I called a friend of my last night and his 5 year old daughter answers and said "To Whom am I speaking?" I just about busted out laughing, I digress.

Mr. *Mysterious Online Personality* who are you and why are you blogging? Well the first question is easy; the second question has to do with sanity of mind during the work day, but out loud let’s just say that I enjoy educating people.

I am the sales manager for a capital equipment finance company and have been doing ‘this’ for going on 18 years now. I get asked politely when I meet new people if I enjoy my job, and the truth is yes, yes I do. However realizing that most people in general have very little idea as to what I do; in retrospect I think a proper introduction is in order, especially if I am spouting out advice into the abyss that is the World Wide Web.

I wrote once in a college paper oh-so-many-years-ago that finance, next to harlotry, is one of the oldest businesses in the world. In short I sell money by partnering with equipment sellers to be offered as a payment solution at the point of sale.

We work with a variety of industries, everything from printing presses and machine tools to being one of the few equipment finance companies that will do prepackaged and custom software solutions.

I spend most of my days training instead of selling and thought I could use this blog as an idea journal to both archive my thoughts as well as maybe pass along knowledge to the general masses of small and medium sized business owners in the search for financing equipment.

This is always the beginning of an answer I don’t want to hear to a question “They” don’t want asked. The question: ‘How’s your Credit (History)?’

Technical… Credit is the provision of resources by one party to another party where the second party does not immediately pay the first party for the resources in full, thereby generating a debt, and instead arranges either to pay for or to return those resources at a later date. (Source)

Party this party that, sounds like a lot of fun doesn’t it? Well of course it is your using someone else’s money to pay for stuff you want or need. When the party ends, and you have bought what you wanted or paid for what you needed, the History begins. (It’s a play on words, get it? Oh never mind)

Credit History is essentially how you paid back the Credit you received. (On Time, Slow, Real Slow, Really REALLY Slow, or Not at All.)

Real Life… We live today in a society where everything is cash or credit, pay now or pay later; most it seems to opt to pay later.

“But Mr. *Mysterious Online Personality* you just told me in your prior entry that Paying Cash was not 1 but 2 nails in the coffin.”

Yes, yes I did; however the obvious response would be don’t buy too much of what you don’t need, but finance what you purchase. (This all has to do with our consumer mentality and keeping up with the Joneses, and is NOT a topic I want to touch.)

I tangent, Credit in the real world sense is the risk involved when a bank, or lender invests their money in you; how likely are you to pay that money back?

Credit however is not some complicated formula; essentially there are three main reporting agencies, (Equifax, Transunion, and Experian) that issue you a score based on certain criteria.

    1) Payment History: Simply put on time payments raise your score while slow payments negatively affect your score based on how late the payment was made.

    2) Exposure: How much dept do you owe, if you have an insurmountable amount of credit card debt your exposure (amount of monthly payments) is higher therefore your risk level rises.

    3) Public Records: If you have any unpaid tax liens, judgments or suits this will adversely affect your score.

    4) Credit Inquires: If you have been out shopping your credit around each and every pull that shows up on your bureau will points each and every time.

Related Articles and Links:

FICO Scores

Free Credit Report

Expanding on ‘Lack of Capital’ from the earlier post whether you are a start up or a 5 year old company the question remains, ‘Why pay cash?"

The truth is while money is cheap paying cash is like digging an early grave. From the banks’ perspective if a customer has a low 4 figure bank balance and is asking to borrow a moderate 5 figure sum the applicant will either be denied or the rate will be higher, and here’s why.

Technical… Lenders want to see that any company applying for a loan earns enough money to meet payroll, cover fixed operating expenses, and comfortably make timely payments on a new equipment loan or lease. While there are a number of ways to define cash flow, lenders most often calculate the cash flow available to repay new debt as net profit plus such non-cash expenses as amortization and depreciation. (Source)

Real Life… Let’s bring this closer to home. If you were considering loaning money (say $50,000) to either Gary or Paul you would first want to make sure that both were going to be in a position to pay you back. For arguments sake let’s say that on the outside Gary and Paul lived identical lives, made the same amount of money lived in the same neighborhood drove the same car and so on. The primary difference between the two of them was that Gary paid cash for everything he owns and Paul financed his lifestyle. If you are looking through bank statement for both parties Paul has well over the amount he is trying to borrow where as Gary has next to nothing.

Paul has managed his lifestyle through small monthly payments while Gary has emptied his cash savings into each purchase he has made. When the time comes to finance not only has Paul built up a credit reputation (covered at a later date) of on time payments but has cash in the bank for emergencies; Gary has neither.  

Consider that to a lender each loan is an investment and that investment has to make sense. Paul in this situation is borrowing money to continue improving his life where Gary is now in a position (short on cash) to borrow money to stay ahead of day to day necessities. There is a reason you will never see a bank classified as a non-profit entity; and for that reason Paul is the better investment.

Cliff Notes… Paying cash is not 1, but 2 nails in the coffin. Financing when cash is not a concern not only helps build necessary credit for future use but also keeps you ahead of the curve. Financing should not be your last resort but a beneficial tool that should be used to help grow your business or lifestyle from the foundation.

Related Articles and Links:

Prime Loan Interest Rate

With stats ranging from 50% to 80% of new businesses failing in the first 5 years, how can you increase your chance of survival?
Having worked in commercial equipment finance for the past 15 years I have sorted through my fair share of start-up applications; imagine a large mountainous eye sore of unprepared hobbyist willing to stake their future unknowing of the basics of running a business full time. To answer the question ‘How to succeed’ (covered at a later date) you must first examine the reasons for failure:

1)     Lack of Capital: Most start-up businesses fail to prepare for the inevitable lack of money. The un-educated think that an immediate windfall of money will result from opening their doors, while the under-educated seem to prepare with a small nest egg of ‘just in case’ money; both result in the same outcome, with the latter arriving a little while later than the first. The truth is whatever revenue you may generate in the first 2 years needs to be reinvested back into the company.

2)     Poor Credit: We live today in a society where 40% of Americans spend more than they make. If your business plan hangs in the balance of being approved through one of the limited sources of financing available to you be prepared to air out your dirty laundry. If you have little to no credit, slow payments, over exposure of credit card debt or anything below perfect credit and stout financials dig up the coffee cans in the backyard financing will be an exercise of futility.

3)     No experience: Society has taught us to follow our dreams; it has failed to mention how to make a living while doing so. If your sole work experience has been as a carpenter and your dreams of opening up a bohemian coffee shop will not leave well enough alone, take leave of building shelves and gain experience as a barista. Businesses will fail, and in mass, when the captain of the ship doesn’t know the first thing about sailing.

Related Articles and Links:

U.S. Small Business Administration

IRS Guidlines for Starting a Business