Finding Your Best Lender – Credit for Small Business Transcript

Dennis Zink: 
Welcome to SCORE Business TV. Today’s topic, where’s the money? Finding your best lender. Both early stage and mature businesses are faced with the challenge of seeking debt financing at various times in their business cycle. We’ll guide you through the search and qualification process with a credit expert. That credit expert is Gerri Detweiler. Gerri is the education director for Nav, the only website that gives business owners free business and personal credit scores and then matches them to financing. She’s been helping individuals and small business owners navigate the confusing world of credit for more than 20 years. Gerri teaches small business owners how to successfully build credit and locate financing. She’s the author of Finance Your Own Business: Get on the Financing Fast Track. Gerri has testified before Congress and has been interviewed for more than 3,500 new stories. Gerri, welcome to the show. 
 
Gerri Detweiler: 
Thank you so much. 
 
Dennis Zink: 
Gerri, the last time I looked, personal credit and business credit is kind of intertwined. I mean, if you’re going to get a loan from a bank or any financial institution, they’re going to want you to sign personally. Isn’t that correct? 
 
Gerri Detweiler: 
Yeah, absolutely. For business owners, it’s crucial that you know both your personal and your business credit, because you don’t know what the lender’s going to check and both of them can have an impact. 
 
Dennis Zink: 
And because it’s a big topic, let’s start with personal credit, okay? So, what’s the best way to check your personal credit? 
 
Gerri Detweiler: 
Under federal law, you can get your free annual consumer credit report from annualcreditreport.com. That’s the federally mandated free credit report website. I would encourage entrepreneurs to check all three bureaus, Equifax, Experian, and TransUnion, because they don’t share information with each other. And if there’s a mistake on one, it might not be on the other. You need to know what all three of them say. 
 
Dennis Zink: 
And as a consumer, what can you do to improve your credit score? 
 
Gerri Detweiler: 
There are lots of things you can do to improve your credit score, but the most important thing is to make sure you pay on time and that you keep your balances low, especially on your credit cards, because a lot of credit scoring models look at how you’re managing your credit card accounts. That’s one of the fastest ways to address credit issues, is bring down those balances and you may see a positive impact on your credit score. 
 
Dennis Zink: 
Is there any difference with debit cards? 
 
Gerri Detweiler: 
Debit cards don’t show up on credit reports, so they don’t help you build credit. They may be convenient, but they’re not a credit builder. 
 
Dennis Zink: 
What are some of the biggest mistakes that people make as individuals related to their credit? 
 
Gerri Detweiler: 
I think the biggest mistake everyone makes when it comes to credit is thinking, I don’t need to worry about it until I need it, but credit is one of those things that you need to nurture along the way and make sure that it’s accurate, complete, that there are no mistakes and there’s no fraud, and that way when you do go to get financing, you’re ready. 
 
Dennis Zink: 
What do you see as the main differences between personal credit and business credit? 
 
Gerri Detweiler: 
There are a lot of differences between business and personal credit, but the biggest is that personal credit has a lot of consumer protections built in. We have several federal laws that regulate what they tell you, that they have to give you free copies of your credit report, let you know if you’re turned down for credit, why and how to get a copy. With business credit, none of that exists. There’s no regulation that covers business credit, so it’s really up to the business owner to be proactive, to check their business credit, monitor it, make sure it’s strong, and if there are problems to fix those mistakes. 
 
Dennis Zink: 
According to the Federal Reserve, a little over half of the business owners that start a company use credit cards to finance their business. Is that a good idea? 
 
Gerri Detweiler: 
It can be. I think … 
 
Dennis Zink: 
I’ve done that. 
 
Gerri Detweiler: 
One mistake I see with business owners is they think their personal credit card is the way to finance their business and the problem with that is that that activity on that personal credit report, credit card always shows up on your personal credit report. So, if you max out a credit card, that impacts your credit. I’ll give you an example. I talked to an advisor who was working with a small business owner. Her financing fell through at the last minute, so she maxed out all her personal credit cards and her credit scores dropped, because of those high balances. Once she got a business loan and refinanced with a business loan that didn’t impact her personal credit, her credit scores jumped 125 points. So, it can have a significant impact. So, I would recommend that business owners think about using the right credit card if they’re going to use that to fund their business. 
 
Dennis Zink: 
Wow. Another statistic, according to the SBA, the small business administration, the second leading cause of business failure is under capitalization. Can you comment on that? 
 
Gerri Detweiler: 
I think one thing that happens with small business owners is they get really busy in the day-to-day of their business and they don’t have a chance to think forward and think, okay, what’s coming next and how will I be prepared for that? Financing, if you want to get really good financing, great interest rate, great terms, you’re probably going to get it through a bank or a traditional lender, and that takes time. So, you need to be planning ahead and thinking forward so that you’re prepared for that financing and your qualifications are as strong as possible. 
 
Dennis Zink: 
Right. And where does a typical business owner get funds to start their business? Or what are the ways, where did they come up with the money? 
 
Gerri Detweiler: 
Well, a lot of business owners sort of bootstrap it, right? So they turn to their personal credit cards or personal savings, maybe they tap their retirement account, friends and family, all those kinds of funding. And it is tricky when you are starting the business. There are some more limited financing options available. But one thing I want to point out is that there, across the country there are economic development organizations and what are called CDFI’s, community development financial institutions, and they’re trying to lend money to small businesses to grow jobs and benefit a community. And those lending options may be available to young or startup businesses with a solid business plan. So, I would encourage business owners to talk to their SCORE mentor and find out what the landscape is locally and see if there are funding options that may be available, even if their business is fairly young. And then of course the other startup option is the business credit card, because most business credit cards don’t care whether you have business revenues. They’re going to check your personal credit and look at income from any source, including a day job, a spouse’s job or any other income that’s available. So, that’s another source for startup financing as well. 
 
Dennis Zink: 
And for business credit card, are you typically on the hook personally for that as well? 
 
Gerri Detweiler: 
You are going to have to sign a personal guarantee for a business credit card, which means if you don’t pay it back and your business goes out of business, you still owe that debt. 
 
Dennis Zink: 
Okay. You have to pay it back. Okay. Roughly 625,000 new businesses are started every year. What types of financing are available for those small businesses? 
 
Gerri Detweiler: 
So, for a startup business, of course those personal funds and friends and family will be available. You might also look into a business credit card. You might also look into microloans to see if those are available. The key really is to start getting some revenue coming in. Once you have revenue, then you have more options. Most lenders are looking at least two of three things. Time in business, which a young business doesn’t have yet, revenues, and then they’re looking at credit. Business and personal credit. So, you want to make sure that each of those three pillars are as strong as possible, as fast as possible, so you can expand the universe of financing options available. 
 
Dennis Zink: 
When you talk about microloans, how micro or micro … How small are they typically? 
 
Gerri Detweiler: 
Well, there’s a variety of microloan programs available. Some are as much as 50,000, even $250,000 may be a microloan to a bank, which may want to make larger loans. The SBA has a microloan program and that program is available to startups. You will typically have to have really good personal credit to qualify, but it is a startup funding source, and the average microloan, according to the SBA is just $13,000. 
 
Dennis Zink: 
Okay. That’s kind of what I was getting at. So the SBA, since you mentioned that, let’s talk about the SBA. What does the SBA do? People think they make loans, but they really guarantee them, correct? 
 
Gerri Detweiler: 
Exactly. So, the small business administration guarantees loans and they have a variety of loan programs. There are a lot of different loan programs available. The thing to think about with SBA is that if one financial institution can’t give you an SBA loan, that doesn’t mean no one can, because each individual lender, in addition to the minimum requirements set by the SBA, will have their own requirements. So, don’t get discouraged if your first initial foray into looking at SBA loans doesn’t turn out to work. Now, if you have some serious challenges, credit challenges, or other issues that are not going to qualify you for a loan, that’s one thing, but look around, because there are different lenders that may want to work with you. 
 
Dennis Zink: 
Now, is that the 7(a) loans that you’re referring to? It’s known as … And then there’s a 504 for real estate. 
 
Gerri Detweiler: 
Correct. So, 7(a) is the most popular program in the SBA loan program. Loans can go up to $5 million and they can be used for a lot of purposes, working capital, even to refinance debt. So, it’s an extremely popular loan program. One of the qualifications for a 7(a) loan, if it’s $350,000 or less, is that they’re going to check a credit score called the FICO SBSS score. That’s a FICO score that is developed just for small business. It can look at your personal credit, as the owner, your business credit of the business, and it can even include financial data of the business as well. 
 
Dennis Zink: 
When you say SBSS, that’s the Small Business Scoring Service 
 
Gerri Detweiler: 
Yes. Yes. Small business scoring service. 
 
Dennis Zink: 
So, what exactly does Nav do? And before you even mention that, how’d you get started with Nav? 
 
Gerri Detweiler: 
Well, I’ve been involved in credit for ages and I wrote the book, Finance Your Own Business with small business attorney, Garrett Sutton. In the course of researching that book, I interviewed the CEO of Nav and he said, “Hey, we want to bring transparency to business credit and financing for small business owners.” I followed what they were doing and then after the book came out I thought they might want to buy some books and instead I’m working there full time, so. 
 
Dennis Zink: 
That’s great. 
 
Gerri Detweiler: 
Yeah, so it’s a great opportunity to work with small business owners and I love helping them understand what’s out there, because I’ve been around this field long enough to see that there are so many more options available now. Options that weren’t available five or 10 years ago. Great example is crowdfunding, where we have this opportunity to raise money without a credit check, just based on a great idea and reaching the right audience. So, getting back to what Nav does, we are, we’re like a Credit Karma for small business. Small business owners come to us, they see their free business and personal credit scores, we’re the only site that does that, and then using that data … And they can also link up their bank accounts so we can see their revenues if they choose, using that data we help them understand financing options that are available to them in our marketplace, and we work with over 110 different financing options now and we’ll help them see which ones are a good fit, based on their qualifications, which ones aren’t and how to get to those better options. 
 
Dennis Zink: 
In preparation for our podcast, I opened up a Nav account and I was checking; I see you can get credit cards and you can get financing options and the … I made some notes about all the different possible ways you can get money, which is kind of amazing. So for example, you could get a no annual fee card or a cash back card, a miles traveling card, points, sign up bonuses, there’s just a whole lot of stuff, but it’s very well set up and it was well organized. It looks like the loans go from $500 to as much as $2 million. Is that right? 
 
Gerri Detweiler: 
Yeah, that’s right. 
 
Dennis Zink: 
What do you suggest that someone like myself, let’s say I’m a small business owner, what I do after I open up the account? What’s my next step? 
 
Gerri Detweiler: 
Well, I should add that a Nav account is free and checking does not impact your credit score, so you won’t see your credit score drop because you’re checking your own business or personal credit. And then once you set it up, then the goal is to look at what’s out there for your business now as well as where you want to be. Again, that proactive, looking forward side of it. If you don’t have any business credit right now, and we do have a lot of Nav customers, some of them have been in business a decade and they have no business credit established, because it’s a little bit different process, then we’ll walk you through the steps of how to build business credit and get those business credit references. Once you have strong personal credit and strong business credit and your business is showing revenues, you have a lot of options available to you for financing. 
 
Dennis Zink: 
Tell me about online loan. So, I mean are they expensive compared to bank loans or other types of financing? 
 
Gerri Detweiler: 
Online loans can be expensive. So, the draw of online loans is that they are very fast. You can get a decision … One lender says their average time to make a decision is seven minutes. 
 
Dennis Zink: 
Wow. 
 
Gerri Detweiler: 
So, they’re tied into bank account information, credit information, they’re using that technology to make a really quick decision. They’re also getting creative on some of the criteria that they use. So, one of those lenders says they use shipping data, like how many boxes your business is shipping, to what zip codes and how frequently you’re shipping. There’s a new social media score for small business that can look at the businesses social media to create a risk score for that business. So, there’s a lot of creative options too. They’re trying to serve many business owners who maybe don’t have traditional qualifications. With that speed, though, also there is additional risk. There’s a risk to the lender and it means a higher cost to the consumer, or to the small business owner. 
 
Gerri Detweiler: 
So, one thing I do want to emphasize for small business owners, this is really important, is that business lenders are not required to disclose an APR. So, they don’t have to tell you the interest rate in the form of an APR. And sometimes it can be much more expensive than you realize, because the way the cost is disclosed. So, it could be, you think it’s a 1.4 factor rate. 1.4 sounds low, if you think of interest rates, right? That’s rock bottom. But if it’s a factor rate, it could, depending on how long you take to pay it back, be 30%, 50%, 70% or more. So, you need to make sure you really understand that that financing is sustainable for your small business. And again, this is another way that a SCORE mentor can be a great resource for you. 
 
Dennis Zink: 
Okay. I remember the leasing companies played around with factors way back when. You never knew what kind of rate it was when you were leasing your car. What kind of criteria is used for credit scores for evaluating loan worthiness, lending worthiness? 
 
Gerri Detweiler: 
With credit scoring models on the consumer side, and again as we talked about earlier, many lenders, even in the business space, will check the owner’s personal credit. They’re looking at your payment history. That’s number one. Do you pay on time and if you’ve paid late, how long ago was it? Then second is how you manage your debt and usually that’s primarily your credit card. So, it’s looking at the balance compared to the credit limit and the closer you get to that credit limit with that balance, the more it impacts your credit and that’s where I see it hit small business owners, right? Because if you have a seasonal business, like here in Sarasota where your season is going to be certain six, seven months of the year and then it’s going to slow down, if you’re carrying high balances during that busy season or if you’re carrying balances during the slow season to get you through, then those balances could impact your credit score. So, that’s a very important factor. And then also the age of your credit history, how much you’re shopping for new credit, those factors are important, but less important than your payment history and your debt. 
 
Dennis Zink: 
So, if someone’s out getting lots of credit cards, they know, right? 
 
Gerri Detweiler: 
They know. 
 
Dennis Zink: 
They know. 
 
Gerri Detweiler: 
They know. 
 
Dennis Zink: 
Okay. So, let’s talk about poor credit. Let’s say you just don’t have good credit. You’ve got a good business idea, you want to start a company, what are your options there? 
 
Gerri Detweiler: 
I’m going to give you a great solution to start, and that is to start with vendor or trade credits. So, most businesses have to purchase something. They have to purchase some kind of supplies for their business, maybe supplies to make a product or maybe just supplies to run the business. Could be ink toner and copy paper and janitorial supplies. There are companies out there that are eager for your business and they will extend what are called net 30 terms. So, they’ll let you get the item now, pay for it in 30 days. And there are a number of them that don’t even check personal credit, so you can start to build business credit for your business even if you have personal credit challenges. I think that’s a great way to get started. It’s also a great way to start building business credit, which as I mentioned earlier, opens up other opportunities for financing for you. 
 
Dennis Zink: 
And once you’ve been established, I recommend that you ask for that 60 days or even that 90 days, right? 
 
Gerri Detweiler: 
Exactly. Exactly. 
 
Dennis Zink: 
What are the common mistakes you see business owners make regarding getting business funding for their company? 
 
Gerri Detweiler: 
The most common mistake that business owners make is to look for that funding at the last minute. And in fact, one of the online lenders says that about 20, 25 percent of their applications come between 6:00 PM at night and 6:00 AM in the morning. So, the business owners thinking, I got to pay this bill, or I got to make payroll and I don’t have the money and they’re online looking for options. When you scramble like that, you’re more likely to end up with something more expensive than you might have qualified for something better. So, just like you hopefully get in touch with your accounting or your bookkeeping on a regular basis, hopefully you’re trying to keep up with that, keeping up with your credit and financing options can also be a smart move, because again, it prepares you so when you need that money, you can find something that’s hopefully less expensive and more sustainable. 
 
Dennis Zink: 
I’ve been there. I had to sell my Mercedes way back when to make payroll once. 
 
Gerri Detweiler: 
Really? 
 
Dennis Zink: 
The problem was that I leased a different car and they’d say, “Oh, Dennis got a new car. Let’s hit him up for a raise.” So that’s … Yeah, but you never know. What happens if you’re turned down for credit? Do you know? Do they have to tell you the reasons why you didn’t get the loan? 
 
Gerri Detweiler: 
You don’t get the same disclosure. So business credit that you do with consumer credit. So, they do have to tell you that you’ve been turned down, but they can also say, “Hey, if you want to find out why, contact us.” And if you’re … If you’ve been rejected, what are the chances you’re going to sit there and decide to contact them and find out why. So, it can be very confusing. We did a survey at Nav and we found that 25% of business owners who have been rejected for financing had no idea why they were turned down. 
 
Dennis Zink: 
Gerri, why don’t you relate a couple of interesting stories that have happened to you regarding people who are trying to get financing. 
 
Gerri Detweiler: 
Well, I just spoke to an entrepreneur who created a silicone baby mat that keeps the toys on this table so they’re not throwing their toys all over the floor. And she said that she got funding through two local or state microloan programs. About $42,000, and her interest rate is 0%. 
 
Dennis Zink: 
Wow. 
 
Gerri Detweiler: 
So, that’s an example of how local funding may be available to your business. I also recently interviewed another entrepreneur, Josh Elledge, he has a company called UpMyInfluence.com, and he’s here in Florida, and he went and did his homework. So he did that long look at what’s the best financing I could get. And with that research, he ended up getting an SBA loan. He said it took him about 30 days. It wasn’t a simple, fast process, but it was successful for him. I also interviewed a company that does excavating and construction work in the Manatee Bradenton area, and she’s used a variety of funding including equipment leasing, and she also was able to get a 504 loan, which is a loan we mentioned is in the SBA program for real estate, and that program gives her a, I believe it’s a 40 year mortgage for 2.99%. 
 
Dennis Zink: 
You can’t beat that. 
 
Gerri Detweiler: 
Can’t beat that kind of interest rate. So, there’s all kinds of things out there, and I think the problem for entrepreneurs is it’s so overwhelming, right? There’s so many options. You don’t know which ones are appropriate for me. So, one thing we have done at Nav is we’ve partnered with SCORE and we’ve created an e-guide. It’s free. It’s called Where’s the Money? And it goes into the different types of financing and what it takes to qualify. And you can download that from the SCORE website, and there’s also a webinar that goes into those details as well. 
 
Dennis Zink: 
What about the calculator? Don’t you have a calculator also? What’s that used for? 
 
Gerri Detweiler: 
So at Nav, we offer a variety of free calculators that you can use to help translate the cost of financing into an APR. So, when the lender says this is how much it’s going to cost, and you think, well, what’s the interest rate? You can plug your details into those calculators and immediately see what it really costs. 
 
Dennis Zink: 
Right, and that’s all free? All the education is free, 
 
Gerri Detweiler: 
The calculators are free, and the e-guides are free as well. 
 
Dennis Zink: 
Let’s look at a company that has high revenues and maybe their credit’s just kind of, okay, what are their options? 
 
Gerri Detweiler: 
Wait, with high revenues, you actually have a variety of options. So, many of these online lenders will want to plug into your bank account to see what the revenues are. Now, when it comes to revenues, one tip I want to give the small business owner is that a lender wants to see that you have revenues coming from multiple sources. If you’re relying on just one, two, or maybe even just three clients and they’re a significant chunk of your business, think about it. You lose that one client, you’re in trouble. You’re scrambling. So, ideally you want to have revenues that reflect a variety of clients. You also want to have very few low balance days. So, if you can find $500 or $1,000 to park in your business bank account, pretend it’s not there and never touch it, that’s helpful when lenders analyze your revenues. 
 
Gerri Detweiler: 
And of course you also don’t want days where you’re … Go NSF. You go below the balance. So, you might want to set up an overdraft account associated with your bank account and that can help. But once … If you have strong revenues, there are options like merchant cash advances, which tend to be higher costs, but they’re very fast, they don’t check personal credit, and what that does is it looks at your credit and debit card sales for your business and then advances you against future anticipated revenues. So, if you have a dentist office, a day salon, a gym, someplace that accepts a lot of credit card payments, then they will advance you and then they’ll take the money right off the top as you bring in future credit card sales. Again, that can be kind of expensive, but it is one of the most flexible and fast types of financing available to businesses with high revenues. 
 
Dennis Zink: 
You mentioned plug into an account, a bank account. Well, I think of a bathtub, and when you pull the plug, you drain it. So, you don’t want them draining your funds and that won’t happen, I’m sure. 
 
Gerri Detweiler: 
Correct. So the technology they use is just to read it. Not to take the money out, unless you say you can take my payments out, so. 
 
Dennis Zink: 
Why should a business owner not want to use their personal credit? 
 
Gerri Detweiler: 
Ideally, you want to move away from using personal guarantees, because that means of course that if something happens with the business, you’re on the hook for the full amount of the debt. In addition, some lending options that check personal credit also report to personal credit. So, an example is some of the small business credit cards that we talked about do report all activity to personal credit. Some don’t. So, if that’s a concern for you, if you think you’re going to be carrying high balances, either periodically or frequently, you may want to choose a business credit card that doesn’t show up on your personal credit. As you grow your business and as you can demonstrate revenue, time in business, and your credit gets stronger, you can move away from personal guarantees. Now, a lenders always going to want that, right? Especially banks. They love to see that the owner has skin in the games. But if your qualifications are strong, then you’re in a better position to negotiate away from personal guarantees. 
 
Dennis Zink: 
You mentioned crowdfunding earlier in passing. Talk about crowdfunding and really is that a good financials resource today? 
 
Gerri Detweiler: 
Crowdfunding can be a great resource for small business owners. And when I was at the SCORE annual awards gala last year, I had the honor of presenting a SCORE award to Cowboy Crickets. They are the, now the largest producer of food grade crickets in North America, and they’ve worked closely with their SCORE mentor to grow their business significantly. And they recently launched a crowdfunding campaign, because they wanted to introduce new flavors of their crickets snacks. I backed the campaign and so I got a variety of these flavors and their chocolate chirp cookie, and so I get to try those. So it’s, so crowdfunding is cool in the sense that it can let you test your marketing. It’s not just about the money. And I’ve talked to entrepreneurs who say, I love crowdfunding, because it lets me test my marketing. If it’s not effective, if people don’t want to back my campaign, I’m not going to go spend on radio and TV and other and online advertising, because I need to tweak my marketing campaign. 
 
Gerri Detweiler: 
Now, the beauty of crowdfunding is they don’t care about your personal credit, but it can take time and you have to invest in a good marketing campaign, and for many businesses it will take a while, unless you have a loyal audience and you’re building on that audience. You have a great email list, you have a great Facebook business page and you can reach out to them and your fans are going to fund your campaign very quickly, then that’s certainly an option for faster funding. But typically it’s not one of the low effort funding options, but it is fairly low cost, because you’ll pay a fee for any credit card sale or any credit card donation that comes in and then you’ll also pay for the marketing campaign and a platform fee. But beyond that, it’s not terribly expensive. 
 
Dennis Zink: 
And if it’s not funded, you don’t get anything? Some of them? 
 
Gerri Detweiler: 
Yeah. Some platforms, it’s all or nothing. Other ones you can partially fund a campaign, yeah. 
 
Dennis Zink: 
Getting back to the crickets, what was their tagline? The food that talks back to you, or? 
 
Gerri Detweiler: 
I don’t know. I’d say it has to do with chirps, right? 
 
Dennis Zink: 
Yeah, did you eat one? 
 
Gerri Detweiler: 
I did. They were delicious. Yes. And the cookie was also great. Yes. 
 
Dennis Zink: 
Gerri, thank you for educating us about small business credit. You’ve made a … Easy to understand a very difficult situation that affects both our personal and our business credit. You can reach Gerri by going to manasota.score.org and clicking on SCORE Business TV. You can also get our e-guide from Nav and the calculator and the other resources and tools that Gerri mentioned. So Gerri, thank you for being a great guest and thank you Nav for being a great sponsor and please tune in for our next episode. Until then, this is Dennis Zink saying, thank you and have a great day.  I may be reached at dennis@Time4Exit.com