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Summary:

Today we offer the latest edition in Larry Chiang’s long-running series on “Things They Don’t Teach You At Stanford Business School,” which he is turning into a book. (A list of Larry’s earlier posts is below.) This month’s installment is about how to build good credit […]

Today we offer the latest edition in Larry Chiang’s long-running series on “Things They Don’t Teach You At Stanford Business School,” which he is turning into a book. (A list of Larry’s earlier posts is below.) This month’s installment is about how to build good credit for your business in a recession.

April is financial literacy month and it’s meant for kids — but we entrepreneurs can learn something too. Surprise! None of these tips are taught in business school. Credit isn’t a class taught inside such Ivory Towers. (I think maybe because we’re supposed to be too good to worry about our FICO scores?) But then, again, credit rules are archaic, so its understandable that Stanford GSB doesn’t school its kin in such minutiae. But I plan to, because especially right now — as we teeter into a recession — a lot of founders are going to learn just how powerful good credit can be.

My 9 Tips for How to Build Credit for Your Business…

Hints: You must have a D&B report on your company, and presentation matters.

1. Vendors that report to D&B build your business’ credit. Vendors that don’t report to D&B don’t build your business’ credit.

2. Proactively fax your D&B report when you are applying for business credit. Also, get a credit application pre-filled out for your business. If you wanna be fancy, make it into a pdf.

3. Proactively call to set up your D&B with your D&B rep. If you don’t have a D&B representative, woo one or charm one.

4. 90% of credit checks are cursory. Why? Because they’re expensive. A D&B report costs $100 or more for the creditor to commission.

5. Pick a bank and stay there. Loyalty counts in the credit markets (just ask Jimmy Coyne from defunct Bear Stearns.) I have my banking relationship from when I was 6. Mid-America bank in Naperville, IL.

6. D&B doesn’t rely on audited income statements or balance sheets. D&B GUESTIMATES! They approximate revenue based on a number of factors including bank deposits and average balances, 1099s from major institutions, and entrepreneur self-reporting.

7. Negotiate for terms with a credit pre-authorization. This is also called “net 30″. Getting net 30 and paying within 30 days is good for your credit. A work-around if they won’t give you net 30 is to pre-pay your first couple orders and then slide into net 30. The biggest banks in the world negotiate for net 30 and pay net 90.

8. Borrow against an asset your business owns, or will soon possess. Borrow against a contract that projects quarter-to-quarter revenue in a method called borrowing against accounts receivable.

9. Never secure a loan with your social security number. Its like signing a blank check because debt collectors can go after your house or any property you personally own.

Do these nine things, and I guarantee your company’s credit rating will improve by at least TK points — which means you need that cash-infusion (and you will, eventually) you’ll get better terms than before.

Larry Chiang is the founder of duck9 and a frequent contributor to Found|READ. His earlier posts include: 9 Techniques For Closing a Deal via Voicemail, How to Work The Room; 8 Tips On How to Get Mentored ; and 9 VCs You’re Gonna Want To Avoid, and 9 Things Stanford B-School Won’t Teach You.

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  1. David Mullings Thursday, April 17, 2008

    I appreciate the advice.

    Securing a loan or line of credit for a young company WITHOUT using your social security number is extremely hard.

    When I was leasing my computer equipment for my business, securing our first business credit card from a major bank or getting a line of credit from one of the biggest banks in the US, they REQUIRED a social security number in each case.

  2. Scott Nassans Friday, April 18, 2008

    CobaltCredit.com offers credit cards for all credit types, as well as several other financial services, such as payday loans, credit repair, debt consolidation and more.

  3. larry chiang Monday, April 21, 2008

    David – do an asset lease back service on 1/5 of your stuff at 20-33% value to show unsecured lines open

  4. Would be great to see an expanded version of this – get it on Larry!

  5. GoodCreditRocks Friday, September 5, 2008

    Making sure your own personal credit is stable before moving into the world of “business credit” is also a great thing to consider. The better your own credit is, the better your company’s is bound to be!

  6. Larry- Regarding, 5. Pick a bank and stay there. What would you say to all those who just lost their bank? I used to bank with WaMu and loved them. I was said to see them go under and am sad to see my free checking eventually die (assuming it does), I’ll ask that they continue to give it to me and see where that gets me. How can we as personal bankers take advantage of this banking scenario?
    Thanks.

  7. 14 Chapters. Over 500 Pictures. « WhatTheyDontTeachYouAtStanfordBusinessSchool Thursday, September 3, 2009

    [...] How to Build Good Credit for Your Business [...]

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