Beginning Steps of Business Credit Building

Building credit for your business can be daunting if you are unfamiliar with the process. The absolute first thing you'll have to do is have a business. A corporation or LLC should be fine to start building business credit. The state where you incorporate is not very important for the credit side of things.

Once your business is setup you will need to make sure it is listed in 411. When you submit applications for credit many companies will search for your business in a 411 listing to verify the phone number on your application. Some companies use Google Voice and submit the number to several 411 services themselves.

Business credit bureaus collect information and report it to businesses that subscribe to their service. There are 3 major business credit bureaus: Experian, Equifax, and Dun & Bradstreet. Some creditors report to Experian only, some report to D&B only, but the ones that help you the most will report to Equifax, Experian, AND D&B, giving you a tradelines on all the major business credit bureaus.

Net 30 accounts mean you have 30 days to pay the invoice after purchase. A few of the net30 credit companies might require you to place 1-2 orders where you pay-in-full upfront before they will give you net30 billing. Net30 creditors include phone companies, gas cards, and office supply stores.

Your business will need 4-5 tradelines reporting in your credit file to start applying for the next level of non-PG credit - retail revolving credit accounts. Wait a month or two after paying before you can expect the net30′s to report. Even if you get in on net30 terms pay before the due date. This will be a positive factor for your business.

Some net30 accounts are easier than others but once you get that first one reporting things should fall in line. If you need business cell phones this can be an easy way of getting net30 tradelines reporting. The higher the balance of your net30 order the better. When ordering you can ask if there a minimum dollar amount before they will report to credit bureaus. Your high balance is usually reported and creditors like to see high paid balances if they are going to offer you a high credit limit.

Now you need to spend some time building your credit file and get those net30 accounts reporting. It may take a few months to get but once that happens a lot of the hard work is over.

Letter Of Credit Financing

The example involves a grain trader in Minnesota, who buys a shipment of grain from a producer and who plans to then resell the same grain to a buyer in the Middle East.

The example involves a grain trader in Minnesota, who buys a shipment of grain from a producer and who plans to then resell the same grain to a buyer in the Middle East. Using what is called the "warehouse receipts financing" method, the Minnesota trader acquires the grain and "deposits" it in a recognized public warehouse and, in return, receives a warehouse receipt, identifying - among other things - the type of grain, its quality, the quantity, and the date it was received into the warehouse.

The trader takes this warehouse receipt to his/her bank as evidence of his ownership and assuming everything is in order, the bank will then extend a loan to the trader a loan based on the estimated market value of the grain, less some percentage amount (sometimes called a “haircut”). The trader then contacts the buyer in the Middle East, who agrees to buy the goods in the public warehouse from the seller in Minnesota.

The L/C mechanism in this case is as follows:-1. The sales contract between the Minnesota seller and the Middle East buyer is agreed and both sides agree to do business on an L/C basis.

2. The buyer requests his/her bank to issue an L/C. This bank is the issuing bank. The L/C specifies that the seller must present certain documents to the bank before receiving payment and in this case the primary documentary requirement is the warehouse receipt.

3. The issuing bank notifies the seller through the correspondent bank (notifying bank ) by SWIFT and then sends the original L/C to the seller.

4. The seller presents his bank with a bill of exchange (draft) based on the conditions of the L/C together with the warehouse receipt and he/she applies for negotiation.

5. The seller’s bank checks the conditions of L/C and the warehouse receipt document. If the conditions of the L/C are found to be consistent with the documents, the seller’s bank pays the seller. However, the seller has to be very careful as the bank is not able to honour the bill of exchange if there is any discrepancy between the conditions of the L/C and the documents provided by the seller. If a discrepancy occurs, the seller has to inform the buyer and have him request the issuing bank for an amendment to the L/C accordingly.

The rules for letter of credit transactions are comprehensively dealt with under the International Chamber of Commerce (ICC) rules called “UCP 600”, which were updated this year.

Getting More Working Capital for Your Business

Lanette Tucker has been with Paragon Financial for 2 years and knows all things factoring.   Paragon Financial was founded in 1994 with the initiative to afford growing businesses an alternative to conventional bank financing. When banks either couldn't grant funds or bestowed too little, Paragon could promptly offer them a steady stream of cash through the factoring of their account receivables.

A common scenario today in business is having a low credit line from your bank.  Lets say you have a $50,000 dollar line of credit with your bank.  You have a long-standing, excellent relationship with your bank but in today's economy it is simply just not enough.   Your credit line is maxed out and the true need of your business is financing of $200,000 or $300,000 dollars to keep your business growing.  What can you do in this situation?  Your business has good credit, the orders are coming in and you are growing at a steady pace.  The only way to take your business to the next level is to secure that much larger line of credit.  What is the solution?

Your business can leverage against your receivables through invoice factoring or purchase order financing through a factoring company.  An experienced factor can work directly with your bank on a subordination agreement allowing you to leverage receivables financing to get the working capital you need to grow your business.

First, what is bank subordination?   A subordination is when a 2nd lender, in this case the factor, asks the 1st lender, the bank, if they will allow the business to take on an additional lender.   Bank subordination agreements are commonly done when leveraging accounts receivable and purchase orders. The accounts receivable or PO's are assets that are used to secure a working capital line of credit.   One of the most common ways lenders will work with each other is through subordination.  Allowing the business to take on both a traditional line of credit and a factoring line of credit

A factoring company can work with your bank and create a bank subordination agreement where their $50,000 dollars is covered by other assets and then a factor can fund against your accounts receivable or purchase orders up to 95%.  This allows the business to take on larger jobs, fund payroll each week and pay for other expenses.  The key is working with a factoring company that has existing relationships with banks and has the experience necessary to compete the transaction. 

Factors are often able to finance your business when a bank will turn you down.   Your bank needs to keep the depository relationship.  Factors do not concern themselves with this because they are not a bank.  Factors simply buy your existing accounts receivables or purchase orders in order for that business to obtain immediate cash payment of the accounts.  They just want to get your the critical cash your company needs to grow your business.