What’s wrong with small business funding model (squeezing water from a turnip?)

Small business is in crisis. This crisis is driving our unemployment and undermining
the financial security of the US.

Our banking system has evolved into looking at a small business as an individual, not as a
business entity.   Most small businesses cash financing and lending is driven by personal credit.  This single source view of credit is the Achilles tendon that is putting literally millions of small business at risk for failure!

The problem is that business owners are living with one credit source, and that is personal
credit (FICO).  This single source dependence on their personal credit resource creates an over usage of personal credit, that results in declining credit scores and limited credit availability. Personal credit is not an unlimited credit resource. In fact, the more you use it (credit inquires, new revolving credit accounts, increase use of credit cards) the lower your credit score goes.   For example, when a business exceeds 50% usage of a credit card, you will likely not only have a dramatic reduction in credit score, but also, the card provider
will likely reduce your available credit limit.  In short, you damage your credit score and reduce your credit
availability at a time that you need more credit to support personal and business cash needs.

Three Reasons why small business owners are in this situation?

  • First- Lenders are interested in minimizing risk.
    The easiest way to minimize risk is to tie lending and credit to
    existing assets, and for most small business owner, their personal  asset are obvious targets.
  • Second- Business owners have not been educated to the opportunity to build additional
    credit assets in their business.  Nearly
    90% of small businesses have underdeveloped business credit profiles.  If business owners knew that they could easily build a business credit asset that would increase their access to credit
    and lending and reduce their personal exposure to business liability; “Who wouldn’t do that?”
  • Third- Small business owners underutilize trade credit to enhance cash flow and fund
    their business.  95% of all US business funding is based on trade credit.  That means
    that less than 5% of all financing is cash financing including credit cards, lines of credit, loans etc.   There is over $1 Trillion dollars of trade credit available to small businesses, however less than 30% utilize trade credit, and of those most are underutilizing this credit source.   If your business is not structured to maximize trade credit, you are leaving $100K’s of dollars of credit and cash on the table. 

How do you change the game? Understand the rules

Reduce your dependence on your personal credit – Blindly using personal credit as the sole source of cash credit for your business is a recipe for disaster.  Stop using personal credit in your business, and if you need to guarantee a business loan or line of credit, make sure that you are building your business credit
score.

Invest in building business credit Most business owners do not understand that business credit is not automatically created when you formed your business.  Business Credit must be created in a systematic way, and before you can create and build a credit file, your company must be lender compliant.

Leverage credit and funding that builds your business credit score– there are 10’s of thousands of  trade credit providers, however only  5% of these vendors report.  It’s important that you work with a partner who can help you identify and apply with reporting vendors.

Leverage your growing business credit–  to support as much cash and trade credit as
possible. The more credit you acquire and support through your business, the
greater the value of your business credit. Your goal is to create a Business Credit Asset ™ that increases the
value of your business.

Reduce your dependency on cash credit:  small business owner are far too dependent on cash credit, it is estimated that the average small business in the US has over $200,000 in cash equivalent trade
credit.  This is an untapped source to finance the growth and health of your business.

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Categories: Business