THE CREDIT LADDER
You should know... There is more to obtaining business credit than just establishing a DUNS number and filling out applications. Business credit needs to be built upon verifiable information, expanded using time-tested strategies, and then nurtured with solid payment habits. There are four type of business credit that range from the most basic to the most complex. Knowing the different levels of credit available to small business owners and knowing when to apply is crucial to your financial success.
Which rung of the business credit ladder is your company on?
Level one is basic trade credit, oftentimes called retail credit, and consists of low-level Net30 accounts. Credit accounts established at this level are generally low dollar amounts and are invoiced on Net30 terms and paid within 30 days. These accounts are usually easy to get as long as the business has established itself properly prior to the application process, but they are a good preliminary indicator to the business credit bureaus of a company's credibility and payment habits. Retail trade lines are typically offered by companies who will sell you the generic products needed by your small business. Very rarely do they ask for a personal guarantee, and they usually do not pull a business credit report on your company. They will, however, report to the business credit bureaus to build a stronger profile.
Most small businesses will establish accounts with these types of companies during their early stages, as a part of their normal day-to-day operations, and then "accidentally" find them reporting onto their credit reports later. Remember, a payment paid just a few days past due to these initial retail accounts is almost impossible to get removed from your business credit profile, so it is imperative that they are always paid promptly. An essential part of our service is to offer "payment reminders" for the small business owner who has more important things to think about right now.
The second level, vendor credit, is very similar to level one but generally involves higher credit amounts and will likely require a credit check on your company. These Net30 accounts are offered business-to-business and are broken down into two categories: preliminary and advanced. Preliminary credit usually involves larger Fortune500 companies who offer revolving store credit cards and typically will require a review of the business credit profile for a history of solid payments, good scoring models, and an established D&B rating. Advanced credit involves companies who will offer contractual credit lines for operational needs, such as equipment financing or the materials needed in day-to-day production.
Credit accounts established on the third level, business financing, have already passed the general muster. Unsecured business lines of credit and major corporate credit cards fall under this category and will require a higher level of creditworthiness that has been pre-established well before the application process. Banks are the primary lender at this level and will require not only a business credit check but possibly a personal credit check, as well. Don’t be confused -- that does not mean that all credit established will need to be personally guaranteed, especially if these are real estate loans with documentation or small- to moderate-sized loans that will further prove a company's viability. Larger loans and credit lines may require business owners to provide a well-written business plan, corporate financial statements and possibly a personal guarantee.
Private investors, venture capitalists and other investors are the backbone of the fourth and highest level of business credit and financing. This level of credit is generally reserved for larger companies that are well-established and can provide investors with detailed financial statements and projected growth strategies for the years to come. By this time, the business has strong legs underneath it and can stand on its own merit without requiring a personal guarantor, but usually requires there be several upper level managers to oversee business operations and development.
At Starpoint Credit Solutions, our goal is to get the small business owner on a solid path to success, no matter which rung of the ladder you are on. Whether you are just starting to build your credit file from scratch or are already making your way to the top, you need to know where you stand and be prepared for the challenges in your path. Let us put our knowledge to work for you and your business, and get your business the credit it deserves.
A word about Personal Guarantees...
A personal guarantee is a promise made by the business owner or an officer of the corporation to be personally responsible for a loan or business debt in the event of default by the corporation. Personal guarantees allow creditors to protect themselves when lending to small businesses or establishing lines of credit. If a business defaults, the owner or officer is personally liable for the debt and, if need be, the lender can then seize their personal assets. Businesses which have established credit in each of the first three levels and have maintained an excellent Paydex score can usually avoid a personal guarantee.
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