Start Smart With Business Credit

We break down how personal credit and cash flow drive small business lending and share the simple steps that boost approval odds. From DSCR to down payments and the role of guarantors, we show founders how to prepare documents, avoid common pitfalls, and choose smart starter products.

• why personal credit signals business reliability
• how pay history, limits, and account mix affect approval
• cleaning up collections and old delinquencies
• understanding DSCR and why 1.25 matters
• equity injection norms for equipment and vehicles
• the role of personal guarantors in business loans
• what documents to bring and why a plan helps
• when business credit bureaus matter and when they don’t
• using a business credit card to start under $5,000
• how to contact us for commercial lending support

Stay on track with your financial journey. Subscribe to the Money Matters Podcast and visit neighborsfcu.org/financialwellness for more tools to help you build a strong financial future

Chapters

• 0:00 Welcome And Entrepreneur Focus
• 0:21 Why Personal Credit Matters
• 2:03 Building Strong Personal Credit
• 3:38 Common Credit Mistakes To Avoid
• 4:39 Personal Vs Business Credit
• 5:08 What Lenders Need From You
• 6:22 Strengthening Cash Flow And Score
• 7:00 Business Bureaus And DUNS
• 7:47 Key Lending Terms: DSCR, APR, Guarantor
• 9:41 Documentation And Business Plans
• 10:31 Timing, Down Payments, And Financing
• 11:35 Starter Option: Business Credit Card
• 12:19 How To Contact Neighbors FCU
• 12:57 Closing And Resources

Transcript

SPEAKER_00: 0:02

Welcome to Money Matters, the podcast that focuses on how to use the money you have, make the money you need, and save the money you want. Now, here is your host, Ms. Kim Chapman.

SPEAKER_02: 0:14

Welcome to another edition of Money Matters, and I'm your host, Kim Chapman. Today we want to get the attention of you entrepreneurs. Whether you are looking to start a business, you just started a business, but you want to know about that also important thing, credit, right? Because in most cases, you need to be able to establish credit in order to establish your business, grow your business. So today that's what we want to focus on. And joining me from our commercial services department is commercial services loan officer Landon Richard.

SPEAKER_01: 0:44

Thank you for having me.

SPEAKER_02: 0:45

Thank you for coming and take the time and sit down and talk to us. We get people all the time, right? They want to start a new business. And especially now it's the beginning of the year, and you know, it's like my New Year's resolution is going to be I'm going to finally do it. I'm going to start that business. And then comes that moment, oh, I need money. You know, you've done that business plan, and it's like, I looked at my bank account and it's not going to do what I need it to do. And so then it becomes the question of where do I get the capital? How as a new entrepreneur can I establish credit? So why is, first of all, why is it even important that entrepreneurs take the time and think about credit for a business?

SPEAKER_01: 1:24

Yeah, absolutely. Because personal credit is a big factor when it comes to doing a small business loan. It's something that we take a look at. It's part of it. Um we take a look at cash flow. So that'll be income coming in from tax returns and financials. Um, but credit, personal credit is a big part of that. So that's definitely an important part to have that set up and ready to go.

SPEAKER_02: 1:44

And so you mentioned personal credit. And so ideally, most entrepreneurs, before they could even get business credit, they've got to have personal credit. So let's talk a little bit. So, what are some of the things that if you and would-be entrepreneurs should be looking at or focusing on with their personal credit before they can start branching out and looking at establishing business credit?

SPEAKER_01: 2:03

Yeah, absolutely. Great question. So with personal credit, you want to make sure that you have great pay history, no slow pays on your credit report. You want to make sure that you have a variety of different accounts open on your personal credit, including different limits on those amounts. Um, and then of course, you want to make sure, you know, you have a good length, a good pay history on those accounts as well.

SPEAKER_02: 2:23

And so why why is it that your personal credit, if I want to open a business, why is it that my personal credit should matter so much as an entrepreneur?

SPEAKER_01: 2:31

Yeah, absolutely. So with that, um, whenever we look at that, um, typically smaller financial institutions are gonna look at your personal credit because it is a great representation of how you're gonna run your business. So if you have good personal credit, it's gonna reflect that whenever you're running your business. And it's a good indicator of you being able to run that business correctly through those financials. So that's what we look at whenever it comes to that.

SPEAKER_02: 2:54

So if I want to take a go and take a peek and look at my personal credit report in hopes that I can start establishing business credit, what are some of the things that I should be focusing on now before I venture off into trying to get business credit?

SPEAKER_01: 3:07

Yeah, absolutely. So you should make sure that you do have that variety of accounts, you have good pay history on it. Um, you want to make sure that your limits are in sync with what you're gonna be requesting for your business loan. So for instance, if you have a bunch of smaller limits on it, you'll want to work on that to have a good history of having some higher limits. That way, if you come to apply for a larger business loan, you can show that you have a proven track record of having, you know, these large loans. And that way, you know, you would have more of a better chance, you know, to get something for the business side.

SPEAKER_02: 3:38

No. Every year we have people that open new businesses. And unfortunately, you know, as history shows, sometimes they just don't make the cut. What are some of the most common mistakes entrepreneurs make when it comes to credit?

SPEAKER_01: 3:50

So I would say for that, the biggest thing is just making sure that you work on any collections or charge offs. We want to see those taken care of, those paid on there. Um, we want to make sure, again, that there's no slow pays, no 30, 60, 90-day delinquencies on there. So, of course, if we understand, you know, things do happen. So we can work with you through any circumstances on that. Um, but as far as that, it's just making sure you have a good length of time between those. So it's nothing recent. So you might not have a 30-day slow pay within the last six months or year. That's a couple of years ago. We can understand and work with you on that. Um, we don't look at a specific score for the minimum on it, but of course, the higher the score, the better your overall credit is gonna be, and that's gonna be beneficial for you.

SPEAKER_02: 4:34

And I know I've kind of thrown around the term personal credit, which we know are for the individual consumers themselves. And then we've talked about business credit. Explain a little bit about what business credit is or how it's different from your personal credit.

SPEAKER_01: 4:46

Absolutely. So business credit is typically gonna be for larger businesses and it larger financial institutions are gonna be looking at that information. So whenever you come to like a credit union or a smaller financial institution, they're typically gonna rely on your personal credit information. And again, that's because it's a generally a good indication of how you'll be with your business and how you'll run that.

SPEAKER_02: 5:08

All right. So if I'm that would-be entrepreneur, I have my business plan, I know what I want to do, but I need some money and I'm coming to neighbors because I know that we do it a little different here. What should I expect? What I what should I be prepared for?

SPEAKER_01: 5:22

Yeah, absolutely. So of course you'll reach out to me, I'll be your point of contact for it. Um, but we would typically get an application in and typically last three years of any personal and business tax returns that are available. Of course, if it is a new business, you won't have those business tax returns, but that doesn't mean we can't take a look at the request for you. We would just simply take a look at it with those personal tax returns for the income. Um, so that's typically just the information that we would need for us to get started. Um we'll go ahead and submit that to our underwriter. And at that point, they would pull that personal credit and they review all that information together to make a decision on the request.

SPEAKER_02: 5:58

And see, Landon, Landon looks so nice. He doesn't look like he knows how to say no, but I'm sure when it comes to these situations, you know, sometimes you have to say no. So again, what are some of those things, again, that somebody should be working on before they come in, you know, even whether they've established the business or they've um already looked at the business, you know, or they're just getting started, what are those things that they should be looking at before they make that call?

SPEAKER_01: 6:21

Yeah, absolutely. So the two biggest factors, again, that we look at are going to be the cash flow, which is gonna be the income from the tax returns. So I would say the best part is to increase any income that you show in your tax returns and then also decrease any expenses or living expenses that you have, such as any personal debts that you could pay off to reduce those monthly um obligations that you're required to pay. So we can take those out of your cash flow to increase the cash flow for the new debt. Um, and then of course the personal credit is another big factor on that. So make sure that you have good pay history, a good score on that. So we can, you know, take that in combination with the cash flow and make a hopefully a good decision for you.

SPEAKER_02: 7:00

And then for those multi-million dollar corporations, right? We want to start big. And you mentioned here we use the personal credit, but with the business credit, they use different models. Can you talk a little bit of just a little bit about what those other models are?

SPEAKER_01: 7:12

Yeah, absolutely. So the biggest one is gonna be Duns and Brad Street. So that is gonna be your big business credit bureau on it. Um, it's gonna be what those larger businesses use on it. So again, for someone starting up, they're really not gonna need that information. I do get some people who will ask me about establishing business credit. And that's when I kind of go over the information with them that we don't look at that, you know, we typically go off of the personal credit. So that's where we kind of go into that discussion on it. So again, if you're a really large business, that's when it can kind of come into play with, you know, the Duntain Brad Street and all that reporting for the business side.

SPEAKER_02: 7:47

And of course, on the consumer side, I spend a lot of time educating consumers, you know, just general information terms. What are some business terms that can that entrepreneurs should be familiar with?

SPEAKER_01: 7:57

Yeah, absolutely. A great one that we take a look at where you'll kind of see something on the personal side would be debt to income ratio on your personal side. So what we take a look at, it's called DSCR, and that stands for debt service coverage ratio. So, in simple terms on it, a 1.0 means you make enough money on your tax returns to pay all of your expenses. So, what we typically take a look at when we do the underwriting is going to be a 1.25. And the reason why we include that extra income is we want to make sure in case of any downturn for the business, any slow period, there's still enough income to be able to service the debt for the loan request. So that's a great term that not a lot of people are familiar with, but it's something that we use whenever we underwrite a business loan request.

SPEAKER_02: 8:43

Okay. Any other terms? APR, APY, what are some other terms?

SPEAKER_01: 8:46

Yeah, absolutely. So APR, of course, is your annual percentage rate. So that'll be the rate that you have on your business loan. And of course, um, we'll work with you as far as the term on the business loan as well. So they'll sometimes you'll be asked on like on the application, it'll ask for your term requested. So for that, of course, um it will be, you know, the length of the loan, how long we want to term it out for. Um, another great term that we'll see that some people aren't familiar with when you get into the business loan is going to be guarantors. So a personal guarantor is required on each of our business loans. That simply just means that if the business is not able to pay for the loan, you're still personally responsible for it. And the reason we do that is that way we don't have someone who just simply closes down the business, walks away from the loan, starts up a new business, and tries to get another loan for it. We want to make sure that loan is held accountable. So a personal guarantee is required for all of our business loans.

SPEAKER_02: 9:40

Okay. So, and if I am just getting started, documentation, because again, you said you're going to be looking at my personal credit. Is there anything that I should be doing, particularly with my personal bank accounts? Or what are the types of documents should I be making sure I am keeping good records of? So if I have to come and see you, that I'm well prepared to show what I have and increase my chances of an approval.

SPEAKER_01: 10:03

Yeah, absolutely. So I would say a good thing to have if you're just starting out would be a business plan. It's not required, but it definitely helps because we can see the work that you put into it and see the projections of what you're looking at for your business. So that's a great thing to get started. It's something great to have on for yourself. You know, that way you can put those things on paper, put the numbers together to make sure it makes sense.

SPEAKER_02: 10:26

All right. And again, I know we say January, lots of people, it's always their New Year's resolution to start. Is there any time of the year that's better than others to talk about starting a business, being able to get business loans?

SPEAKER_01: 10:38

Not necessarily. I would say any time of the year is great for it. Uh depending on the type of business, you know, it could be, you know, something where you want to start it out in the summer. Um, it could be something you want to start out in the winter or when school starts. Um, but as far as doing the business loan, you can do it any time of the year.

SPEAKER_02: 10:54

What are some of the typical questions that you get from entrepreneurs when they come in and they're ready to get the loan? They all bright eyed, bushy tail, and they're just ready to come in and say, hey, give me$50,000. I want to buy a food, truck, I'm a great cook. What are some of those typical questions that you get?

SPEAKER_01: 11:08

Yeah, absolutely. So a big question is, what money down do I have to put on it? So um, it will, of course, depend on the different type of business loan that you're applying for. Um, typically for something like an equipment loan or a vehicle loan, it's about 10 to 15% down on it. Um, so that's typically required. It's great to let the members know that ahead of time. We try to stay away from as much 100% financing as we can, just because of the simple fact when it comes to business loans, it can be shown as neighbors being an investor in the business if we do 100% financing. So that's why we do require some equity injection into the loan.

SPEAKER_02: 11:43

I know with personal credit, often it's recommended sometimes to start with a personal small credit card. For business credit, would you recommend our business credit card something seen as something positive?

SPEAKER_01: 11:55

Absolutely. We have a great business credit card program. So for anything$5,000 or less, all we require is current proof of income and a completed application to review that request. So it can be any personal or business income that you can provide for the proof of income. And it's a great product to get people started with that.

SPEAKER_02: 12:13

Well, I think you've got a lot of people ready to go ahead and get started and probably to come in and see you. So if they do have more questions that they want to learn about getting business credit, establishing, you know, a line of credit, where would they contact you?

SPEAKER_01: 12:27

I would say the best point of contact is going to be going to our website, neighborsfcu.org. We have a great tab on there with our commercial products. Um, you can go into that and kind of select the different products that we offer on the business lending side. It'll have information about our business uh loans with the lines of credits, term loans. We'll have our credit card information on there as well. And there's also an inquiry form on there that you can fill out, and that comes to me directly, and I'll reach out to you through email or phone call. If you'd also prefer, you can of course go into the branch or give us a call at our main number and they can get you to me.

SPEAKER_02: 13:01

And what's the main number?

SPEAKER_01: 13:03

It is 225-819-2178.

SPEAKER_02: 13:06

All right. Well, thank you so much, Landon. I think that's some great information. Again, I know whether it's the beginning of the year, the middle of the year, end of the year, entrepreneurs are always looking to see how they can go ahead and grow with their business, establish credit, and I think this is some good useful information. So thanks again.

SPEAKER_01: 13:22

I appreciate you having me.

SPEAKER_00: 13:25

Stay on track with your financial journey. Subscribe to the Money Matters Podcast and visit neighborsfcu.org slash financial wellness for more tools to help you build a strong financial future.