How to Establish Business Credit?

With the rapid change in the financial world, everything related to finance is changing, whether it is credit facilities or investments. Steps are being taken to make everything simple, convenient, and fast. There is a consensus among financiers that businesses have different financial requirements, and there is a need to resolve them. One such step taken by these, which may help businesses, small or big, is to establish business credit. This is an option which you can avail of, where financial institutions provide loans, without needing the credit rating or the personal assets of the owner as security. And, most importantly, the organizations of every size and age can avail of it, whether it’s old or new, big or small. Whether you need finance for setting up or expanding the business, purchasing material or equipment, or advertising, this facility is always there for you.

Steps

There are various steps involved in establishing it. The first point that you should remember is to ensure strong fundamentals of your business. Moreover, you should also take care to see to it that you meet the requirements of financiers. Ensuring this would make listing of your business with commercial credit reporting agencies easier.

The next step is to develop a connection with suppliers and vendors. These suppliers and vendors should be such that they not just extend credit payments, but most importantly, report the history of your payments to the respective agencies. You need to have the backing of at least five such vendors, and they should not tie your personal guarantee or social security number while giving you such credit.

Obtaining credit cards for the same is the next step. You should get three such cards, but make sure that they are not connected to your personal credit. Moreover, you should also ensure that these credit card companies report your transactions and payment history to the concerned agencies. However, unluckily, there are not many types of such cards, which would consider approval without checking your personal credit report. In such a scenario, you should look around and search for such a card. Take your time in this step as it can be crucial. In case you are not able to pay your corporate bills on time, your personal credit would nosedive, even if you have an excellent history. Similarly, if your commercial credit history is excellent, but your personal one is not that good, it would affect your business ratings. So, it’s absolutely important to segregate both these entities. Once these steps are done, you can then opt to use these references so as to obtain bigger credits.

How to Establish It for the First Time?

Today, suppliers and creditors are increasingly checking, not only your personal, but also your commercial credit reports to decide on how much to lend and at what rate. This is the reason why it has become necessary to set up a separate report. In case you have set up your business for the first time and still haven’t established it, you can opt to get trade lines so that you can start building your respective report. You may incorporate or apply for a Limited Liability Company so that your business seems to be a separate entity. You can also get an Employer Identification Number from the Federal Government. Open up a bank account for it. Moreover, a dedicated phone line would do you a whole lot of good, but make sure that you list it. Once these steps are done, you can ask for business credit in the name of your company and start building a good score.

How to Establish It With Bad Personal Credit?

Even if you have a bad credit history, it is still possible to establish it. For this, you should legally separate from your business. If you don’t opt for this and you apply for one, your social security number would be used, and your bad personal credit would come in the way of getting you a good deal. For separating your personal finances from it, you need all the necessary licenses, and most importantly, apply for a tax ID number.

You need to start small as getting a business loan is easier for a startup without credit history, in case you have dropped your personal credit. Build it over time, paying off the amount you have borrowed on time and making the required payments on time.

You should not only concentrate on building the credit score of your business but also work on rebuilding your personal one, as well. Ultimately, you may need to approach a larger financier for a bigger loan, and in such cases, financial institutions consider both these scores.

Thus, the most important thing to remember, alike in all other cases, is that you should try to make your payments on time so that you can establish it fast. These are the necessary steps that will help you to build up a good credit score.

What is Tangible Net Worth?

One of the financial parameters which lenders care a lot about when deciding whether or not to finance a company is its tangible net worth. It represents the total of its tangible assets like land, building, machinery, inventory, etc.

Explanation

If there is any party which is most concerned with the tangible net worth, it is the lender. When a company approaches a lender and asks for a significant amount of money as a loan for expansion purposes, the lender will no doubt be a little wary.

The lender will view all the finances of the company, its performance, its ability to generate revenue and its ability to pay back the loan. Of the parameters it chooses to examine when they evaluate whether or not the company will pay back the loan, is the tangible net worth of the company.

One look at the word will tell you that it has got to do some thing with tangibility and the market value of the company. It is the amount of money that the company would realize, should it go into the market and sell all of its tangible assets. The distinction between tangible and intangible assets needs to be made here.

Tangible assets are those which can actually be touched, felt and sold. Intangible assets include goodwill, trademarks and patents which the company has. But, while intangible assets command a pretty good value, no one in the market will be willing to ‘buy’ goodwill, unless they buy the company outright. Therefore, tangible assets include all such items which have a resale value.

Importance

Let’s go back to the reference about the lender here. When a lender evaluates whether or not to give you a big loan, the lender no doubt wants to know if you will be able to pay it back. Should you default on the loan or become unable to pay the loan, the lender would like to have some sort of security against the loan.

And by calculating the worth of your tangible assets, the lender knows that in case of default, just how much you will be able to raise, should you sell your tangible assets. If the tangible net worth of the company is well above the amount of loan being given, and there are not many liabilities tied to the assets already, then the lender will have no qualms about giving the money to the company.

Calculations

Now from the above section, you understand that the two things associated with the tangible net worth is the tangible assets present with the company and the liabilities attached to them. Calculating it will also take into consideration the following factors.

Tangible Net Worth = Total Assets – Intangible Assets – Liabilities

As you can see, the tangible net worth is a pretty important consideration from the point of view of the lender, to be sure that the company has enough funds to pay back the money owed. This is what makes it such an important financial management variable.