but also poor planning – including financial planning.

Small business owners are major key economic drivers and although many of these business owners might not realize it, their contribution to the economy is substantial. One of the other things that these business owners might also not realize is that how they set themselves up, specifically how they set up their small business credit is extremely important.

Acquiring and maintaining good company credit really is the difference between failure and success. As part of an initial business plan, which should be completed no matter how large or small your business, setting up good sound financial policy including corporate credit is key.

Therefore it is essential to start off with developing and maintaining separate business credit. Rules governing small business credit are different than personal credit, and you must familiarize yourself with both in order to increase your chances of success.

Corporation or LLC?

There are a lot of advantages to setting up a separate corporate entity; purchasing goods and services under a properly structured business can allow you some personal protection if the company fails. And there are additional tax incentives and write offs depending on how you decide to run your business and set up your company credit. Credit can also assist with cash flow and payroll.

Small company credit will also allow for negotiating more favorable financing terms and start to create an independent credit rating from your personal situation. Once you set up business credit, then it’s a good idea to start dealing with other companies that report your payment history to business credit agencies to start to build up your credit reputation.

You want to increase your credibility over time in order to build a stronger foundation and to access additional company credit in the future when it comes time to expand if necessary. And you want to ensure that you keeping your bills paid on time and that there are no financial delays or chance of any liens or other adverse credit transactions occurring.

No matter what the size of your business, setting up proper business credit is still very advisable. And good credit can mean the difference between surviving and thriving and failing.

Establishing Business Credit

In the US, the key players in business credit evaluation are Dun and Bradstreet. You need to ensure that you keep in the good books with these folks because trying to recover from a bad rating is extremely tricky.

The Dun and Bradstreet Rating measures your company’s business credit rating against other companies that are similar. There is data that’s provided on different sectors including your company’s net worth, equity, number of employees, and financial stability and risk. Other factors can also include age of the company, trade payments, payment history, and public filings.

You will find that other companies you want to deal with or financial institutions that you want to borrow from will access information about your company produced by Dun and Bradstreet.

So one of your first steps toward a sound financial future is for you to register with them and get your small business credit started off on the right foot.

This site is all about helping consumers increase their chances for credit approval in all aspects. In the financial world, your reputation is clearly indicated by your credit score. It is calculated using your credit history and your debt, if any.

If you have been paying all your bills on time, have not been indebted for a reasonable period of time and have a positive credit history your credit score will be a good figure. The three digit number is very important and when you apply for a loan, or decide to rent a house or seek employment, it influences the response you will get.

The credit score is just a number. It does not come with a conclusion stating whether your credibility is good or bad. Lenders will study your report and makes decisions for themselves. It will be solely based on your report and their interpretations will be solely based on their personal behavior.

A low credit score indicates that you are not very creditworthy. Therefore, a lender will not want to give his money, house or car, or anything for that matter, to you as an investment. It will be a risky investment as they will not be sure regarding your ability to repay the loan, in whatever form it is.

Employers or landlords etc. do not feel comfortable hiring or giving out their house to a person with a lot of credit cards. It shows that you have the option of taking a lot of credit and is a sign of instability in terms of your finance.

If your credit report shows that you have frequently reached the credit limit of your credit cards, the lender will again be cautioned. It is a sign that you are financially unstable and are probably threatened by an unfavorable situation. Once again it is a sign that by giving by accepting your application, the lender cannot be at peace. Your application process for the loan, job or property is unlikely to be accepted and in the event that the unlikely happens, you may be charged an extra interest rate.

Employers do not want to hire people with a low credit score. A person with a low credit score may have just taken up the job for a period of time till he manages to stabilize his score and no organization appreciates people leaving them after being employed for only a short duration.

You must keep in mind that your credit score will have a different effect on different people. Different people are comfortable in different levels of risk and nobody wants to enter into a financial deal that has a factor of uncertainty.

The credit score is the most important part of good creditworthiness and determining possible credit approval. A good score increases it while a bad one stains it. There is a lot that can be done to improve your credit score.

Though different countries have adopted different procedures of calculating the credit scores there are some basic techniques which are applicable to all such calculations.

To improve your credit score you have to understand the factors which influence your credit score. Banks and other loan givers use the credit score as a reflection of your reputation in the past. If you have repaid all your previous dues on time, are not indebted and have a good credit history then your credit score is a good one.

Of all the others, the most important factor which directly influences your credit score is if you have been making all your payments on time. These include your credit card bill, your mobile bill, your electricity bill, and any previous loans you may have taken. Make sure that you pay all your bills on time as the companies which calculate your credit score take into account all the times you have cleared your previous bills after a period of thirty days from the due date. Once this has been done, for the next seven years, every time you get your credit score calculated, it will be negatively impacted due to the late payment.

Another important thing that you need to do to elevate your credit score is to keep your debts minimized, if not at a zero level. Try using a debit card instead of a credit card.

If you are one of those who have a habit of stuffing your wallet with credit cards, you must reconsider. The more credit cards that you have the higher is the credit limit that you are entitled to have. For the credit evaluator, this may be treated with caution. It reduces your creditworthiness. Instead of a lot of cards, try having a single card with a high credit limit. Additionally, if you always have money in the account then it will be beneficial for your score.

Credit score evaluators like it if you seem like an experienced player in the credit market. The longer your credit history, the more your credibility and the higher it will take your credit score.

Also, before getting your credit score evaluated find out the type of score you need to present before your loan agent as there are various categories. These simple steps will help you maintain a good credit score.

The credit score of a person or a firm reflects their credit worthiness and it clearly reflects whether the person is financially stable or not. It is like a number which shows the probability of you paying your bills in the specified period.

Your credit score is calculated by analyzing and interpreting the credit report that is prepared. It follows a simple procedure and determines the likelihood of your credit approval.

The exact formula for the calculation of the credit score, or FICO score as it is popularly called in the United States, is propriety for each of the concerned credit bureaus and is not revealed by them. Despite that, a basic break-up of the score and the factors it is based upon are listed below.

§  The Payment History: 35% of the score is based on your payment history. If you have been regularly paying your bills on time then your credit score will benefit from it and if you delay your payments your score will fall.

§  Debt: 30% of the credit score is calculated by computing the total debt you are under. This will be affected by your outstanding unbilled amounts and your credit card bills. The higher your debt, the lower is your score.

§  Time Factor: The amount of time that your credit history is analyzed for accounts for 15% of your credit score. The accuracy of the calculations is directly affected by the number of observations and the longer you have spent in the credit field, the better your credit score will be.

§  Credit Types: This accounts for 10% of your total score. In the past if you have dealt with different types of credit then your credit score will be affected positively. It shows that you are experienced and will benefit.

§  Inquiries: 10% of the total score is calculated by monitoring your inquiries. This shows that you are searching for new credit and brings down your credit score depending on the number of inquiries made.

The final credit score calculated is a three-digit number and its minimum value is 300 and the maximum is 850.

The three major credit bureaus which exist today are Experian, TransUnion and Equifax. These are the companies which prepare the credit reports that are used by the Fair Isaac Corporation (FICO) to calculate the credit score. All the three companies deal directly with the consumers. They have a good reputation and their reports are considered valid by all the major lenders and evaluators in the United States of America.  Equifax also finds a place in the New York Stock Exchange (NYSE).

A federal judge ordered Wells Fargo to pay back $203 million that it gained through “unfair and deceptive business practices” according to U.S. District Judge William Alsup. They were found guilty of profiteering by processing transactions out of order for bill payments, debit card charges and processing checks. With $35 overdraft fees on each transaction, Wells Fargo would process the largest transactions first, so that they could charge the $35 overdraft fee more often on each of the smaller transactions.

For instance, let’s say you use your debit card to buy a cup of coffee Saturday morning. Then you stop and get a burger. Then you make a few other small transactions. The next day you buy a couch for $900 and it puts you over by a few bucks. Instead of charging you $35 for going over on the couch, they would process the transaction for the couch first, then the smaller transactions so they can charge you $35 for each of the smaller transactions. This policy resulted in millions of dollars of profit for Wells Fargo since they began doing it in 2001, and eventually lead to this class action lawsuit.

The order essentially forces Wells Fargo to reverse those fees from Nov. 15, 2004, to June 30, 2008 that were processed in this manner, but didn’t impose any additional fines for their blatantly illegal actions, and the ruling may actually protect Wells Fargo from future class action lawsuits based on the practice. The ruling is akin to a car thief being told to give the car back without any additional punishment. the fact that this story is being sold to the public as a victory for the consumer is a bit of a stretch.

The case is Gutierrez vs. Wells Fargo and even after the ruling, Wells Fargo is allowed to charge customers up to 4 overdraft fees per day. Getting approved for credit has never been so much fun!

Credit card issuers are being forced to play by a fairer set of rules by the Credit Card Act passed by Congress. Additionally, the financial overhaul bill signed by Obama entitles consumers to more disclosures about the credit approval process, as well as restricting credit card rates and fees. Institutions are finally being forced to be more open and accountable to consumers. But it’s not all good news for consumers.

“Don’t expect these credit card companies to accept smaller profits, just because the government has changed the rules of the game” says J. Vincent Burr, founder of the online newspaper MichiganStandard.com. “The Credit card Act legislation was introduced in 2007, so their lawyers have been working on exploiting loopholes and adding new revenue streams for the last 3 years in anticipation of these laws.”

Some of these new revenue streams include draconian overdraft fees on debit cards. “Do not opt-in to this so-called overdraft protection being offered by banks like Chase. To offset some of the losses by their credit card divisions due to these new rules, they plan to hit people with $35 fees every time you pull more money than is available in your account. This is being sold as a service to customers, but in reality it is akin to financial rape.” says Mr. Burr. “As long as you don’t opt-in, if you try to use your debit card without available funds the transaction simply won’t be processed. However, if you opt-in to the so-called protection, and you go over on something as small as a $2 cup of coffee, that coffee will end up costing you almost $40.”

The Credit Card Accountability Responsibility and Disclosure Act, as it is formally known requires card issuers to give consumers 45 days notice before changing rates or fees. It also requires information to be added to statements indicating how long it would take you to pay down your debt if you’re only making minimum payments, and how much it would cost with interest if you pay only minimum payments. This is good, but will probably not make a huge difference since many people realize how irresponsible it is to carry these debts long terms, but many people delude themselves into thinking that they’re going to get some financial windfall that will allow them to pay it off sooner than they will realistically be able to do. Consumers will also be allowed one free credit score per year, much like the one free credit report now provided.

One of the biggest loopholes closed has been the practice by credit card companies of applying payments to balances with the lowest interest rate first. As often happens with promotional rates and balance transfers, consumers may owe their balance at several different APR’s and these will now be paid down in order of highest interest rate first, which should help considerably. Often times, consumers have a balance at 0% that gets paid down first, while their balance at 24.99% is carried indefinitely racking up the finance charges, so this practice will no longer be allowed.

Another huge loophole closed and one that should have been made illegal years ago, was the process of raising interest rates on past purchases. If you charged $2,000 worth of furniture on a credit card at what you believed to be 9.9%, and you calculated that you could afford the debt at that rate, you would be surprised to find that the credit card company could then raise your rate and charge you 24.99% or higher on that same purchase after you already agreed to buy it at 9.99% interest. This practice is no longer allowed. If you rate is raised, it is only applied to new purchases after the rate goes into effect.

Some of the other  fees you can expect to be increased to offset the losses brought on by these changes include higher annual fees, balance transfer fees and cash advance fees. One thing is for certain, despite the well-meaning intentions behind the new regulations, the banks will not accept making less money and the costs will be passed on to consumers in one way or another.