Things go a lot easier when potential lenders, suppliers and partners can decide to take a risk based on a garden pond operation’s credit history and capability of repaying obligations. With strong business credit, a business can borrow at a lower cost, with more favorable terms. In fact, many small garden pond retailers, distributors, builders and manufacturers with good business credit, have discovered it is possible to get loans without an onerous and often-embarrassing personal guarantee.
Obviously, business credit is quite difficult to get. For any small business owner navigating the credit and lending world can feel like a vicious Catch-22. Most commercial banks and traditional lenders are reluctant to loosen their purse strings until a would-be borrower has proven themselves with a strong credit history. But it’s difficult to develop that good record when no one will lend in the first place.
In the Beginning
When a business issues another business credit, it’s referred to as “trade” credit. Trade, or business, credit is the single largest source of lending in the world.
Information about trade credit transactions is gathered by the credit bureaus to create a business credit report using the business name, address and federal tax identification number (FIN), also known as an employer identification number (EIN). The business credit bureaus use this compiled data to generate a report about a company’s business credit transactions. In many cases, those extending credit will rely on that business credit report to determine if they want to extend credit – and how much credit they’ll give.
The major business credit bureaus that compile and provide copies of the reports are:
• Dun & Bradstreet (www.dnb.com)
• Experian Business (www.experian.com)
• Equifax Business (www.equifax.com)
Unfortunately, because information provided to the business credit bureaus is sent in voluntarily – no business is required to send it in – the credit bureaus may never receive much, or even any, information about a garden pond business’s credit transactions. In fact, many businesses go for years racking up business credit without any of it being reported to the credit bureaus.
Establishing Business Credit Basics
The following are among the proven strategies for establishing business credit and gaining recognition from the credit reporting agencies:
1. If not already incorporated, forming a corporation or LLC (Limited Liability Company) to operate the garden pond operation or business, and obtaining an FIN or EIN from the IRS should be considered. Corporations and LLCs afford business owners liability protection, and a business credit profile can be created that is separate from the owner’s personal debts.
2. Every garden pond business should be registered with some, if not all, of the business credit bureaus. DUN & BRADSTREET (D&B), for example, is one of the main business credit bureaus and runs its own business credit score. An established business with an EIN can begin the process by applying for a free DUNS number. The number is how lenders will determine the operation’s credit worthiness (most business credit card and lending companies will ask for a D&B number during the application process).
3. Apply for a business credit card. Although most major credit card companies require that cardholders be in business for two years before extending credit, there are many small, local banks that are more accommodating to small businesses. They may be even more accommodating if an owner or manager is savvy enough to set up a business bank account with them!
Even though the business may not actually require more credit cards to finance its operations, it should still apply for more business credit cards. In business, the 5-3-2 rule is key – a business’s credit record is not considered established and solid until it has at least five trade accounts, at least three credit cards, and at least two small loans fully paid off.
4. Comply with all business requirements. Not being in compliance with local, state and federal rules, ordinances, regulations and laws can raise red flags with both credit bureaus and grantors. Potential red flags include such things as a lack of a business license or a phone line. Many suppliers will not grant credit to another business that hasn’t taken the steps to set the operation up with the proper licenses or meet local, state and federal requirements.
5. Financial statements and a professional business plan are a necessity particularly in today’s economy. These documents are also required by many credit grantors.
6. Finding companies willing to grant credit to the garden pond business without a personal credit check or guarantee is also a good strategy. When a supplier grants a business credit, it is important to ensure they report the payment experiences to the business credit bureau. This step can help build a business credit report as well as provide a financial foundation for the operation.
7. Managing debt so the garden pond operation or business, large or small, won’t experience trouble making payments, which will negatively affect its credit score.
8. Monthly payments to credit grantors will keep a business credit profile active.
9. Get a Website – Having a Webpage may not seem like a must in building or maintaining business credit, but D&B now shows and lists Websites on credit files. Many banks also use the fact the operation has a Website as a positive factor in determining the credit worthiness of a borrower.
Suppliers often allow their customers a grace period before requiring payment for the goods or services they provide. This is called vendor or trade credit and it permits every garden pond retailer, installer, distributor and manufacturer to generate at least some revenue from the sale of goods before they have to pay for those goods. Even better, vendor or trade credit is often easier to obtain than bank credit because it doesn’t require collateral. Unfortunately, trade credit can be quite expensive.
Terms of 2% 10-days, net 30-days (2% discount if paid within 10 days, the net (full) amount due in 30-days) translates into a 36% or 37% annual interest rate if the cash discount is foregone. While trade credit may be appealing to garden pond professionals looking to save money, beware when opting to take these discounts.
Building More Credit
It is important to remember that business credit cannot be built overnight. Everyone should think about the business credit of their garden pond construction operation from day one. Having access to credit can help any business adapt to changing conditions and position itself for success. But what steps can a garden pond professional take to improve the credit worthiness of his or her business?
1. Always pay on time. The operation’s ability to repay loans promptly has the greatest impact on its credit score. On-time payments are the most direct way to improve a credit rating.
2. Ensure creditors regularly report the operation’s payment history to the credit bureaus. If timely payments to suppliers and lenders are not included in its profile, the business may not get the credit it deserves for paying bills on time. It goes without saying that the credit profile should be monitored at least twice per year to ensure that all vendor payment relationships are included.
3. Maintain good personal credit. After all, well-managed personal finances can indirectly impact the business’s credit worthiness. Bottom-line however, personal and business credit ratings are separate and do not directly affect one another.
4. Contribute to the business’s credit profile. The more information provided to credit bureaus, the more robust its credit profile will be. In addition, wherever possible, suppliers and vendors should be chosen that report their experiences to credit bureaus, which will also help boost the operation’s profile.
As already mentioned, the best place to start building or rebuilding business credit is with suppliers. Many types of suppliers, including major brands, extend lines of credit to businesses giving them the opportunity to finance purchases and conserve their cash.
In addition to goods and merchandise for resale, a garden pond business can obtain products such as office supplies, computers, and marketing materials with payment terms ranging from net 30 to net 60 days. Of course, the focus should remain with applying for credit with suppliers that provide products and/or services needed on a regular basis, in order to make regular purchases using the operation’s credit line. By paying invoices on time every garden pond business can build a business credit history and increase the operation’s credit worthiness.
With a strong business credit report a garden pond professional can stop relying on personal credit to qualify for needed financing. Because a creditor, lender or supplier can now easily determine the operation’s risk level with a business credit check, qualifying will be a much easier process.
Building business credit can also improve the garden pond business’s image, protect the owner’s personal credit, limit liability, and increase credit capacity since businesses can obtain 10 to 100 times greater financing than an individual. But the time to think about credit for your business is now – hopefully before it is really needed.