How to maximize your odds of securing funding
Things go a lot easier when potential lenders, investors, and suppliers can take a risk based on a chiropractic practice’s credit history and capability of repaying obligations. With strong business credit, you can borrow at lower costs and with more-favorable terms. In fact, many small practices with good business credit have discovered it is possible get loans without an onerous and often-embarrassing personal guaranty.
Unfortunately, for any chiropractor starting out or attempting to turn around a small practice, navigating the credit and lending world can feel like a vicious Catch-22: Most commercial banks and traditional lenders are reluctant to loosen their purse strings until would-be borrowers have a proven strong credit history. Yet it’s difficult to develop a good record when no one will lend to you in the first place.
In the beginning
When a business issues or extends credit to another business, it’s referred to as “trade” credit. Trade, or business credit, is the single largest source of lending in the world.
Information about trade credit transactions is gathered by the credit bureaus to create a business credit report using the chiropractor’s name, practice name, address, and federal tax identification number (FIN), also known as an employer identification number (EIN). The credit bureaus compile this data to generate a report about a practice’s credit transactions. In many cases, lenders will rely on this report to determine if they want to extend credit—and how much they’ll give.
The major credit bureaus that compile and provide copies of the credit reports are Dun & Bradstreet (D&B), Experian Information Solutions, and Equifax Inc.
But because the information provided to the credit bureaus is usually submitted voluntarily—no business or practice is required to send it in—the credit bureaus may not receive much information about a practice’s transactions. Many practices can go for years without any of their credit history being reported to the bureaus.
Establishing practice credit basics
Fortunately, a number of proven strategies can help establish the credit-worthiness of any practice:
- Incorporate. Form a corporation or LLC (limited liability company) to operate the practice, and obtain an FIN or EIN. Corporate and LLC structures offer you liability protection, and a business credit profile can be created separate from the principal’s personal debts.
- Register with the credit. D&B, for example, runs its own business credit score. If you have an EIN, you can begin the process by applying for a free DUNS number. The number is how lenders determine your practice’s creditworthiness (most companies will ask for a D&B number during the application process).
- Apply for a credit. Although most major credit card companies require cardholders to be in business for at least two years before they will extend credit, many small and local banks are more accommodating to professional practices. (They may be even more accommodating if you have set up your practice’s bank account with them. Even if your practice doesn’t need additional credit cards, you should still apply for more. In business, the “5-3-2” rule is key—a practice’s credit record is not considered established and solid until it has at least five trade accounts, at least three credit cards, and at least two small loans fully paid off.
- Comply with the rules. Not being in compliance with local, state, and federal laws can raise red flags with those who grant credit. Red flags include lacking a business license or phone line. Many suppliers will not grant credit to a business that hasn’t taken the steps to obtain the proper licenses and meet professional regulations.
- Document. Financial statements and a professional business plan are necessities, particularly in today’s economy. These documents are also typically required by credit grantors.
- Do your homework. Finding someone willing to extend credit to your practice without a personal credit check or guaranty is a good strategy. And when a supplier grants you credit, ensure they report your payment record to a credit bureau. This can build a new practice’s credit report as well as provide a financial foundation for a turnaround.
- Manage debt. Failure to make payments will negatively affect your credit score. Make monthly payments to creditors, which keeps your credit profile active.
- Get a website. Having a webpage may not seem like a “must” in building credit, but D&B now lists websites on credit files. Many banks consider a website a positive factor in determining creditworthiness.
Suppliers often allow a grace period before requiring payment for goods or services. This is called vendor or trade credit and it permits a business to generate at least some revenue from the sale of goods before paying for them. Trade credit can be easier to obtain because it doesn’t require collateral or a track record. Unfortunately, it can also be quite expensive.
Terms of 2 percent, 10 days, net 30 days (2 percent discount if paid within 10 days, full amount due in 30 days), translates to a 36 or 37 percent annual interest rate if the cash discount is foregone. While trade credit may be appealing as a money saver, beware when taking these discounts.
Building more credit
Credit cannot be built or rebuilt overnight, so keep it in mind from day one. Having access to credit can help you adapt to changing conditions. But what specific steps can you take to get there?
- Always pay on time. Your ability to repay loans has the greatest impact on your credit score.
- Monitor your profile. Ensure your creditors regularly report your payment history to the credit bureaus. Otherwise, you may not get the credit you deserve for paying your bills on time. Monitor your practice’s credit profile at least twice a year.
- Maintain personal credit. Well-managed personal finances can indirectly impact your practice’s creditworthiness, though the two will remain separate.
- Be a contributor. The more information provided to credit bureaus, the more robust your credit profile will be. Choose vendors that report their experiences to credit bureaus.
The best place to start building or rebuilding practice credit is with your suppliers. Many of them, including major brands, extend credit for the opportunity to finance purchases and conserve cash.
In addition to goods and merchandise for resale, a practice can obtain products such as office supplies, computers, and marketing materials with payment terms ranging from net 30 to net 60 days. Of course, focus on applying for credit with the suppliers who provide the products and services you need on a regular basis. By paying invoices on time, your practice will increase its creditworthiness.
With a strong credit report, you can stop relying on personal credit to qualify for financing because lenders can easily determine your practice’s current risk.
Building credit can also improve your practice’s image, protect your personal credit, limit liability, and increase credit capacity as most businesses can obtain 10 to 100 times more financing than can an individual. The time to think about credit for your practice is now.
Mark E. Battersby is a tax and financial adviser, freelance writer, lecturer, and author located in suburban Philadelphia. He can be reached at 610-789-2480.
DISClAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional adviser t issues related to your practice.