Michael Gerber, author of the book The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It, called the desire to start and own your own business an “entrepreneurial seizure.” Having experienced this more than once myself, I lovingly call it the same thing. Who in their right mind would choose to throw caution to the wind, risk personal assets and reputation, and be willing to work incredibly long hours for less than they could make working for someone else facing the realities that only 50 percent of the businesses that start today will still be in business 10 years from now?
With close to 30 million small businesses in the United States, there are obviously quite a few.
When I started my first business, I don’t think I realized how much time I would have to spend “in the books.” At the time, I could walk into the bank and get a couple thousand dollars on my signature. My banker knew me, he knew I was good for the money, and I don’t think he gave it a second thought. At the time I wasn’t looking for tens of thousands of dollars, but I would occasionally need a few thousand dollars to get over a cashflow hump or purchase something I didn’t have the cashflow to buy.
Those days are gone.
Any small business owner who has been in the bank looking for a loan knows, the first thing they ask about is your credit rating. And, if you don’t have 700 or better, you’ll often end up leaving the bank without the loan you’re looking for. In fact, you might be interested to know that as few as 10 percent of the small business owners who go into the bank looking for a loan are able to leave the bank with the money their seeking.
Although Credit Score is #2 of the Five “C”s of Small Business Lending:
- Credit Score
I think it should probably be #1.
It doesn’t matter if you’re talking to a banker or an alternative lender, it’s the first place they look to get their first impression of you as a borrower. Some lenders are willing to accept a lower credit score than others, but they universally agree it’s a pretty good measure of your willingness and commitment to meet your financial obligations.
For most of the small business owners who come to Lendio looking for a small business loan, their personal credit score is every bit as important as their business credit score. For idea- or early-stage businesses it’s critical because the owners likely haven’t established a business credit score yet. If you’ve ever been asked to sign a personal guarantee on a line of credit or other business loan, you are probably in this category yourself.
Not too long ago I was talking to Tom Gazaway, a good friend and colleague at Hawkeye Management, who suggested that your credit score was an asset not unlike the cash you have in the bank, the equipment or supplies you use to do business, or your personal investment account. I had never articulated it that way, but doing so offers some perspective regarding how a small business owner should manage his or her credit. You wouldn’t intentionally mistreat an expensive piece of equipment or leave a company vehicle parked in front of your place of business with the engine running and the keys in the ignition after everyone had left for the night—how you manage one of your most important assets, your credit score, needs to be treated the same way. With that perspective in mind, here are some suggestions that might make that asset more valuable:
- Use credit to help your business grow: Small business often needs borrowed capital to grow and thrive. With that in mind, don’t waste your credit score borrowing money for anything that doesn’t help do that. Growing up in a small business family and working in the warehouse as a teenager, I remember our first forklift. My Dad wanted a forklift for many years before we finally purchased a second-hand forklift. Yes, it would have made life in the warehouse more convenient in those early days, but there were other purchases more important to help our business thrive and grow. When we had something heavy that needed to ship, which we often did, we requested the freight company send their truck that had a lift gate. If borrowing money wasn’t going to directly impact the bottom line and help us grow, my Dad would wait. I think that’s good advice.
- Don’t put off till tomorrow what should be done today: I know what it’s like to feel like I needed to rob Peter to pay Paul. The last few years have been tough for small business owners who watched credit tighten during the Great Recession. Getting behind on payables or other obligations sometimes isn’t a choice. Fortunately, most lenders I speak with understand what business owners have had to do over the last few years and will make allowances for business owners who have been through tough times but are now current with their financial obligations and have demonstrated that for a year or two. If you’re credit has taken a beating over the last four or five years but your current financial condition is sound and you’re meeting your current financial obligations, there are lenders who will work with you.
- There’s no such thing as the “Good Credit Fairy”: If you’ve got a credit score in the low 600’s or 500’s, ignoring it won’t make it go away. And, even if you take steps to fix your credit, it won’t magically jump to 700+ because the Good Credit Fairy waves her magic wand. Depending upon how bad it is, you might want to seek the help of a credit repair specialist, but it still might take 18 months or more before you will see the fruit of your labors. If it’s not too bad, you can do a lot by catching up on old debts, but it will still take time. There are a couple of companies that specialize in credit repair in our Small Business Resource Center.
Bad credit can be painful, but it’s not the end of the world. There are lenders that will work with you even if you have a credit score of 500 or so. Yes, you will pay a higher interest rate than someone with a credit score of 700, but that shouldn’t be a surprise. Sometimes you need to pay the piper. Nevertheless, if you can make sure you wisely pay off the higher interest loans you have to use today, you’ll build a better credit rating and likely be able to find less expensive capital in the future.
Whenever I would ask my Dad why we didn’t buy a new forklift or delivery truck he would say, “Good things come to those who wait.” He was a “slow and steady win the race” sort of guy. I think there are many small business owners who could learn a thing or two from that perspective.
Click HERE to learn about what you can do if the bank says “NO” to your request for a loan.
Click HERE to learn about what you can do to prepare for your first meeting with a lender.
Click HERE to learn about financing an idea-stage small business.