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.