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Explore Our Blog Series on Credit
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Overview of Credit Relating to Personal Finances

What is credit?

Credit is a contractual agreement in which a lender lends money to the borrower with the intent to pay the lender back at a later specified date (usually with interest). Credit is the purchase of goods or services with money that you do not yet have in your possession but have the intent to pay back the lender once you receive the money. When buying groceries with a credit card you are using credit. Getting a loan to buy a car or a house is also using credit.  

Why do you need credit?

Lenders look at your credit score to see how likely you are to pay them back. Buying items such as houses or cars may require you to get a loan and the lender will look at your credit score to see if it is a good investment to lend you their money. Your credit score may even be used in the hiring process or by landlords and will also affect your loan interest rates.  

What is your Credit Report/Score?

Your credit score is a three-digit number that represents your credit history and trustworthiness from lenders. Lenders use that three-digit number to help determine how you will use their credit line based on your financial history. The range is 300-850 with 850 being the highest score available. Most credit scores fall between 600 and 750. A credit score above 700 hundred is considered a good score and a score above 800 is considered excellent. A credit score or FICO score is created based on five different criteria and they are debt utilization, payment history, types of credit used, new credit, and credit length. From these five factors your three-digit credit score is created, and that number is what lenders look at to see how likely you are to pay them back or not and if it will be on time or late.     

How do you Build/Improve Credit?

Like losing weight, it takes time and there is not a quick, simple solution for it. To help improve your credit score make sure you pay current debts on time.  Late payments are an easy way to decrease your credit score. To improve paying on time you can set up payment reminders through your online banking. You can also set up recurring payments which are scheduled when a payment is due and your online bank will automatically take the minimum or set payment out of your account. Some believe this is not a good idea though because it does not help you improve your money management skills or time management skills for making payments on a regular basis. Another step to take will not necessarily improve your credit score but it will give you peace of mind. This step is to decrease your debt and over spending. You will need to create a budget and that budget will need to be geared towards putting all extra money except for necessary payments towards paying off your debts. It is best to pay off the debts with the highest interest rate first and then work your way down from there until you have paid all of your debts off. Debt consolidation programs can be beneficial for those that seek to simplify their payment plan. The third step is to limit yourself from opening any new lines of credit so more credit is available. Opening new lines of credit will actually lower your credit score especially when you have unpaid debt.

Kenton, Will. (April 17, 2019). Credit. Retrieved from

https://www.investopedia.com/terms/c/credit.asp

Mai, Jessica. (May 5, 2016). 7 ways your credit score can affect your life. Retrieved from

https://www.businessinsider.com/how-your-credit-score-can-impact-your-life-2016-5

myFICO. (2019). How to repair my credit and improve my FICO scores. Retrieved from

https://www.myfico.com/credit-education/improve-your-credit-score

Building and Repairing Business Credit 

Building business credit helps to separate your personal credit history with your business’ credit history and then you can benefits from having good business credit even if your personal credit history is lacking. In other words, if your personal and business credit are separate and your personal credit score falls then your business credit will stay the same and vice-versa. Having business credit allows the owner to keep there personal assets protected as well. Keeping your personal and business accounts separate allows for clear cut budget analysis, more straight forward record keeping, and protection for each individual score in case of an unforeseen hit on either account. 

Having good business credit has many benefits. One of those benefits is that you have better interest rates and credit terms when applying for loans from lenders and banks. Good business credit also helps to position your company for better payment terms with your vendors and suppliers. Another benefit is that it will help you reduce the number of times that you are required to prepay for services or products your company needs to operate and grow.

It is still important to make sure that your personal credit is in good shape. With young businesses that do not have a lot of credit history  lenders may check the owner’s personal credit as well as the business credit when applying for a loan. Therefore, the health of both personal and business credit are important to maintain.

The first step that needs to be taken when you want to start building credit as a business is to incorporate your business. If the business is a sole proprietorship or partnership, then the credit history is the same as the owner(s). When the business is incorporated it separates the owner and the business. Forming a Limited Liability Company (LLC) is a form of incorporation which this legally separates the owner and business from each other. The next step should be to get a federal employer identification number (EIN) which is used for federal tax filings. The EIN is simply used like a social security number for your business and is required to open a bank account in the name of the LLC or corporation. After obtaining the EIN for your corporation or LLC then you can open a checking account under the business.   

Now that the business has taken its own form and is separate from the owner you can treat the business as a separate person.  You will want to pay the expenses or transactions of the business from the business account. When looking for a business credit card it is important to pick a company that reports to the three major agencies. Opening a business credit card is one of the best ways to build business credit. Having a business phone number in your business’s legal name is another aspect that supports fostering the identity of the business.

Opening a line of credit  with your vendors/suppliers can be mutually beneficial for both parties. Find vendors/suppliers that report to credit agencies so the positive transactions will be reflected on your score. A line of credit is revolving credit where you can borrow, repay, re-borrow, and then repeat this cycle if there are funds available. After opening a line of credit confirm that they are reporting your business’ payment history to the three credit agencies. 

Experian, Equifax, and Dun & Bradstreet are the three major reporting agencies for business credit. Opening a credit file is an important way to monitor your credit and it is recommended to check your score once a year for possible fraudulent activity. It is very easy for a business to check it’s credit score. The business can pay Experian, Equifax, or Dun & Bradstreet a fee and these bureaus will provide a full copy of the business report. 

If a business has a credit score that has been damaged there are steps you can take to repair the score. One of the main reasons business credit is low is due to late or missed payments. Making payments on time will not only stop your credit score from decreasing, it will begin to improve your credit score. Early payments will give you an even better credit score than if you just make payments on time. If you have a past due account, you may be able to rectify this if the creditor or lender is willing to negotiate. Some lenders may remove all negative marks from your account if you make a certain amount of payments on-time. This all depends on the negotiation and mercy of the lender because they have no obligation. Having more than one account is a good idea to build credit as long as you are careful not to overextend your resources creating undue liability for your company. 

Reducing revolving credit is another step that should be taken. Lenders look at the credit utilization rate which means they look at the debt to credit ratio. Say your credit limit is $5,000 and you owe $2,500 then you have used up 50 percent of your available credit which will actually decrease your credit score. The higher the ratio the higher the risk and the lower your overall score. You want to keep the percent of used credit (debt) under 30 percent or only charge what you can payoff every month. 

Closing the accounts will not help improve your credit score, in fact, it will actually hurt your credit score. Open and keep accounts and if you have not used an account in a while make a small purchase and pay it off right away, but keep the account open.  

Rampton, John. (May 15, 2017). 7 Strategies to Repair Your Business Credit. Retrieved from

https://due.com/blog/7-strategies-to-repair-your-business-credit/

Wolters Kluwer. (2019). How to Build Business Credit for a Small Business. Retrieved from

https://www.bizfilings.com/toolkit/research-topics/running-your-business/how-to-build-business-credit-for-a-small-business

DeNicola, Louis. (April 17, 2019). How to build business credit. Retrieved from

https://www.creditkarma.com/advice/i/build-manage-small-business-credit/

Explore Cash Flow

Cash Flow and What it Means for Your Funding Opportunity

Cash flow is the total amount of money that is going in and out of a business, especially if it affects liquidity. In other words, cash flow can be looked at as the total net amount of cash-equivalents and cash flowing in and out of the business. The basic objective of financial reporting is assessing the timing, uncertainty, and amounts of cash flows. A cash flow statement reports investing, financing, and operating cash flows. Simply put, a cash flow statement measures how well a company can manage its cash position. Which means it measures how well the company can generate cash to fund its operating expenses and the ability to pay its debts off.

A positive cash flow means that the company is robust and making profits. The company’s liquid assets are increasing which allows them the ability to reinvest in their company, pay back shareholders and expenses, and provide a barrier of protection when future financial challenges arise. The company must have enough cash or cash-equivalents to be able to handle short-term liabilities. This flexibility is what creditors and investors look for.

The key to making sure that your company does not struggle is to avoid having a lot of profits tied up in accounts receivable and inventory, or overly devoted to capital expenditure.

Kenton, Will. (May 5th, 2019). Cash Flow. Retrieved from

https://www.investopedia.com/terms/c/cashflow.asp

Murphy, Chris B. (May 8th, 2019). What Is a Cash Flow Statement? Retrieved from

https://www.investopedia.com/investing/what-is-a-cash-flow-statement/

Explore Collateral

Why Use Collateral for the Loan Process?

Why use Collateral for the Loan Process?

Having collateral to offer lenders helps secure better loan terms because it increases creditworthiness. Collateral allows for a higher loan amount, lower interest rates and longer repayment terms if desired. Should you default, offering collateral upfront gives you greater control on what may be seized.

Collateral is something that is pledged as an asset to the lender if the borrower defaults on the loan. A loan that has collateral involved is called a secured loan and normally has a lower interest rate since it is backed by the collateral. There can be many things offered as collateral but the most common are houses, cars, savings accounts, and investment accounts. For example, mortgages are loans that have houses as collateral and car loans have the car as collateral.

In capital funding for businesses collateral includes some mixture of real property, cash accounts, unpaid invoices, inventory and/or equipment, and sometimes a personal guarantee from a co-signer.

Kagan, Julia. (April 12th, 2019). Collateral. Retrieved from

https://www.investopedia.com/terms/c/collateral.asp

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