Business Credit Secrets Rev Revealed ealed Table Of Contents - The Steps of Business Credit 1) Know the Don’ts Before You Start—Or Else! 2) Choose your Business Entity 3) Get a Duns Number 4) Get a Paydex (and 2 other Scores) 5) Apply for Unsecured Business Credit
Step #1 - Know the Don’ts Don’ts Before you Start You must know the Don’ts and the Dos in Business Credit before you start. Here are the “Dos”: How Do You Get Premium Business Credit?-A One-Two Combination: • •
Dun and Bradstreet Paydex Score
Filing your Profile with Dun and Bradstreet With 70 percent of the the market share for business credit reporting, Dun & Bradstreet is the titan titan of business credit profiles. The most important thing you can do is start your Dun & Bradstreet profile and get your Duns number to start applying for credit. Be forewarned: There are certain certai n “Don’ts” you need to know know before you start a Duns profile for your business. With Business Credit what you don’t know can hurt you ! Many businesses get a Dun and Bradstreet business credit ratingbefore they've taken other necessary steps, and unwittingly damn themselves to a poor or “red flag” status, effectively dooming them for good business credit before they start. What exactly do need to know to establish a positive Dun & Bradstreet profile for maximum business credit? What are the “don’ts”? Basically, you must follow these “rules” and set up properly before you call Dun & Bradstreet to set up a profile. Here are the things you must have to open the way to top business credit ratings: •
You must have a tax ID number (getting a tax ID number is discussed in the next section “Getting a Tax ID Number)
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You must have a phone number listed in the business directory of your local phone company and more importantly, it must be locatable by the operator. To get top business credit rating, you must have 10 employees or more. You must say have been in business for 2-3 years or more, although being incorporated recently is ok. Optionally, to get the highest business credit rating you want to have more than 1 branch location that is listed with the local phone operator. You must have live operators or “employees” answering the phone at your business at all times. You must file your articles of incorporation, officer’s list, and other corporate paperwork such as financial statements with your incorporating state. You must file financial statements with Dun & Bradstreet as well, saying that you make 3 hundred thousand or more year. You must be current on all your state corporate filing fees, as well as your state and federal taxes. If the Dun & Bradstreet field officer in your location stops by, you must have a real brick and mortar location for your business and look like you’re legitimately doing business there. Is not acceptable to have a P.O. Box address. You must have a business license with your local city, state, or county if it is required in your locale, and Optionally, is a good idea to have a web site that shows in the search results of the major search engines.
Step #2 - Choose Your Business Entity You may have heard that creating a corporation or LLC will limit your liability and show a certain amount of stability to business creditors. Here are some options for choosing your business entity:
Sole Proprietorship The simplest form of business in which a sole owner and his business are not legally distinct entities; the owner is personally liable for business debts.
General Partnership A partnership in which there are no limited partners, and each partner has managerial power and untitled liability for partnership debts.
Limited Partnership The limited partnership has limited and general partners. The general partners manage the business and are individually liable for the debts of the partnership. The limited partners are limited in the amount they can lose, by the amount of money they invested in the partnership.
S-Corporation A corporation that is eligible, and does elect to be taxed under the Subchapter S of the Internal Revenue Code. Basically, shareholders pay tax on the corporation's income by reporting their pro rate shares of passthrough items on their own individual income tax returns.
C Corporation A corporation that is an organization authorized by state law, to act as a legal entity distinct from its owners. A corporation has it's own name, and has it's own powers to achieve legal purposes, and therefore, is a separate legal entity.
Limited Liability Company (LLC) The LLC is a hybrid between a corporation and a limited partnership. LLC's provide protection from
personal liability, just as corporations do, and yet LLC's receive the tax treatment of limited partnerhsips, or a C corporation, whichever the members of the LLC desire
Some Notes on Choosing an Entity a) The Offshore Corporation – there are lawyers that specialize in just this type of entity, claiming that you can achieve maximum freedom from state tax and maximum protection from lawsuits by filing offshore. There might be some extra expenses in setting up this way, and remember that your creditors will often times be local, so there’s a disadvantage in having your corporation set up in another country. Make sure you find a lawyer that specializes in these and is passionate about them, since they are a specialty unto themselves. Also don’t be scared off by lawyers that are “bigots” and just favor one entity that like to make money with, like the LLC. Offshore definitely has its uses, especially if you are a business of some scale that can afford the fees for upkeep. b) The Nevada Corporation – Class C or Class S – Nevada is unique in that it does not have state tax, and also it enjoys special protection from liability because it does not require officers to appear on the officer’s list, they can choose “nominees”, virtually staying anonymous. Also, Nevada has a law that defines ownership as possession, so in other words you could pass your stock like a “football” to a relative to avoid being identified as an officer or owner in the Corporation. With the foreign Corporation act that passed in the late ‘90s, the states want you to register as a “foreign corporation” if you’re not actually doing business in Nevada. You can choose Class C so that you print stock (the stock you can pass like a football if you are in trouble) or Class S corporation. The class S corporations is for small businesses, like a one woman/man shop. However, the class S doesn’t have the double taxation, taxing the corporation and the stockholders both. I personally favor the Class C Nevada Corporation, I think Class C looks better for business credit. You need a lot of employees to get the highest business credit scores, and the Class S gives the appearance of a smaller business. I will explain more about business credit scores later. c) The In State Corporation. This is where you incorporate in the state you are in. You have to pay state tax, but you’re usually minimizing your profits on your tax statements anyway. For Business Credit, it is more important to not be “red flagged” by Dun and Bradstreet as a sham business as in having a fake storefront or P.O. Box in Nevada, so it is much better to have a corporation in your home state for business credit. Banks you will be applying to for credit lines and credit cards will much prefer this ultimately, rather than saying you have a Nevada corporation with a home branch in Nevada. d) The LLC. This is the most popular entity these days because it is cheap to set up usually only four hundred dollars or so. And also the LLC prevents creditors from coming after your personal assets so the liability is “limited” to your business assets. e) Sole Proprietorship. Anyone can do business in their own name as long as they pay their taxes and get a business license in their local city or county, so for instance if you are Sally Aimes, you can do business as Sally Aimes. The question is why would you want to do business under a sole proprietorship? Then surely you would be applying for credit and using your own Social Security number and therefore your business loans would be basically personal loans. I would like you to get an ideal entity for business credit, such as a Corporation where you could buy multi-million dollar real estate projects or other businesses in the future with business credit, so this means you would probably want to choose an entity that reflects these large ambitions—some kind of corporation.
The Advantages and Disadvantages of Various Entities Advantages of an LLC Relative to a "C" Corporation Tax Consequences to Owners. The primary advantage of the LLC over the "C" Corporation is in the tax consequences to owners. As a pass-through entity, the LLC's income and losses flow through and are taxed to or deducted by the members, normally retaining the character they had in the LLC. Thus, there is a single level of tax, and losses are fully deductible by members (but are subject to passive activity rules and the deduction may not be in excess of their bases in their membership interests). The income of a C corporation is taxable, both by the federal government and your state, at the corporate tax rate. Thus the corporation and its shareholders may be subject to "double taxation", when dividends are paid to shareholders because the corporation pays tax on its income and the shareholders pay tax on dividends received from the corporation, and the corporation is not allowed to deduct dividends as an expense. Structure of the Owners Participation. The owners of the LLC have greater latitude and flexibility in providing for the return of an owner's investment. There is also more liberty in structuring the owners participation in the enterprise.
Disadvantages of an LLC Relative to "C" Corporation. Retention of Earnings. A venture that intends to retain substantial earnings may find the corporate structure beneficial. It is likely that the marginal corporate tax rate on the retained earnings (only 15% up to 50K) will be lower than the marginal rates applicable to individuals. One needs to carefully study the venture's projections and calculate the estimated after-tax financial performance of the venture before making a decision. Fringe Benefits. An LLC taxed as a partnership cannot provide many of the fringe benefits that a "C" Corporation can. Members are not "employees" for purposes of the fringe benefit rules. See, e.g., IRC 5105(9) relating to accident and health care plans and IRC #79 relating to group term life insurance. If the LLC provides members with fringe benefits, the cost must be included in the member's gross income. In some states, "C"s can maintain more favorable asset-protected retirement plans.
Advantages of LLC Relative to "S" Corporation Restrictions on Ownership. An "S" Corporation offers the advantage of limited liability for owners, and some of the advantages of being taxed as a partnership. It does not pay tax on its earnings, and its profits and losses are passed through and taxed directly to its shareholders. However, there are a number of restrictions on the ownership of and the operation of an "S" corporation that do not apply to an LLC. The "S" corporation can have only one class of stock. Its stockholders can be only natural persons, and those persons must be U.S. citizens or resident aliens. An "S" corporation may have no more than 75 shareholders. Special Allocations . Further, an "S" Corporation may not specially allocate tax attributes to its shareholders. Those attributes pass through pro rata. This fact restricts the type of debt the corporation may issue, hampers efforts to gradually shift control of family-owned businesses, and in general makes passive investments difficult to structure. Deductibility of Losses. An "S" corporation differs in the ability to obtain tax basis from its share of the entity's liability, which determines the extent of losses that may be deducted by the owners, and their ability to receive operating distributions tax free. An "S" corporation shareholder does not share in the entity
liabilities and its basis is limited to the cash invested. Both an LLC member and a limited partner increase their basis by the allocable share of entity liabilities. Moreover, distributions of appreciated property trigger a gain to the "S" corporation that passes through to the shareholders. Also, there is a second entity level tax on built-in gain, if the "S" corporation was formerly a "C".
Disadvantages of LLC Relative to "S" Corporation The LLC offers the limited liability of the "S" corporation and pass-through taxation with none of the "S" corporation restrictions on ownership and operations. Therefore, we really cannot see a great deal of general disadvantage. However, there may be some disadvantages in a special case. In addition to any disadvantages of LLCs compared to other entities, one should keep in mind the following general drawbacks to the use of LLCs: The legal ramifications of forming and operating an LLC, e.g., tax classification is more uncertain because of the lack of guidance from established case law and regulations. This may be more theoretical than real. Other states may not recognize all of the rights and privileges afforded to an LLC in your home state. If the LLC has one or more members who are non-residents of the LLC state, it must file a list of members and consents with its annual state tax return. As to any nonresident member who fails to consent to your state tax jurisdiction, the LLC must pay the tax attributable to the non-consenting member's distributive share of LLC income. The members of an LLC may have implied authority to act on behalf of the LLC and bind the LLC, e.g. signing of deed of trust (mortgage). As a general rule, the LLC will probably serve well in those circumstances where the limited partnership and "S" corporation were formerly used. The LLC may even be used in those circumstances where the "C" corporation was used. However, the "C" corporation does have its advantages, particularly with respect to the availability of nontaxable fringe benefits and asset protected retirement plans. Therefore, we recommend you continue to use the "C" corporation in those circumstances where a "C" corporation was formerly used. Use an LLC in those situations were a limited partnership (including an FLP, unless a specific estate and gift tax result is desired) or "S" corporation was formerly used.
Getting a Tax ID Number To get your Tax ID Number, also called an EIN or Employer Identification Number, you can apply online with the IRS at: https://sa1.www4.irs.gov/sa_vign/newFormSS4.do
You can have (and need) a Tax ID Number for business credit, even if you don’t have employees. You have to tie the Tax ID number with the Social Security number, so that IRS can identify an individual that belongs to that corporation. It can be any officer in your corporation (not only the chief owner or stockholder), but you do have to give a SS#, and if you are a one woman or one man show it probably has to be yours. Does this affect your privacy? Not really. The IRS does not divulge this information. Business owners are concerned not only with building their business credit, but asset protection and secrecy usually as a secondary concern. For instance, in Nevada you can hide as the owner of a corporation because you can get officers of the Corporation other than yourself and even choose “nominees”, professionals for hire that will put their names on your officers list from the state so that your identity would be hidden if anyone tried to sue you. Another asset protection strategy is to have two corporations where one is the “holding company” for a corporation that owns another corporation. You do all your business activity in the subordinate corporation, and if one day someone sues you you have your parent corporation or “holding company”
place a lien or UCC-1 form on your corporation being sued. That way the financial assets of your corporation are already spoken for because they are attached by your other corporation. Some corporate officers like this method of asset protection and privacy. However, the goal of privacy is the opposite of the goal of business credit. This is because when you are starting to build business credit you want the opposite of privacy. You want Dun & Bradstreet to come and visit your call you and check your address and phone, you want your bank to be able to reach you and verify that your business lives where you say it does, and you want to both of them to be able to verify with your incorporating state that you exist as a Corporation, (or in the case of a sole proprietorship) that you exist as a business license to the city). However, think of it this way: if you want business credit and are applying for for the first time, think of a way that you can be public. Is very important to get a phone listing with “411” for your business. If you have an 800 number, get this listed with the operator. Get the phone listing the most “legitimate” style possible. If you’re very small business and always answer your own phone, you might spring about 25 dollars a month for 24-hour answering service that answers live, rather than a cheesy answering machine. If you’re just starting a new corporation or LLC, and you need a tax ID number to start your business credit file, then go ahead and use your Social Security number. The reason is that although you may want nominees to hide who you are once asset protection is the goal, when you are first building business credit you want to be public. Your name needs to be on the officers list of the corporation. Does this mean that others can find you? Actually, if collectors or litigants mean to get a hold of you and cause you ill will then they will not be able to do it because the IRS does not release this information, namely whose Social Security number is associated with your corporation. Also, any officer can put their Social Security number on the Corporation and does not need to be the one that owns stock in the Corporation. If you’re just starting out, and there are no other officers of the Corporation (in other words your one-man show or one-women show), and if you don’t plan on getting sued in the near future then go-ahead and associate your Social Security with the tax id number. You can do it on the Internet at this link: Can you put your 1 year old niece on the Officer’s List of your corporation? No, the officers of your corporation have to be 18 years or older. Remember that the LLC holds the advantage that if someone wants to sue you personally and you have a corporate account, the prosecution can’t touch it. to belongs to the Corporation which is a completely different entity. If you have someone that is trying to sue you as an LLC or corporation, you can use your asset protection corporation to placed a lien on your corporation and therefore render it to useless to attach. It’s already been attached.
Step #3 – Get a Dun and Bradstreet Business Profile and a “DUNS Number” If you’re going to play with the “big boys” and “big girls”, and you want to get the largest low interest rate commercial loans for your business, then you are going to have to have a good rating with Dun and Bradstreet. Dun and Bradstreet and Experian Business are the two main companies that track business credit. There are others, but they’re not as large or important. Experian is also not at all as large as Dun and Bradstreet. Dun and Bradstreet is 70 % of the market share for business credit reporting and Experian is just about all the rest.
Dun and Bradstreet is the important institution in tracking businesses, and you’re DUNS report will make you or break you in business credit. You want to get a Duns Number and Business Profile by contacting Dun and Bradstreet on the phone or by email, but you want to be very very careful (!) to make sure you are ready to talk to Dun & Bradstreet. We will tell you below what to do to get ready. The reason is that when they ask you what kind of business you are, how many employees, etc., you want to think over very carefully what you want your business image to be, because once you give them information, it is very difficult to remove it. So, for instance, if you tell them that you are a home-based business and you only have one employee, you are basically takingthe risk of ruining your chances for having the highest type of business credit score, the one reserved for companies with 50 employees are more. Also, what you tell Dun and Bradstreet is put on the report and is permanent, so when you go to a bank to apply for a working capital loan or credit line, they may not like what is on there, for instance that you’re "only" a home-based business with just one employee. Here is an example of what you want to tell Dun & Bradstreet in order to be eligible for the highest credit score (Paydex score of 75 or over. Will be explained in the next section get a Paydex score): • • •
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Been in business 5 years. Gross more than a million in sales a year. 50 employees. (Some people go with 5 employees, but no less than 25 is necessary for a top credit score, i.e. 75 Paydex score) Business based in the same state as the officer (you) Address and phone that is listed under your business name, phone that answers with your business name. A location that looks like an office, just in case a Dun & Bradstreet field officer shows up. More than one branch office, a headquarters office that you can be visited in, and a satellite office in another city. (Companies with more than one branch appear larger and more stable to Dun and Bradstreet).
Warning: If you’re not ready to tell Dun & Bradstreet these things then do not call them yet! Dun & Bradstreet will call to verify not only that your phone answers with your business name, but that you are listed, and they will even go so far as to call the Secretary of State to see if you are really incorporated and if you have paid your corporate dues with the State. If you’re located in a different state than your Nevada corporation like I am, they will call your state to ask if you’re registered as a foreign corporation in that state! Dun & Bradstreet will go through great lengths to protect their reputation by making sure you’re honest in your business pursuits and that you really do exist. As far as your financial statements, they rely on what you tell them for the most part, and you can say that you have 5 or 50 employees.
Step #4 Get A High PAYDEX Score Part 1 of 3 – Know your Business Credit Scores There are three business credit reporting agencies in the United States that lenders and financial institutions rely on for information to grant credit, those being D&B, Experian, and ClientChecker. Dun and Bradstreet or D&B
Over 70 million businesses are registered with D&B
The credit profile created by D&B uses information provided by the business owners and vendors of the business Grants a PAYDEX score to businesses based on payment experiences of the business Issues a DUNS Rating based on the financial statements of the business Has a High Risk status for company's that will destroy a company's ability to obtain credit Experian Business
Over 14 million businesses are registered with Experian The credit profile created by Experian uses information provided by vendors only Grants an Intelliscore based on payment experiences Is one of the three largest personal credit bureaus ClientChecker
The only credit reporting agency dedicated to small businesses The credit profile created by ClientChecker uses information provided by vendors only Grants a PayQuo Score based on payment experiences
Here are the three Business Credit Scores The business credit scores with D&B and Experian are what the lenders and financial institutions look for to determine credit. PAYDEX Score
Score ranges from 0 to 100 A score of 75+ is good Based on payment experiences reported by vendors Need 5 trade references who report to D&B Intelliscore
Score ranges from 0 to 100 A score of 75+ is good Based on payment experiences reported by vendors
Need 2 trade references who report to Experian DUNS Rating
Various rating schedules Based on employee size and financial statements Also takes into account payment history PayQuo Score
Score ranges from 20 to 90 A score of 80+ is good Based on payment experiences reported by vendors Need 3 trade references who report to ClientChecker
Part 2 of 3 – Raise your Business Credit Scores Your Duns Number and Business Profile by itself doesn’t mean anything much to a real serious creditor like American Express card or a bank that gives SBA loans—you really need what’s called a PAYDEX score. A score of 75 or better is ideal, and is equivalent somewhat to the consumer credit score of 75. To get a high PAYDEX score, you must: • • •
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Find 5 vendors to give you business credit (we list 20 below) Pay 15 days before your invoice says your payment is due After 6 months, apply for a credit card or credit with the larger vendors like American Express or Wells Fargo (more listed below) that normally won’t touch you without a PAYDEX score. Pay this card before the due date. Ask a commercial lender (it might be your present bank) for a working capital loan, or equipment lease, even it is secured by equipment, inventory or some business assets. Pay this loan before the due date.
Challenges to establishing business credit for a Paydex score are the following: •
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Just like consumer credit history, people will report the bad but not the good. A telephone bill that went to collection will easily look like a “bad debt” on your Dun & Bradstreet report, and will be very difficult to remove. Unlike Consumer Credit, there is no Fair Credit Reporting Act that protects businesses. Therefore you’re only recourse if something is inaccurate is to beg, plead and cajole Dun & Bradstreet to take it off, and show proof of payment and / or a deletion letter from your creditor.
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Finding a vendor that reports to Dun and Bradstreet is challenging because you have to know who they are! We will fix that.
Use a Secured Visa Business Credit Card that Reports to D&B and Experian We have a vendor that will do this for you: it is a Prepaid Secured Visa account. To get this card, it is merely $100, and no one is turned away! You have to be referred by us, so all you have to do is click here to request an application to your email address of choice. Get your Business Credit Card today! mailto:
[email protected] Allow 24 or 48 hours for a reply. You will get a link to our online application for a Secured Visa Business Credit Card. How much identification do you need to apply for the prepaid business credit card? The only identification you need is the Tax ID and the date of birth. Because of the Patriot Act they now require your date of birth on these types of applications. However that is very little information to provide to start getting positive business credit reported to your credit report! After you develop a good credit history with this vendor (pay 15 days early on your invoice), then:
Step #4 Get A High PAYDEX Score Part 3 of 3 - Apply for Secured Loans or Equipment Leases How about that nice Porsche? Actually, of late the IRS frowns on the lease of overly fancy automobiles, but you can lease an automobile, tractor or some other piece of equipment once you have 3 trade references, and get your vendor to report your on time payments to Dun and Bradstreet.
How to Qualify for Auto or Equipment Leasing Most businesses have been through the ringer with leasing companies because they are promised the world by other leasing companies only later to be told they couldn’t be approved, many times without an explanation as well. It is usually much easier to obtain funding from a leasing company than a bank. Most leasing companies do not rely upon the same information as banks when a credit decision is made. Leases involving stronger credits and equipment with low depreciation rates will always be easier to approve. Lessors will generally look at 4 things when analyzing a company’s credit: 1) Three Trade References - These are suppliers and vendors of yours that have given your company 15 or 30 days to pay them and have always been paid on time or even 15 days early. If a trade reference comes back with net 30 terms and an average pay history of 35 days, then that trade reference is useless and we must get another one. 2) Average Bank Account Balance . This is important because it tells us if the company can afford an additional monthly payment as well as the usual stressors put on their cash flow. Upon request, your bank
will fax us a sheet that gives us the average balance of your account in the last 6 months. It will also tell us if there have been any NSF checks written from that account. Unfortunately, however, some banks have ceased to co-operate with outside creditors. Many times it may be necessary for the lessee to fax us the last 6 months bank statements, so we can calculate our own average balance. 3) Personal Credit of the Officer or Majority Owner of the Company . It may not be necessary to use this information in certain circumstances but in most cases we must view it. The logic behind pulling the credit is that if the officer or owner of the company pays their bills on time than they will pay their company’s bills on time. Even if there won’t be any guarantees on the lease, sometimes it helps to view the credit in order to strength the lease’s overall credit rating. 4) Dun & Bradstreet Report on your Company . The report will tell us if there are any outstanding liens or judgments in the company’s name. In some cases it will give us financial information on the company which may or may not be useful. Most importantly it will give us a Paydex score. The Paydex score is an overall credit score of your company which reflects the timeliness of your pay history to vendors, suppliers, and creditors alike. A good Paydex score is usually 65 and above. Any company with a Paydex score below 65 may be required to show additional proof of a good credit history. We understand that much of the Dun & Bradstreet information can be inaccurate, however, the truth of the matter is that if there is negative information listed on the report, then credit managers will weigh that in their credit decision. These are the 4 major items any leasing company will judge for a credit decision. If you have at least 2 good trade references to give us, a good bank rating, and good credit, there is no question that we will be able to help your company out.
Step #5 Apply for Unsecured Business Credit such as Unsecured Business Loans, SBA, Working Capital Loans, Factoring Here are the steps to getting unsecured Business Credit 1) Get a vendor that will do the following: 1) give you Business Credit with little or no credit history 2) not require a personal guarantee 3) report to Dun and Bradstreet 3) Apply for vendors that are relatively easy to get: Staples! They will check your Experian Report first and if you have one for business they will give you a card without requiring a personal guarantee! Check out these other vendors, especially Viking Office Supply, Gas Cards and Neimann Marcus. They have a history of lending to new businesses.
Neimann Marcus Nordstroms J.C. Penney Comp U.S.A. Texaco Shell Home Depot
Target Staples Radio Shack Mobil Office Depot Office Max Viking Office Supply
3) After you have paid these companies 15 days before your invoice is due for a few months try the following: • • •
Equipment Leasing (Make sure they report to D&B, Experian) Wells Fargo Business Visa
Relatively easy to get right now! They don’t require a personal guarantee if you have some of the aforementioned companies on your report! Pay 15 days early on these invoices for 6 months! 4) Apply to Vendors that are harder to get: •
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American Express Blue (Small Business, they tend to want a personal guarantee, but lend prestige to your file) Credit Lines or Factoring Accounts with your local Credit Union or Business Bank.
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