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Why and How to Beef Up Your Business Credit Score

By Caron_Beesley, Contributor
Published: June 25, 2012 Updated: September 23, 2016

Do you know your business credit score? Feel unnerved about relying on your personal credit score for business transactions? As a business owner, taking steps to separate your personal and business finances is a smart strategy. Obviously, this means implementing a strategy to build good credit in your company’s name.

What is Business Credit?

Business credit is much like your own personal credit score – it’s a proxy for your business’ ability to repay its debts. When you start a business, this type of credit may not be at the top of your agenda. But as you plan to expand and grow, establishing good business credit will be helpful if you decide to apply for a business loan.

Who Monitors Your Credit?

Business credit, also known as trade credit, is the single largest source of lending and is monitored by business credit bureaus. These bureaus gather data on trade credit transactions and produce business credit reports for the benefit of credit issuers. Credit is measured on a scale of 0-100, with a score of 75 or more being the ideal range.

Good Business Credit Can Open Doors and Bring Many Benefits

Establishing business credit is about so much more than trying to improve your chances of securing a loan. SBA guest blogger and business credit adviser, Marco Carbajo, offers these 10 reasons to start building credit in your business’ name:

1. Protect your personal credit ratings – With corporate credit, your business debts and financial obligations would be reported only on your company’s credit reports—not on your personal reports. As a result, your personal debt to credit limit ratio would not be impacted by the debts of your company.

2. Protect the corporate veil – By separating personal and business credit, you eliminate the risk of commingling funds – and this includes the commingling of credit.

3. Limit personal liability – By building a creditworthy company, creditors and lenders will be less likely to require a personal guarantee to secure financing.

4. Conserve cash flow – Many suppliers, businesses, and vendors will extend credit to your business with net 30-day to 60-day terms. This allows you to conserve cash while obtaining the products and services your business needs.

5. Limit accumulating personal debt – You can obtain financing for your company without supplying a personal guarantee. Funding programs like accounts receivable financing, trade credit, and merchant cards protect you from facing a lot of personal debt.

6. Maximize financing opportunities – Many lenders, creditors, and suppliers will only extend credit to businesses that meet their corporate compliance guidelines. This includes a business credit listing and ratings with the major agencies.

7. Build a business asset – A business with established credit history and available credit is attractive to potential buyers and investors. It improves the appearance of your business’ funding capacity and stability.

8. Limit inquiries – With business credit, you can stop relying on your personal credit to obtain financing, which limits the amount of inquiries being pulled on you personally.

9. Receive larger credit limits – You can obtain 10 to 100 times greater credit limits from lenders as an established creditworthy business than you can as an individual.

10. SAVE MONEY! Businesses obtain more favorable rates on lines of credit compared to an individual. For example, you may pay up to 13% interest on a $100,000 line of credit whereas a business could qualify for an interest rate of 7%. That would save you almost $40,000 in interest alone.

 What Affects your Business Credit?

There are many factors that affect your business credit score: payment history, the amount of credit you have available, the age of your credit profile, and even the frequency of inquiries made on your profile.

Steps To Build Credit

More than simply applying for a business credit card, there are some very specific steps you should take to properly build and manage your credit score. This blog explains more: 6 Ways to Establish and Maintain a Healthy Credit Score for Your Startup or Small Biz.

Remember: if you are a sole proprietor, you’ll need to incorporate your business first (this creates a separate legal entity for your business).

Related Articles

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

3 Principles That Turn Planning Into Management

By Tim Berry, Guest Blogger
Published: June 21, 2012

I’ve been reminded twice in the last week about how important planning is to business, and how too many people misunderstand what a plan is supposed to do. My reminders came from two different people doing startups. Neither of them needs a business plan to show to investors. Both need business plans to figure out what steps to take and when, and how much money they need.

This reminds me of these important principles of business planning that everybody should keep in mind.

1. Form follows function

You’re probably aware of this as a general principle of good business and a lot of other things. It also applies to business planning. What this means in practice is that a business plan is only the formal, carefully edited and produced document that you fear and dread when it’s going to be submitted to banks or investors as part of a process of raising money.

Most of the time, as in the case of both entrepreneurs I dealt with recently, a business plan isn’t formal, isn’t carefully edited, and isn’t produced like a document. Instead, it’s a collection of related thoughts, lists, tasks, dates, and basic business numbers. It’s not for outsiders to read, but for you, the entrepreneur, to help you sort things through and organize what to do. And it doesn’t matter what form it’s in, as long as it helps the business figure out the next steps.

Those business pitches, the summary memos, the elevator speeches you read about? Those are not instead of the business plan; they are outputs of the business plan.

2. It’s about management

The objective of the business plan is better management. It’s knowing what to do. Too often, people tend to think the objective of the business plan it to present the business to outsiders, as if it were a sales tool to summarize the business to banks or investors. Instead, it’s a tool to help with the management.

For example, a good strategy summary in a business plan sets priorities and focus. It doesn’t have to be brilliant; it has to be practical. It defines a target market, market needs, and a product offering to match those needs. It establishes what’s most important and – frequently vital – what isn’t important.

And, as an additional example, the nuts and bolts of the business plan ought to be about concrete specific tasks, people, and resources. The plan should define milestones, business activities, and specify responsible parties, start dates, ending dates, and deadlines. The plan should establish how performance will be measured and the numerical goals. And the plan should project basic numbers, including sales, cost of sales, expenses, and cash flow.

The easiest way to test a plan for how well it does with management is to ask yourself how you’ll know whether the business is on track or not. If the plan doesn’t have a lot of specifics that can be measured, then it won’t help with ongoing management. You have to be able to use the plan to check the numbers and results, review, revise, and then correct the plan. It’s a tool for management, not an end in itself.

3. It’s not accounting

Portions of a useful business plan look a lot like accounting statements. For example, a projected income looks like an income statement, and a projected cash flow looks like an actual cash flow statement.

However, the huge difference is that planning is about the future, while accounting statements are about the past. The future is an educated guess that is valuable for how it builds on assumptions, how it connects the spending to the revenue, and how it helps with managing the business later because of plan-vs.-actual analysis. The past is a report on a database of actual transactions.

Because of this vital difference, accounting has to be an accurate report on an actual collection of transactions, but planning has to have simplifying assumptions and aggregated numbers. For example, depreciation in an accounting statement is a report of a detailed database of assets, purchase price and purchase dates, accumulated depreciation, and so forth. Depreciation in a business plan, on the other hand, is an educated guess of the total.

The good news is that keeping this difference in mind makes the planning projections easier. You don’t have to invent a fictional reality in detailed transactions. Instead, you create educated guesses of major categories.

Conclusion: all three of these basic principles serve as a reminder of what business planning is supposed to be, what it is supposed to do, and how it can help you in your business. 

About the Author:

Tim Berry
Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .

5 Lessons Small Business Owners Can Learn from TV Makeover and Mentoring Shows

By Caron_Beesley, Contributor
Published: June 21, 2012 Updated: September 29, 2016

Are you a fan of TV business “makeover” or mentoring shows? Programs like Ramsay’s Kitchen Nightmares, Tabatha Takes Over, Shark Tank, or The Apprentice make for compelling viewing. Designed as pure entertainment, these shows often smack of voyeurism, like you’re watching a train wreck about to happen. But they can also offer invaluable insights to business owners – opening our eyes to some universal truths about entrepreneurship and business ownership.

Not convinced? Here are some transformational learning moments common and consistent to many of the businesses brave enough to open their doors to the cameras:

1. Communication is Key

The effect of poor communication in business is perhaps the starkest lesson learned from reality business shows – and the results are universal. Low employee morale, uncontained egos, poor understanding of duties and roles, unhappy customers, gossip, rumors, and disrespect for management are all signs of poor communication.

So what are the antidotes for poor communication?

  • Check your Ego – Ego is a significant obstacle to business success, as encountered by countless reality TV business turnaround experts. Counteract it by being objective about your business and open to new ideas.
  • Demonstrate Good Leadership – It takes time and effort to be a good leader. Put aside day-to-day distractions and schedule one-on-one time with staff, solicit their input, and listen. Regular staff meetings that encourage input and give you an opportunity to share business goals and achievements are vital to building engagement, trust and improved communication.
  • Show Respect and Courtesy and Be Consistent – Go beyond mere verbal niceties and ensure that your actions consistently evidence your good will as an employer. A strong, happy team will benefit enormously from a leader with the right attitude.
  • Listen – One of the first things the hosts of a business transformation TV show will do is listen to the business owner, the staff, and even customers. This is the first step in gauging what’s working, what’s not, and healing the wounds of a dysfunctional team. Listening attentively, providing meaningful feedback, and offering support and encouragement open the doors to a healthier business environment.

2. Learn From the Competition

The epiphany is another common scenario in these shows: opening the business owner’s eyes to what the competition is doing. Hosts like Gordon Ramsay and Tabatha Coffey mentor business owners to embrace rather than retreat from competition. They encourage business owners to take a hard look at what they think they are doing wrong or could do better in the context of what the competition is doing. This involves refining their niches and finding ways to connect with their target market. Demonstrating value, customer service and leadership in a niche are proven techniques that work time and time again.

3. Need Funding? Value Your Business Carefully

Budding entrepreneurs seeking funds on the reality TV show Shark Tank make the common mistake of miscalculating the worth of their business venture based on sales and profit projections. Whether you’re seeking angel investment or a traditional business loan, over- or under-valuing your business or investment needs is something savvy lenders or investors will jump on. 

Proper financial planning and research are essential to a realistic, yet attractive proposal to potential lenders or investors. Here are a few guides and training resources from SBA to help you forecast your growth and financing needs:

4. Become a Pro at Delivering Your Elevator Pitch

Another hot tip for budding entrepreneurs and seasoned business owners looking to grow is perfecting your elevator pitch. Why? If you can’t describe succinctly what you have to offer, to whom, and the benefits you provide, then any pitch to investors is going to quickly fall apart (as often demonstrated to cringe-worthy effect on Shark Tank).

5. Be Prepared to Diversify

Diversification strategies are often at the heart of reality TV business transformation shows. For example, would adding a new line of products or killing off unprofitable lines help drive focus and profits? Explore all possible avenues, plan your approach and desired outcome, and test and review your findings.

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

The Difference Between a Trade Name and a Trademark – And Why You Can’t Overlook Either

By Caron_Beesley, Contributor
Published: June 20, 2012 Updated: September 19, 2016

When it comes to starting a business, there’s often some confusion about the process of business name registration. How are trade names and trademarks different? Does a trade name afford any legal branding protection? Can your trade name be the same as your trademark?

Simply put, a trade name is the official name under which a company does business. It is also known as a “doing business as” name, assumed name, or fictitious name. A trade name does not afford any brand name protection or provide you with unlimited rights for the use of that name. However, registering a trade name is an important step for some – but not all – businesses (more on this below).

A trademark is used to protect your brand name and can also be associated with your trade name. A trademark can also protect symbols, logos and slogans. Your name is one of your most valuable business assets, so it’s worth protecting.

An important reason to distinguish between trade names and trademarks is that if a business starts to use its trade name to identify products and services, it could be perceived that the trade name is now functioning as a trademark, which could potentially infringe on existing trademarks.

To learn more about the role trade names and trademarks have in your business and how to apply for each, read on. 

Registering a Trade Name

Naming your business is an important branding exercise. If you choose to name your business as anything other than your own personal name (i.e. a “trade name”), then you’ll need to register it with the appropriate authority as a “doing business as” (DBA) name.

Consider this scenario: John Smith sets up a painting business and chooses to name it “John Smith Painting.” Because “John Smith Paining” is considered a DBA name (or trade name), John will need to register it as a fictitious business name with a government agency.

You need a DBA in the following scenarios:

  • Sole Proprietors or Partnerships – If you wish to start a business under any name other than your real one, you’ll need to register a DBA name so you can do business under the DBA name.
  • Existing Corporations or LLCs – If your business is already incorporated and you want to do business under a different name, you will need to register a DBA.

Note that many sole proprietors maintain a DBA or trade name to give their business a professional image, yet still use their own name on tax forms and invoices.

Depending on where your business is located, you’ll need to register your DBA name through either your county clerk’s office or your state government. Note: Not all states require fictitious business names or DBA registration.  SBA’s Business Name Registration page has more information about the process, plus links to the registration authorities in each state.

Registering Your Trademark 

Choosing to register a trademark is up to you, but your business name and identity is one of its most valuable assets, so it’s worth protecting.

Registering a trademark guarantees exclusive use, establishes legally that your mark is not already being used, and provides government protection from any liability or infringement issues that may arise. Being cautious in the beginning can certainly save you trouble in the long run. You may choose to personally apply for trademark registration or hire an intellectual property lawyer to register for you.

Trademarks can be registered on both federal and state levels. Federal trademarks can be registered through the United States Patent and Trademark Office. Applications can be submitted online, by using the Trademark Electronic Application System (TEAS), or by requesting a hard copy application and mailing in a paper form. Although both methods are acceptable, filing online is a faster and more cost-effective process (less than $300).

Tip: Before you register, you’ll need to follow these steps:

  • Determine whether your product is eligible for a trademark
  • Conduct a trademark search using TESS (Trademark Electronic Search System)

Because it can be tricky to identify potential infringement or clashes, and the penalties for doing so are high, it’s worth talking to a good intellectual property lawyer to ensure you cover all bases.

As with trade names, registering a trademark at the state level varies from state to state. Check out the USPTO's State Trademark Information page for links to your state’s trademark office.

For a step-by-step guide to filing a trademark application, FAQs and more, refer to SBA.gov’s Small Business Guide to Intellectual Property.

Related Blog

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Do You Have Enough Insurance to Cover Rebuilding Costs After a Disaster?

By Carol Chastang, SBA Official
Published: June 18, 2012 Updated: September 21, 2016

When it comes to insurance, small businesses stand to lose the most by not having adequate coverage.  And while the mega-disasters like last year’s Hurricane Irene get a lot of media attention, those cataclysmic events are rare.   Smaller disasters, like the neighborhood power outage or the burst pipes that leads to a business shutting down for just a couple of days, hour, can force an under-insured business to close down for good.

Prepare for a disaster

Ten months after Hurricane Irene ravaged communities along the East Coast and Puerto Rico, the U.S. Small Business Administration continues to approve disaster loans to homeowners, renters and businesses.  So far SBA has approved more than $132 million in disaster loans to more than 1,400 businesses, to cover underinsured losses.   After all the work you’ve done to build a profitable business, it’s essential to protect your investment with enough insurance to weather the disaster and quickly resume operations.     

Here are a few action items to consider when filling out the insurance portion of your business continuity plan:

  • Review Your Insurance Coverage. Contact your insurance agent to find out if your policy is adequate for your needs.  The policy should be tailored to the individual business and take into consideration not only property damage but loss of revenue and extra expense that occur when a disaster causes a temporary shut-down.
  • Ask a lot of questions.  Make sure you understand the policy limits, the deductible, and what is actually covered
  • Consider Business Owner’s Insurance.  The Business Owner’s Policy (BOP) is a standard insurance package of coverage that a typical small or medium-sized business would need.   It includes general liability protection, and business interruption insurance, which provides money to offset lost profits or pay operating expenses the business could have covered if the disaster had not occurred. 
  • What about Flood Insurance? According to the U.S. Geological Survey, floods are the leading cause of natural disaster property losses.  Business owners, particularly those running home-based businesses, should consider getting coverage from the National Flood Insurance Program. Most homeowners’ insurance policies don’t cover flood losses.
  • Know what you own.  Inventory your personal and business assets before the disaster occurs.  Record the price and estimated replacement cost of furniture, computers, machinery—everything of value at your business.  Keep receipts, take photos and video of your property, and store that information office at a secure location.

Having a plan in place to restore your business to its pre-disaster condition requires a bit of focus and foresight, and the cash to maintain the right insurance policies.  In the long term, it will make a difference when it comes time to deal with the aftermath any kind of disaster, whether it’s a massive hurricane, or the water-main break in the alley behind your business. 

Related Resources

About the Author:

Carol Chastang

SBA Official

A Raise or a Benefit: You Choose

By BarbaraWeltman, Guest Blogger
Published: June 12, 2012 Updated: January 9, 2013

Companies that have survived the economic downturn of the past several years may be in a position now to reward employees that hung in during tough times. Many workers have not had raises in years or have even seen wages and benefits cut. Before you jump to offer a raise, think about the best way to reward your staff from a tax perspective.

The cost of a raise

When you increase a worker’s pay, it costs the company more than the actual addition to the paycheck. The company must factor in:

  • The employer’s share of FICA (to cover Social Security and Medicare taxes). For 2012, the employer’s share of FICA is 6.2% on wages up to $110,100, and 1.45% on all wages.
  • State unemployment insurance. Each state sets its own rates for this cost, which is collected as a tax on wages paid. (The federal unemployment tax (FUTA) is assessed only on the first $7,000 of wages, so a pay increase likely won’t impact this employer cost.)
  • Benefit formulas. For example, if you make contributions to a qualified retirement plan, such as an SEP, it is based on compensation. Say you contribute 10% of employees’ compensation to the plan each year. A $2,000 wage increase means an additional $200 cost to the company.

The bottom line for the employer in giving a wage increase: figure anywhere between 15% and 50% of that increase as an extra cost to the company. In other words, a $2,000 wage increase really costs you $2,400 (if you assume a 20% cost in terms of taxes and benefits).

From the employee’s perspective, a wage increase is really worth only as much as he or she can keep after tax. If, for example, an employee is in the 25% tax bracket, a $2,000 wage increase only nets $1,500 after income tax (even less when the employee’s share of FICA is factored in).

Instead of giving a wage increase, why not offer a fringe benefit? The benefit can cost the company less — there may be no employment taxes on the benefit—while providing a valued item or service to the employee.

Tax-free benefits

The tax law has an extensive menu of fringe benefits that can be offered to employees (including owners) without any tax cost to them, or to the company. The benefit is tax deductible for the company, but there are no added employment taxes.

Here are some of the benefits that can be offered (a complete list of benefits and their employment tax treatment can be found in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits:

  • Adoption assistance
  • Dependent care assistance
  • Education assistance
  • Group-term life insurance
  • Transportation benefits (such as commuter transit passes and free parking)

The key to making most types of fringe benefits tax free to employees is that they must be offered on a nondiscriminatory basis. If, for example, you want to help with an employee’s daycare expenses, this benefit must be offered to your entire staff (with some exceptions) on the same terms and conditions. If you help only a single employee by paying for or reimbursing her daycare costs, it is taxable in the same way as if you had given a raise.

Taxable benefits

Some benefits to employees are taxable, but may still be better from a tax perspective than a pay raise. These benefits can be used to reward a specific employee; they need not be offered on a nondiscriminatory basis.

When it comes to taxable benefits, there is obviously a tax cost to the employee. However, the tax cost is less than what the employee would have to pay out-of-pocket to enjoy the same benefit. For example, if you allow an employee to drive a company car for personal purposes, such as commuting to and from work, this benefit is taxable to the employee. There are various ways for a company to figure the taxable value of this benefit (explained in Pub. 15-B). Say it works out to be $2,000 for the year. If the employee is in the 25% tax bracket, it means a tax cost of $500. In other words, for a mere $500, the employee enjoys the use of the company car for commuting; this is much less than it would cost an employee to use a personal vehicle or even public transportation for commuting.

Final thought

Before you decide to offer a raise or a benefit to an employee, talk with your tax advisor. By essentially pushing a pencil on paper, you can determine the better way — for both the company and the employee — to reward the employee for valued service.

About the Author:

BarbaraWeltman
Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BigIdeas4SB or at www.BigIdeasforSmallBusiness.com

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