Business Credit Article # 4

Business Credit: Myths, Must-Do's and the Four C's.

If you are a business owner with poor personal credit, you may be thinking that corporate credit is simply unavailable to you. This is not true! In fact, the process of establishing good business credit may even help you improve your personal credit because you will have a better understanding of how credit lending works.

In the credit world, there is what's known as the "Four C's" of Credit-four things banks look at to determine your creditworthiness. These "Four C's" apply to individuals and to businesses, and they are:
o Character
o Capacity
o Capital
o Conditions

When a bank judges your business's character, it is looking at your size, location, years in business, number of employees, stock performance and several other defining characteristics. This is why it is very important that as a business you have a physical address, a business phone, answered professionally during business hours, and a business license (if your state requires one).

Your business's capacity assesses the ability of your business to pay its bills. A bank considers capacity by also examining past credit histories, cash flows and types of previous debt-secured or unsecured. Therefore it is vital that as a business owner you have been paying all your credit bills on time. A late payment on a credit bill is a mark against your business that is not easily removed.

Another important component of your business's capacity is an obvious one-make sure you are building a credit history on your lines of credit. If you have lines of trade credit, which you have been using for supplies, check to see if those vendors have been reporting your good payment history. You will need at least 5 trade references to obtain a business paydex score, which is similar to your personal FICO score. Better paydex scores bring your business better loan rates.

The capital of your business is considered to assess whether the business has the financial resources to repay creditors. This particular component of the "Four C's" is usually the most closely inspected by lenders when considering a loan request. It is also a convincing argument against using your personal credit to fund your business expenses. The basis of your capital is reflected in your debt-to-income ratio, and if the majority of your credit is personal, you are making it very difficult for your business to be judged on its own merits.

That last of the "Four C's" is "conditions." Conditions are the external factors surrounding the business in question. A bank may consider general market fluctuations, growth rate of the industry and currency rates when considering extending a line of credit to a business. Because these factors are outside the scope of your business, it gives good cause to start now on securing lines of cash credit because it may be even harder to get the money you need in the future. Furthermore, if times do get hard for your business due to market fluctuations, you will be very glad you already have some cash reserves in place to float through the tough times.