Your business’s success is at risk. This is our essential checklist, a key to unlocking lender credibility and safeguarding your personal assets. Checklist Below ↓
This comprehensive checklist is designed to guide you through the crucial steps of establishing and strengthening your business, covering two key areas: “Complete Compliance” and “Getting Approved.” In the “Complete Compliance” section, we delve into essential aspects like Entity & Filings, Business Location, Phones & 411, Website & Email, EIN & Licenses, Business Banking, and understanding Agencies & NAICS. Then, in “Getting Approved,” we focus on preparing a solid Business Plan, managing Assets & UCC Data, understanding Corp Only Facts, assessing Your Bank Rating, and building Comparable Credit. Adhering to this process not only legitimizes your business but also enhances your credibility with lenders and reinforces the corporate veil, crucial for protecting your personal liability. This checklist is a roadmap to building a robust, credible, and financially sound business.
✓ Business Fundability Checklist
Your Business Needs To Be An Entity To become bankable your business must be a separate legal entity
The only way to completely separate your personal credit from your business’s credit is to have a legal business entity such as an Incorporation or LLC. Action items for this step:
- Set up a business entity or make sure your business entity is set up correctly.
- Verify that your business legal name is not going to create any trademark infringement.
- Make sure your entity is “In Good Standing” and Foreign File your entity if required.
- Your entity should be filed using a USPS listed business address, not a residence or mail stop.
Why do you need a business entity to build business credit? It is best to build business credit with an LLC or Corporation (S or C Corporation). Creditors, Lenders, Trade Accounts and so on prefer to see an actual business entity. Furthermore filing and using a business entity to build business credit can separate you personally from the liability of operating your business. Unless you’re required to operate as a LLP or other type of partnership (Medical Practice, Law Firm, CPA, etc.), you should create a business entity. Your personal and business credit can never be truly separated if you operate as a sole proprietorship or partnership – everything you do remains “personal”. Don’t be fooled! The business credit reporting agencies will let you build business credit reports under a sole prop or partnership but these are completely worthless as everything you do under those is 100% personal which makes you personally liable for each and every business debt. Don’t do it. Compliance Item – Must Have A Business Entity Compliance Item Fix – Form An Entity Haven’t formed an LLC, C-Corp or S-Corp for your business yet? Protecting your personal credit and assets is just one of many reasons to operate your company as a separate entity (LLC, C-Corp, S-Corp, etc.). Whether you’re a single owner-operator or a larger company with employees, it’s the right decision. Get set up easily with a corporate entity that best fits your needs. Your business cannot become Bankable and stand on it’s own for financing without being its own entity.
Your Business Must Be At A USPS Listed Business Address
The address you list as your Business Location is a critical factor in building strong business credit and securing financing. While using a home address for business is possible, it can limit your access to certain lenders, as lenders often view home-based businesses as higher risk.
If you don’t have a physical location, there’s no need to shell out thousands for an office space. Companies like iPostal offer the perfect solution and often charge less than $20 per month.
It’s essential to ensure your business’s legal name, including any DBA (Doing Business As) filings, is accurate and consistent across all documents and accounts. Inconsistencies, such as opening credit accounts under different names or variations, can lead to multiple credit files and potential confusion. If using a DBA, it’s crucial to use it consistently across all banking, utilities, office leases, and credit accounts to avoid duplicate credit files.
Regarding your business address, lenders tend to favor physical business locations over residential addresses, as home-based businesses have a higher default rate on loans. Using a residential address can tag your business as a higher risk, potentially leading to declined credit applications. While you can use a home address for building business credit, it may limit your funding options. Avoid using mail stops or PO Boxes, as these can signal to lenders that your business might not be established or credible. Instead, consider a USPS-listed business address or a virtual office solution to establish a more professional presence.
Key points to remember:
- Consistency in Business Naming: Ensure uniformity in your business’s legal name and DBA across all financial and legal documents.
- Avoid Mail Stops and PO Boxes: These can negatively impact your credibility with lenders.
- Consider a Virtual Office Solution: If you don’t have a physical business location, a virtual office can provide a professional, USPS-listed business address.
You need a FCC listed business phone number. Not Cell or Home Listing.
Having a proper Business Phone and 411 Directory Listing is important to receive funding from many lenders. In today’s credit and analytics-driven world, lenders often associate businesses operating solely from cell phones with a higher risk of default. To mitigate this risk and enhance your business’s credibility, it’s crucial to have a dedicated FCC listed business phone number, not a cell or home phone number.
Having your business listed with 411 directory assistance under your business name is a compliance requirement. Many lenders still use 411 listings to verify a business is legitimate. This listing not only validates your business’s existence but also boosts its perception among lenders, vendors, and creditors. While a toll-free “800” number can lend credibility and provide customer convenience, it’s essential to have a local business number for the 411 listing.
Options for setting up a business phone number include virtual local phone numbers in your area code or toll-free numbers. If you already have a local number, adding a toll-free number can further enhance your business’s professional image. Remember, 800 toll-free numbers cannot be listed in your local 411 directory, so a virtual local number is necessary for this purpose.
To comply with these requirements, avoid using a cell phone or residential number for your 411 listing. You can submit your business name and phone number for listing with the national 411 directory, a process that may take up to two weeks. Alternatively, you can contact your local phone carrier or use services like ListYourself.net for listing.
In addition to traditional phone listings, ensuring your business is listed on major online business directories is equally important. These online listings play a significant role in the business credit building process and are a key tool used by potential clients and partners to locate your business.
Business Domain, Website, and Professional Email
Having a registered Business Domain, Website, and Professional Email for your business gives lenders assurance you’re doing things the correct way. In today’s digital age, having a professional website and email addresses is not just beneficial for business operations, but also a critical factor in establishing your business’s legitimacy and creditworthiness.
Business Domain and Website:
Credit providers and lenders now use your website as a tool to assess the legitimacy and stability of your business. A well-designed website that provides comprehensive information about your business can significantly enhance your credibility. It’s important to ensure that your website scores well in web analysis, which includes factors like error-free content, mobile-friendliness, SEO optimization, and backlinks. A score of 60 or above is considered favorable. If you don’t have a domain yet, consider checking for the availability of your business name in various formats (.com, .net, .org) and choose one that aligns with your business identity.
Professional Email Address:
Having a professional email address (like [email protected]) rather than a free email service (like [email protected]) is crucial. Lenders have observed that businesses using free email services have higher default rates compared to those with professional email addresses. This simple yet significant detail can influence a lender’s decision to approve your credit application. Setting up a professional email address is an easy and cost-effective step that should not be overlooked.
In summary, ensuring your business has a professional domain, website, and email address is not just about online presence; it’s a compliance requirement that significantly impacts your business’s ability to secure credit and financing.
Federal EIN & Business Licenses: City, County, State
You must obtain a Federal Employer Identification Number (EIN) and ensure you have the necessary Business Licenses from your city, county, or state.
Federal Employer Identification Number (EIN):
An EIN is essential for your business as it serves as your business’s unique tax ID number, akin to a Social Security Number for individuals. This number is not only used for tax purposes but also crucial in building your business credit profile and opening a bank account. You may need a new EIN if your business undergoes significant changes such as bankruptcy, corporate restructuring, or change in partnership. It’s important to ensure that all agencies, banks, and credit vendors have your business listed with the correct EIN. You can apply for an EIN online or through the incorporating service you used for setting up your business.
Business or Professional Licenses:
Having the appropriate licenses for your business is a critical compliance requirement. Inconsistencies in business addresses across different licenses or the lack of necessary licenses can hinder your business credit building process. You should check with your state, county, and city government offices to determine the specific licenses and permits required for your business type. This step is crucial as requirements can vary significantly based on your business’s location and nature. For instance, operating a business from home may require a different set of licenses compared to a business with a physical storefront.
In summary, securing a Federal EIN and the appropriate business licenses are foundational steps in establishing your business’s legitimacy and creditworthiness. These steps are not just about legal compliance but also about laying a strong foundation for your business’s financial future.
Business bank account must have the exact State and Federal filed name
Importance of a Business Bank Account:
Your business bank account plays a pivotal role in establishing your business’s start date and credibility. The date you open your business bank account is often considered the actual start date of your business by lenders, rather than the date of incorporation or EIN issuance. This date is crucial as it marks the beginning of your business’s financial history and is a key factor in credit and lending decisions.
Compliance and Consistency:
It’s essential that the name and address on your business bank account match exactly with the legal paperwork filed with the State and your Federal EIN paperwork. Any discrepancies can lead to complications in credit and lending processes. Regularly audit your business bank account details for accuracy.
Banking History and Relationship:
Lenders and credit agencies often gauge the age and reliability of your business based on the length of your banking history. A longer banking relationship can enhance your borrowing potential. Therefore, it’s beneficial to establish and maintain your business bank account as early as possible.
Online vs. Traditional Banking:
While online-only banks offer convenience, they may sometimes hinder the lending process due to technological limitations in data access for lenders. This can lead to declined loan applications. Therefore, alongside an online bank account, it’s advisable to have an account with a traditional brick-and-mortar bank to avoid such issues.
Merchant Credit Card Processing:
Accepting credit card payments can significantly enhance your business’s revenue potential. It not only makes transactions easier for your customers but also opens up opportunities for funding based on credit card sales. Choosing the right merchant account processor is crucial for this aspect of your business.
In summary, setting up and maintaining a proper business bank account is not just a formality but a critical step in establishing your business’s financial foundation. It impacts your creditworthiness, borrowing potential, and overall perception in the eyes of lenders and credit agencies.
All Agency Listings Must Be Exactly The Same
Uniformity Across All Agency Listings:
Ensuring that every agency, creditor, supplier, and trade credit vendor lists your business identically is crucial. This includes the exact spelling of your business name, address, and phone number. Inconsistencies, even minor ones like variations in the business name or address format, can significantly impact your business’s credibility and creditworthiness.
Compliance and Verification:
It’s important to conduct regular audits to confirm that key agencies such as the State, IRS, your bank, and 411 directory assistance have your business listed with the exact legal name and details. This also extends to utility bills and other business-related documents, which should all reflect the correct business name and address.
SIC and NAICS Classifications:
Your business’s classification under the Standard Industrial Classification (SIC) and North American Industry Classification System (NAICS) codes is more than just a formality. These classifications can influence funding approvals, as certain codes are associated with higher risks of loan defaults. Although SIC codes have largely been replaced by NAICS codes, some entities, including government agencies and lenders, still use SIC codes. It’s essential to ensure that your business is correctly classified in both systems to avoid any negative implications on your funding opportunities.
In summary, maintaining consistency in how your business is listed across various agencies and ensuring accurate industry classification are key steps in building a strong business credit profile. These factors not only affect your ability to secure financing but also play a significant role in how your business is perceived by lenders, creditors, and other financial institutions.
Have You Taken The Time To Plan Your Business?
Essential for Lender Approval.
A comprehensive, SBA-compliant business plan is often a prerequisite for securing financing from lenders, including banks and SBA lenders. They use this document to assess the viability, planning, and potential success of your business. It’s not just a formality but a critical tool that demonstrates your understanding of the market and your business strategy.
Living Document for Business Success:
A business plan is a “living” document, vital for both new and established businesses. It should be regularly updated to reflect changes in the market, business goals, and strategies. This plan is your opportunity to convey your in-depth knowledge about your product or service, market dynamics, and the operational aspects of your business.
Key Components of a Business Plan:
- Executive Summary: A concise overview of your business, capturing the essence of your business model and strategy.
- Market Analysis: Detailed insights into the market size, your role in it, and the competitive landscape.
- Company Description: An outline of your business operations and the reasons for its viability.
- Organization & Management: Your team’s expertise and experience, and how it contributes to success.
- Marketing & Sales: Strategies for marketing and sales, whether in-house or outsourced.
- Service or Product Line: A clear description of what you’re offering – products or services.
- Capitalization Requirements: Funding needs and sources.
- Financial Projections: At least two years of forward-looking financial forecasts, supported by industry and market data.
Professional Assistance:
Creating a business plan can be daunting, but there are services available to help translate your business ideas into a formal plan that meets lender requirements. Some of these services offer credit terms and report your payments to business credit agencies, further aiding in building your business credit profile.
Question for Reflection:
Does your business currently have an up-to-date business plan that you can confidently present to potential lenders?
Using Assets Can Make Getting Approved Faster
Leveraging Assets for Business Credit: Utilizing your existing assets can significantly streamline the process of obtaining new business credit accounts and financing. By offering assets as collateral, you can access a wider range of funding programs, especially as your business becomes more bankable. This includes leveraging revenue streams as collateral or selling them for immediate working capital. Having working capital is crucial for initial expenses and down payments to maximize business credit opportunities.
Understanding UCC Filings: A Uniform Commercial Code (UCC) filing is a legal form that a creditor files to declare a security interest in your assets. This filing is public and alerts other potential creditors about existing claims on your assets. It’s essential to be aware of any UCC filings against your business or personal assets, as they can impact your ability to secure future loans.
Common UCC Filing Scenarios:
- Tax Liens, Mechanic Liens, and Judgments: These indicate outstanding debts and can affect creditworthiness.
- Blanket UCC Filings: Often seen with SBA or PPP loans, these filings can encumber all current and future assets of the business and the owner, limiting their use as collateral for future loans.
Checking UCC Filings: Before applying for new loans or funding, it’s advisable to review any UCC filings associated with your business. This preemptive step can prevent surprises and rejections due to undisclosed liens or claims.
Asset-Based Funding Options:
- Personal Assets: Assessing the value of personal real estate, structured settlements, or retirement investments can provide avenues for securing business credit.
- Business Assets: Evaluating outstanding invoices, existing purchase orders, and the value of owned equipment can unlock additional funding options.
Note on Building Credit Without Assets: While leveraging assets can expedite the business credit building process, it’s also possible to establish business credit without using personal or business assets. This approach focuses on other aspects of creditworthiness, such as revenue, business history, and credit relationships.
Action Points:
- Assess the value of both personal and business assets.
- Check for any existing UCC filings and understand their implications.
- Explore asset-based funding options suitable for your business needs.
The Owners Personal Credit Can Play A Role
Personal Credit in Business Financing: While building business credit aims to separate personal and business finances, the reality is that the business owner’s personal credit can still play a significant role, especially in the early stages of securing financing. High personal credit scores can unlock more favorable financing options.
Ideal Personal Credit Score: A personal credit score of 720 or higher is often preferred. Owners or officers with such scores are likely to access better financing terms and higher approval rates.
Corp Only Financing Realities:
- Asset-Based Financing: For startups or businesses with poor personal credit, assets like receivables, revenue streams, or equipment can be used as collateral.
- Unsecured Cash Financing: This requires pre-qualification, including a strong credit history, sufficient revenue, and a solid business credit score.
Qualifications for Unsecured Cash Financing:
- Comparable credit amount to the requested loan.
- At least 10 tradelines with a year of history.
- Minimum Bank Low 5 Rating (average daily balance of $10,000+ for 90 days).
- Completion of all 20 items of Lender Compliance.
- $35,000+ monthly gross revenue.
- 2+ years in business.
- Filed tax returns and financial statements for the previous year.
- Entity in good standing with necessary licenses.
- Manageable debt-to-income and debt-to-limit ratios.
- Strong business credit scores and FICO Small Business Score.
Non-Cash Corp Only Financing: There are numerous sources for non-cash financing like net 30 payment terms, revolving credit lines, and specific brand credit cards. These are common for building business credit.
Caution Against Authorized User Account Abuse: Purchasing authorized user accounts to inflate personal credit scores is considered fraudulent. Lenders can easily identify these artificial boosts, potentially leading to declined business loan applications.
Optimizing Owners’ Personal Credit:
- Keep credit card balances below 45% of the limit.
- Maintain a debt-to-income ratio under 45%.
- Limit credit inquiries.
- Aim for high-limit revolving accounts.
- Don’t close old accounts; age of credit matters.
- Resolve any collections, judgments, or charge-offs.
- Strive for a 720+ FICO 8 score.
Action Steps:
- Regularly monitor and improve personal credit scores.
- Consider asset-based options if personal credit is not strong.
- Be cautious about strategies that artificially inflate credit scores.
- Keep personal financial health in check to enhance business financing opportunities.
Bank Ratings Are Important to Getting Approved
Why Bank Ratings Matter: Your business bank rating is a crucial factor in becoming bankable and getting loan approvals. It reflects your business’s ability to manage cash flow and service debt. Lenders use this rating to gauge the financial health and creditworthiness of your business.
Understanding Bank Ratings:
- Balance Rating: This is the average minimum daily balance over a three-month period. For instance, maintaining an average of $10,000 classifies as a “Low 5” rating. This rating is essential as it indicates to lenders your business’s capacity to handle debts.
- Bank Rating Cycle: A three-month period is used to assess your bank rating. Consistently maintaining a “Low 5” rating during this period is crucial before applying for larger loans.
- Account Management: How you handle your account, especially avoiding NSF (Non-Sufficient Funds) checks, is critical. NSF checks can significantly damage your bank rating.
Bank Rating Levels:
- Low 3: $100 – $399
- Mid 3: $400 – $699
- High 3: $700 – $999
- Low 4: $1,000 – $3,999
- Mid 4: $4,000 – $6,999
- High 4: $7,000 – $9,999
- Low 5: $10,000 – $39,999
- Mid 5: $40,000 – $69,999
- High 5: $70,000 – $99,999
Bank Verification in the Digital Age: Lenders can access detailed information about your business banking activities, including deposit summaries, account balances, NSF incidents, and bank ratings. This transparency means that maintaining a healthy bank account is more important than ever.
Achieving a Low 5 Rating: If you’re unable to maintain the $10,000 required for a “Low 5” rating, consider temporary solutions like borrowing from friends, family, or using personal credit resources. However, this money should ideally remain in the business account to maintain the rating.
If You Don’t Have $10,000: While a high bank rating is beneficial for securing larger loans, it doesn’t impact your ability to build strong business credit scores. If you can’t achieve a “Low 5” rating immediately, focus on building your business credit and revisit improving your bank rating when your business’s financial situation improves.
Action Steps:
- Assess Your Current Bank Rating: Check your last three months’ bank statements to understand your current rating.
- Improve Account Management: Avoid NSF checks and maintain a healthy average daily balance.
- Plan for a “Low 5” Rating: Explore ways to increase your average balance to at least $10,000.
- Separate Bank Rating from Credit Building: Continue building your business credit scores regardless of your current bank rating.
Remember, a strong bank rating is a key component of your business’s financial health and can significantly impact your ability to secure favorable loans and credit lines.
Obtaining Your First Bank Business Loan
Understanding the Importance of a Bank Business Loan: Securing a bank business loan, especially one that reports to business credit agencies like Equifax and Experian, is a significant step in establishing your business’s creditworthiness. It signals to other lenders and creditors that your business is reliable and capable of handling financial responsibilities.
How to Secure a Bank Business Loan:
- Using a Certificate of Deposit (CD) as Collateral: You can open a CD with an SBA preferred lending bank and then secure a business loan for 100% of the CD’s value. This method is effective as long as your personal credit is in a reasonable state (preferably not in the low 500s).
- Finding the Funds for the CD: The required amount for the CD deposit doesn’t have to be substantial; starting with as little as $5,000 is feasible. Consider various sources like personal savings, loans from family and friends, or other creative funding methods.
Benefits of a Secured Bank Loan:
- It’s reported on your business credit report like any other loan.
- It doesn’t get marked as “secured” on your credit reports.
- Enhances your credit profile, making your business more attractive to other lenders.
The Concept of Comparable Credit: Comparable credit means having a loan amount that is similar to what you’re asking a new lender for. For example, if you secure a $25,000 line of credit using the CD method, it shows potential lenders that another institution has trusted you with a significant loan amount, making them more likely to offer you credit.
Strategy for Using Comparable Credit:
- Borrow a sum (like $25,000) personally and use it to open a CD.
- Secure a business line of credit against this CD.
- Other lenders see this credit line, increasing your chances of getting more credit offers.
Advantages:
- The CD used as security might be released after 12-18 months of timely payments, freeing up those funds.
- Repaying the personal loan can boost your personal credit scores.
Suggestion for Borrowing from Friends or Family: If you borrow the initial funds, you can assure the lenders of repayment:
- Use the borrowed money to open the CD and secure the loan.
- Deposit the loan amount into a separate account and use it to repay the loan.
- After the final payment, you can return the borrowed money with interest.
If You’re Not Ready or Unable: If securing a CD-backed loan isn’t feasible for you right now, don’t worry. Building business credit can still proceed without this step, though having such a loan can expedite the process. You can always consider this option later when your business is more established.
Your Next Step: Evaluate your current situation and decide if setting up a secured bank CD loan is a viable and beneficial step for your business at this moment. Consider your ability to secure the necessary funds for the CD and the impact this step could have on your business credit building process.
See how your business stacks up!
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Table of content
- Your business’s success is at risk. This is our essential checklist, a key to unlocking lender credibility and safeguarding your personal assets. Checklist Below ↓
- Action Item 1: Entity & Filings
- Action Item 2: Business Location
- Action Item 3: Phones & 411
- Action Item 4: Website and Email
- Action Item 5: EIN & Licenses
- Action Item 6: Business Banking
- Action Item 7: Agencies & NAICS
- Action Item 8: The Business Plan
- Action Item 9: Assets and UCC Data
- Action Item 10: Your Personal Credit
- Action Item 11: Your Bank Rating
- Action Item 12: Comparable Credit
