ARDMORE, Pa. — Things go a lot easier when potential lenders, suppliers and partners can decide to take a risk based on a dry cleaning business’ credit history and capability of repaying obligations. With strong business credit, a business can borrow at a lower cost, with more favorable terms. In fact, many small dry cleaners with good business credit have discovered it is possible get loans without an onerous and often embarassing personal guarantee.
Obviously, business credit is quite difficult to get. For any small dry cleaning business owner, navigating the credit and lending world can feel like a vicious Catch-22. Most commercial banks and traditional lenders are reluctant to loosen their purse strings until would-be borrowers have proven themselves with a strong credit history. But it’s difficult to develop that good record when no one will lend in the first place.
IN THE BEGINNING
When a business issues or extends credit to another business, it’s referred to as “trade” credit. Trade, or business, credit is the single largest source of lending in the world.
Information about trade credit transactions is gathered by the credit bureaus to create a business credit report using the business name, address and federal tax identification number (FIN), also known as an employer identification number (EIN). The business credit bureaus use this compiled data to generate a report about a company’s business credit transactions. In many cases, those extending credit will rely on that business credit report to determine if they want to extend credit—and how much credit they’ll give.
The major business credit bureaus that compile and provide copies of the reports are:
- Dun & Bradstreet (dnb.com)
- Experian Business (experian.com)
- Equifax Business (equifax.com)
Unfortunately, because information provided to the business credit bureaus is submitted voluntarily—no business is required to send it in—the credit bureaus may never receive much, or even any, information about a dry cleaning business’ credit transactions. In fact, many businesses go for years racking up business credit without any of it being reported to the credit bureaus.
ESTABLISHING BUSINESS CREDIT BASICS
Fortunately, there are a number of proven strategies that can help establish the credit worthiness of any dry cleaning or laundry business and gain recognition from the credit reporting agencies:
1. If not already incorporated, forming a corporation or LLC (Limited Liability Company) to operate the dry cleaning or laundry business, and obtaining an FIN or EIN from the IRS should be considered. Corporations and LLCs afford business owners liability protection, and a business credit profile can be created that is separate from the owner’s personal debts.
2. Every dry cleaning business should be registered with some, if not all, of the business credit bureaus. Dun & Bradstreet (D&B), for example, is one of the main business credit bureaus and maintains its own business credit score. An established business with an EIN can begin the process by applying for a free DUNS number. The number is how lenders will determine the operation’s creditworthiness (most business credit card and lending companies will ask for a D&B number during the application process).
3. Apply for a business credit card. Although most major credit card companies require that cardholders be in business for at least two years before they will extend credit, there are many small, local banks that are more accommodating to small businesses. They may be even more accommodating if an owner or manager is savvy enough to set up a business bank account with them!
Even though the dry cleaning business may not require more credit cards to finance its operations, it should still apply for more business credit cards. In business, the 5-3-2 rule is key—a business’ credit record is not considered established and solid until it has at least five trade accounts, at least three credit cards, and at least two small loans fully paid off.
4. Comply with all business requirements. Not being in compliance with local, state and federal rules, ordinances, regulations and laws can raise red flags with both credit bureaus and those who grant credit. Potential red flags include such things as a lack of a business license or a phone line. Many suppliers will not grant credit to another business that hasn’t taken the steps to set the operation up with the proper licenses or meet local, state and federal requirements.
5. Financial statements and a professional business plan are a necessity, particularly in today’s economy. These documents are also required by many credit grantors.
6. Finding companies willing to grant credit to the dry cleaning business without a personal credit check or guarantee is also a good strategy. When a supplier grants a business credit, it is important to ensure they report the payment experiences to a credit bureau. This step can help build a business credit report as well as provide a financial foundation for the operation.
7. Manage debt so the laundry or dry cleaning business, large or small, won’t experience trouble making payments, which will negatively affect its credit score.
8. Monthly payments to credit grantors will keep a business credit profile active.
9. Get a website. It may not seem like a must in building or maintaining business credit, but D&B now shows and lists websites on credit files. Many banks also use the fact the operation has a website as a positive factor in determining the creditworthiness of a borrower.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a financial adviser for advice regarding your particular situation.
Check back Wednesday for Part 2!