Contents1 9 Critical Mistakes Entrepreneurs and Business Owners Make2 How to Avoid Them3 and get a Small Business Loan4 Do yourself a favor and find out5 how to get a small business loan for your business…5.1 So the $64,000 Question to you is, “How Much Are You Willing to Risk For Your Business?”5.2 Are you using your personal FICO score to get funding for your business?5.3 Are you corrupting your FICO score?6 Are you establishing a real business entity? 9 Critical Mistakes Entrepreneurs and Business Owners Make How to Avoid Them and get a Small Business Loan Let me ask you a question: Do you make any of these critical mistakes that can not only cost you your business but your peace of mind … and if you’re not extremely careful, it may even cost you your home? Do yourself a favor and find out how to get a small business loan for your business… Believe me, you can absolutely do this WITHOUT Risking Your Personal Assets. You can easily do this without Lowering Your Personal FICO Credit Score, and eventually, do this all without personal guarantees! So the $64,000 Question to you is, “How Much Are You Willing to Risk For Your Business?” As a business owner and entrepreneur, you’re different. As crazy as this sounds, your brain is hardwired to take more chances than most people and actually enjoy it. But let me ask you this; Do you really like the joy or the adrenaline rush of business to such an extreme that you will take the chance to put this all on the line: Being chased by bill collectors and creditors? Having to go through a foreclosure or worst bankruptcy? Being turned down for a mortgage, car loan, or credit cards? Paying more higher interest rates on ALL of your debts? Did you say “no?”? If you didn’t, congratulations you’re already an expert. Otherwise, keep reading. Chances are you’re like most business owners and entrepreneurs I’ve interacted with over the past thirty-five years, and you’re flying without a parachute. Most business owners and entrepreneurs usually commit several financially critical errors when funding the start, the day-to-day operations, and the expansion of their businesses. 9 times out of 10, they don’t recognize the fact that they’re setting themselves up for a potentially critical error. A harsher reality is this. These well-meaning individuals, once they realize they’re committing errors … end up rocking themselves to sleep believing that the ramifications are nothing more than a small minor and insignificant flea on an elephant’s backside until they get declined when applying for a business loan or credit. They’re shocked when they find out that they are unable to get the 0% offered in that commercial for that new car. Worse they have to forget the Mercedes and settle for something else. Or how about being chased by creditors. The relentless phone calls and letters in the mail. Where does it end? Declaring bankruptcy? In order to make sure you’re not falling into the abyss, I’ve put together the 9 most critical mistakes business owners make with their finances. Especially when you are trying to get a small business loan. These are devastating and unforgiving moves that can put your business in a huge hole. These mistakes are so bad they can drown you in debt. Worse, they can literally obliterate your finances both now and in the future. As a business owner and serial entrepreneur, I have helped 1,000’s of individuals and business owners. I’ve helped them miss these expensive bone-headed mistakes as they build strong business credit. As a previous owner of brick-and-mortar stores and multiple online businesses, I will show you the steps you need to take to get the small business loans for your business today! Do yourself a favor. Just follow what I outline below. That way these 9 dream killers will be totally avoided. I’m telling you they are dumb and if you just follow what I’ve outlined, I can guarantee you a way to securing your business. And what this means to you is that you’ll be securing not only yours but your family’s future. Critical Mistake #9 Are you using your personal FICO score to get funding for your business? This is easy without a doubt the biggest and perhaps the most frequent errors business owners make. They use their personal credit (FICO score) to fund their businesses. Easy to understand examples include: Using your personal credit to pay for your business expenses (no separation between business credit and your FICO score) Business liabilities like expansion, equipment, or inventory financed with a personal loan Are you guilty of using these ways to get money for your business? If you answered “yes” you’re actually in good company. Unbelievably, and sadly, too many so-called “experts” actually give misguided advice to gain access to business capital. Don’t get me wrong, their words of wisdom are not designed to deliberately hurt you … but nonetheless, it is incredibly dangerous. Let me tell you why. The reason I’m telling you not to use your FICO credit score to help secure the funding for business expenses is to keep you safe. You WILL potentially crush your FICO score. Trust me, it’s almost guaranteed. If your business is going to rely on your personal credit here’s what typically happens: FICO scores go down – a lot. Every lender wants to look at your FICO score. They want to see what your history looks like. Even a true business loan that has no traditional PG (personal guarantee) from an alternative lender will want to see your credit score. Every time you apply for any type of credit or loan, an” inquiry” is created. The result is that each inquiry drops your score. Understand that inquiries only make up 10% of your credit score and they do drop off in 6 months. However, the immediate challenge for you is that the more your score drops, the more challenging it is to secure financing. Plus if lenders see that you are “shopping” they sometimes assume you are more desperate to secure a loan and will deny your application. So it becomes a real catch-22. And you stand almost a zero chance of getting financing with the most favorable rates and terms. Your available personal credit gets reduced – dramatically. The more credit or assets you have guaranteed or used for your business, the higher your credit card utilization. Your credit card utilization as a rule of thumb should be no more than 50% and 40% is even better. If not, this results in both personal and business lenders being less willing to give you credit for business and personal use. The fact of the matter is that personally guaranteeing the loan for your business could block you from securing a mortgage or refinancing your current mortgage to a lower rate. It can also prevent you from getting the most attractive rates on car loans or leases or even your credit cards. Everything is lost. Using your FICO score to secure business financing, means tying your personal finances to your company. If your company goes belly-up, you’re stuck holding the proverbial bag. Your personal credit will be crushed. Same with your business. I’ve got to tell you that you’ll never see that “business loan” you took from your 401K or IRA to get your business off the ground. The bill collectors will be dialing you up day and night, or worse knocking on your door. I’m sure I don’t have to tell you that if things turn south quickly it may mean Chapter 7, 11, or 13 or even lose your house in foreclosure. The lesson here is to build a strong wall around your economic well-being. Remind yourself constantly to build your company’s credit on its own merit and not off the back of your FICO score. Critical Mistake #8 Are you risking your personal ass-ets? Each and every time you encumber your assets (car, home, stocks, other valuable assets) to secure business financing, you unwittingly place your prized personal possessions, such as money market funds or stock and bond accounts, your autos, or worse, your house. Unfortunately, you must be prepared in the event that your company is unable to repay the loan on time or starts missing payments, the bank or lender will start taking action for you to pay back the loan. Make no mistake about it, they will come calling. And as a last resort using the courts to remediate any actions. Do you know why the sole prop is the riskiest structure? Listen, of course, you can establish business credit as a sole proprietor. Even so, you’re on the hook for all personal and corporate liabilities. The reason is that you’re using your social security number and not a corporate tax ID or EIN. As a result, your FICO score (credit report) will be based solely on your social security number and the activity associated with that number. Again, that’s because you do not have a corporate tax ID number when you operate a “Sole-Prop”. Remember: As a sole proprietor, you also have no legit means for separating your business credit from your and personal FICO. If you really want to save your ass-ets, incorporate! By incorporating your business properly, you protect yourself and your family. This protection happens by separating your FICO score from business credit and creating two distinctly different entities viz a viz your social security number and EIN or business tax ID. From the government’s perspective, there is no difference between an SSN and EIN. Both are seen as individual taxable entities. Therefore you can reduce or eliminate your f personal responsibility for the company’s liabilities. As an extra benefit, you will also possibly reduce your taxes by shifting income and expenses rightfully to the business. Critical Mistake #7 Are you corrupting your FICO score? It goes like this; When the wedding bells ring and they pronounce you man and wife, you commit to sharing your lives. For many couples that are uninitiated to the world of personal and business credit, this means commingling your personal credit with your significant other. Unfortunately, combining and sharing credit isn’t a testament to your true love and devotion. Especially for entrepreneurs… It’s what people in the industry like to call “credit file contamination”. As an entrepreneur, this is akin to treason! Joint credit means your significant others’ FICO history is now part of your credit (or vice versa). If your significant other inadvertently doesn’t make a payment, your credit takes a direct hit. This gets worse and more complicated. You definitely want to ensure that you’ve done everything necessary to make sure you create distinct business credit that has nothing to do with your personal FICO score. Furthermore, making sure your credit and your spouse’s credit is totally separated as well. Believe it or not, the simple mistake of mixing your credit may prevent you from reaching your business objectives, namely getting that coveted business loan or business line of credit to help build your business. It can ultimately be the obstacle that prevents you from obtaining the business financing to grow and expand your business. The safest way to stop and commingling or mixing of credit files is to totally wean your credit from your spouses. Do everything in your power, although it runs contrary to “true love” to keep them separate. Listen, life happens. If one or the other happens to get their personal credit banged up, the other can use their credit to keep the family afloat. Make sense? Critical Mistake #6 Are you late? Life happens. You accidentally lose your credit card statement or deleted the e-bill. So big deal it’s a few days late. As they said in Forest Gump, “@#it happens!” Yeah, yeah, yeah, but as a business owner, when you are looking to get a business loan or financing, no lender wants to see any late payments. Let me say this again. No late payments. Not business not personal. NOTE: Many alternative lenders will allow for a minimum number of late payments or even bounced checks. However, please do not make this a habit. it will negatively affect your rate and terms and you will not receive the best business loan programs available. Your credit report, commonly referred to as your FICO score, is a summation of your credit history for the past 10 years. Kind of like that “permanent” record you were warned about in school. Except this one is very real! Believe me when I tell you that missing payments, late payments can damage your credit score enough to prevent you from getting any business funding. A single late payment can put pressure on your credit score for many years. Believe it or not, it will be used to prevent you from receiving a small business loan, working capital, or a simple line of credit. To be denied can be devastating. This can seriously hurt your chances to finance the launch, growth, or expansion of your business. I have two solutions to help you here. The first, maybe easier said than done, is to make sure that you pay your bills on time. Second, and this is probably going to be more difficult, is to build your business credit. That way, challenges with your FICO will have no impact on your company’s business credit. Just remember, again, skipping steps is deleterious to separating your business and FICO score. Issues with your FICO score will negatively impact your ability to build your business. Critical Mistake #5 Are you taking money from your family, friends, or fools? Using that convenient piece of plastic in your wallet with your name on it for business purchases spells potential trouble. The first thing you do is actually reduce your available credit also known as credit card utilization. By using a credit card for business purposes impacts that credit needed to use on your family for every day or emergencies. If you’re like many individuals in the U.S., you use the piece of plastic as your financial backstop. That means using the credit to help with emergencies like hospitalizations when you can’t work. I’m telling you now that draining your personal credit on your business expenses is like wearing a safety harness with frayed straps. Still, many business owners we talk to daily turn a blind eye to these dangerous practices: Using personal credit to pay for business expenses. The rationale or logic used by most is that when they use their personal credit cards for these expenses, they promise to pay themselves back sometime in the future. I’ve seen this for over 30 years. It almost never happens. Individual business owners delude themselves into thinking they’ll pay themselves back. Here’s how the logic works. They build a business with personal credit and loans. Some day they sell the business. This is their retirement nest egg. What that business owner really never calculates in the selling price is how much they personally lent to the business and the additional carrying costs of either charges interest or lost opportunities. The result is netting far less and not really having the capital necessary to enjoy that retirement. They miscalculated, and this can be even more costly, is that technically, by commingling your business and personal credit, you cannot really take it as a business expense. So if you’re ever audited it may be difficult to take those charges as expenses in your business and you may be forfeiting real business write-offs. Once they’ve maxed out and reached their limits they start persuading their spouses or other family members into using their credit to continue financing the business. It’s what I call going to the 3 F’s. Family, friends, and fools. WARNING: if you talk your family members into providing capital to your business, you’re just making a huge hole for your family and then expect them to find their way out of it. If your business fails – as the vast majority, unfortunately, tend to do in the first 5 years, (according to the SBA) your family could be devastated and left in financial ruins. You need to think about what your Thanksgiving or Christmas table will be like if that happens. Thinking of asking family and friends to put money in your business? DON’T. As we mentioned in Critical Mistake #9, it is potentially disastrous and a CRITICAL ERROR to fund your business expenses using personal credit or assets. Look, and this can be a bitter pill to swallow, what’s good for the goose is good for the gander. Why should your family pony up funds if you’re not willing or able to put it in yourself? Please do yourself a huge favor. Your business is your business. It needs to stand on its own. Do things the right way from the get-go and keep it all separate. Critical Mistake #4 Are you establishing a real business entity? Owners of businesses are often oblivious to the true value of incorporating your business entity properly. Too many accountants and attorneys are as well (my apologies to all the competent professionals out there). How do I know this – personal experience and bad advice. There are even fewer professionals let alone business owners that understand how simple it is to build business credit. TRUE STORY: I was at a networking meeting. I was asked what I did. As we deep-dived into the conversation it turned to business lending and Business Credit Building. This individual had really no idea how to build it. None whatsoever. Who was I speaking to? I can’t share that, however, I can tell you what he did and who were his clients. He was a who’s who CPA from Washington, D.C. His clients were ALL Congressmen, Senators, Supreme Court Justices. About the only one, he didn’t have as a client were past Presidents. He was AMAZED when I explained it all to him. Setting up your company’s “legal” entity properly is the action that the IRS allows so your business entity is legally separated from you, personally. It becomes a tax-paying entity that will stand on its own. Whether its assets or liabilities. Setting this up properly is the actions that make your business assets your business assets and not yours personally. It is the line that protects your assets. The nice thing is that if you do this the right way if you’re sued, they cannot get access to your ass-ets like your home, auto, or any other family jewels. As long as they can’t pierce the corporate veil. And how do you make sure that can’t or won’t happen. Keep your personal assets and liabilities totally separate from your business. It’s not hard to do. Just be diligent. SIDE NOTE: A Sole Proprietor or Sole Prop uses the social security number of the business owner. That’s you. Unfortunately, it’s almost impossible to keep things separate here. Usually, and this is a generalization when you have a hobby and derive some income, the Sole Prop serves you well. however, I’ve seen companies doing $13M a year in revenue set up this way as well. What a disaster! Establishing separate business credit isn’t the sole reason to set up your legal business entity. Why are you in business? Making money, right? Not to just make money. You want to make a lot of money. And you want to invest some of that profit back into your business to grow and expand. Plus the tax benefits of running a business as a business and not an extension of yourself. You need access to capital to help grow your business. By turning your business into an LLC, C Corp, or Sub S (we are not accountants), you are taking the first steps in gaining access to business credit. The result will mean getting your business the business capital needed to expand your business. The whole idea of this process is to be able to get business credit strictly on the merits of your business without your personal credit backing it up. Just remember, while this takes time, there are business loans available now without those traditional personal guarantees. TRUE STORY: How nice would it be to have a business credit card from American Express in the business name only. Your name is nowhere on the card. Imagine the surprise on the cashier’s face when they look at the card and then you knew that your name isn’t that name on the card. Well, that happened to me in L.A. airport at the Hertz car rental. I was on a business trip and used the car to pay for the rental. Long story short I had to get the manager and I called AMEX and they verified that I was who I said I was (and not the name on the credit card). But remember just because you incorporate, that doesn’t automatically mean your business qualifies for all the business credit needed. Especially the highly sought after and coveted types of business credit. Your ultimate objective is to get money in the name of the business. You don’t necessarily just want vendor LOC’s (Lines of Credit which you do not need to offer a personal guarantee). To get the “Big Kahuna” of business credit, you need to crawl before you walk and then walk before you run. What are the few first steps? Incorporating your business, Get a real business office and address that’s verifiable, Get a local phone number Get a 411 listing, and Make sure you get a business license and Have a business that makes money. Start crawling by following the yellow brick road. The road begins setting you on the highway for building your business credit with the D&B, Experian, and Equifax business credit. Give the 3 business credit bureaus what they need to score your company. You’ll be on your way to apply to the handful of top business lenders who can offer you a business loan. TRUE STORY: A business associate and friend took the steps I outline elsewhere in this blog. Within 90 days he called me all pumped. He had just secured over $100,000 in spendable money on business credit cards that had no tie to his personal credit. Critical Mistake #3 Are you running when you should be walking trying to build business credit? Business Credit is a critical piece to your business success. There is no doubt that it can help you create wealth. Why? It’s simple. The opportunity to reinvest money into your business helps you to continue growing and expanding. Rome wasn’t built in a day. Neither is building business credit. Especially if you’re trying to build a nice retirement nest egg. Naturally, it takes some time. But if you can spare some time and be just a little patient you can get funding from business lenders. And these can be loans, working capital, or lines of credit with no PG. Establishing a legal entity and getting that EIN is just step one! Just like you can’t rush a child to walk. It can take many several months to years, the same with building business credit. Typically it takes 2 to 3 years. Can you speed this up? Actually, you can. You can work to accelerate building business credit faster. You can get the money in as little as 1 month (just follow the yellow brick road. Don’t worry if you do not qualify right away. I can guide you. Like a good traffic cop I can direct you around the tie-ups and obstacles so you can get on that highway of funding). Just stick to the route that I highlight. Critical Mistake #2 Are you following through on your quest to build business credit? Here’s a sad truth: Starting the process doesn’t ensure success. Sadder is the fact that the vast majority start but then get lazy. No follow-through. Or they abruptly stop. This process is like a giant picture puzzle (I promise you not the 10,000 piece jigsaw puzzles). If you don’t work on at least a little of every day or week (ok, maybe a month) it will all come to a grinding halt. Keep track because you may try to jump over the key small baby steps. It’s these baby steps that may make you or break you. Why stop with a few vendor lines of credit worth thousands when you can go for it all and get 100’s of thousands? There is nothing worse than starting and not following through on to be denied. Critical Mistake #1 Are you pulling a Homer Simpson? We all have our Homer Simpson moments. It happens to almost all of us. We start pulling in the big bucks or we’re getting our business credit and business loans. What happens next is that many business owners have too much month at the end of the money and spend money on stuff their cash flow will not support. Feeling like they deserve it they are enchanted with the big Mercedes or cruise around the world they’ve not had after years of hard work and sacrifice. Unfortunately, short-term gains are clouding the long-term picture. Long-term financial goals are traded for short-term pleasures. As I said, it happens to almost all of us. Do you want to really reach your goals? Then take the time to realize that business credit and a percentage of your bottom line profits should be reinvested to generate greater revenue for your growing company. Not personal consumption. I could probably talk to you for another few hours on this subject. This is only the beginning. Plan your work and work your plan. That was the advice given to me as a 23-year old by a then 84-year-old. I hope my 40 plus years of experience in some way can now help you.