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Levi King’s father, an Idaho farmer who paid cash for everything, taught his son to avoid credit cards and debt. So at age 23, when he founded his first company, an electric signs and awnings manufacturing business, he followed his dad’s example. He paid cash on delivery to his suppliers.
Eventually, one supplier asked King why he didn’t pursue a credit option with them. It had never occurred to him, but he liked the idea of being able to wait to pay. That is, until the supplier pulled his personal and business credit histories and found nothing.
”’There’s not even a record of your company,'” King remembers the supplier saying. “It was a, ‘If I didn’t know you, I would think this was a scam’-type conversation. ‘I know you’re here buying stuff. I know you’re real, but sorry, it seems like you don’t exist.'”
This experience led King, who is now co-founder and CEO of financial services company Nav, to devote his career to helping small-business owners manage their credit. Many SBOs, even if they understand the importance of personal credit, don’t recognize the need to establish business credit. Less than one-third of nearly 3,000 SBOs surveyed by Nav and Manta have business accounts that are tied to a line of credit, while 72 percent don’t know their business credit score. This is often the case with entrepreneurs who bootstrap their businesses with personal credit cards, savings or help from family and friends.
“Thanks, Dad. That advice was great for someone who wanted to live as a farmer for the rest of their life,” King says, reflecting on his father’s aversion to credit. “It doesn’t work for somebody trying to build a business, or who ever wants to buy a home or anything.”
When credit becomes a problem
You may have launched a business three years ago, you may have employees, your business may even be profitable. But say you need a loan for some new equipment. Based on your credit history, your business will look like a startup — maybe one that established itself as an entity three years ago and is just now starting operations. The bank may find the investment too risky.
King explains that alternative forms of lending have emerged in the past 15 years to give so-called “credit ghosts” options, examining their bank statement data in lieu of credit history. However, many lenders take advantage of the fact that credit ghosts aren’t eligible for bank loans, and they charge a high interest rate.
“They get this high-cost financing, which can sink their business because it’s too expensive, or put them in cycle of reborrowing,” King says. “Most of those lenders don’t report to the bureaus, so the problem persists.”
Lenders to credit ghosts have no incentive to report activity to a commercial bureau, King explains. To do so would help their borrowers establish credit, overcome credit ghost status and qualify for other financing options. Small-businesses stuck in this cycle often can’t afford to expand.
Before Nav, King’s first financial tech company was Lendio, a small-business loan broker. While he was actively working with Lendio (he’s still an owner), more than 1 million small businesses used Lendio’s services. Three percent of customers were happy with the loans they ended up with, while 30 percent received high-cost alternative financing. The other two-thirds of customers weren’t eligible for loans due to bad or nonexistent credit.
“I thought, ‘We only make 3 percent of our customers happy — that’s crazy. That’s not how tech companies work,'” King says. “If 3 percent of people would’ve liked their iPhone, the iPhone would’ve been the biggest flop ever. I’ve realized that the real problem that needs to be solved is credit education.”
Paying out of pocket for 14 years
Nav customer Christian Benavides immigrated to the U.S. from Peru in 1996. He worked in restaurants for three years until he realized how difficult it was going to be for him to rise up the ranks in that industry.
“I always knew that I wanted to do my own thing,” Benavides says.
He moved on to work for a construction company in Concord, Calif., and his boss saw potential in him. He mentored his young employee, teaching him how to talk to clients. But he didn’t explain the importance of credit, so when Benavides started working for himself, he paid for supplies out of pocket for years. From 2002 to 2016, he estimates that he spent half a million dollars on materials.
Benavides had five credit cards, though none had a limit of more than $500. He fell into a trap that too many uninformed entrepreneurs and consumers find themselves in.
“The way I saw credit cards was, ‘Oh, free money!’” Benavides says. “I would get a credit card and I would go to a shopping mall and spend the whole $500, boom, in one day, and then max the thing. My thinking was, ‘Oh, I’m going to make them suffer to get their money, so I’m just going to pay the minimum every month until I’ve paid it off.’ Little did I know I was paying tons of money in [interest].”
Eventually, a friend and fellow entrepreneur told him about Nav, which allowed him to establish credit within a year of downloading the app. He started using 30 percent of his credit card limits and paid off his existing debts. Soon, he got more credit card offers in the mail, including a business credit card from Home Depot. He was thrilled — he would no longer have to dip into his savings to pay for materials.
“All of these people that I know either are or were under that situation,” Benavides says, explaining that not everyone is as lucky as he was to have been educated about how to build credit. “It should be more, on TV, shoot for like, minority channels or something in order for them to hear about this.”
How to build business credit
King overcame his credit ghost status through that first supplier who identified his lack of credit. It gave him net 15-day terms so it could start reporting his activity to commercial bureaus. Then his other suppliers started doing the same thing.
You can open a minimal line of credit (from $1 to $300) with a supplier such as Home Depot or Staples, for instance.
“Almost anyone will get approved for them, even if they have bad personal credit,” King says.
For other suppliers, ask for credit and arrange to pay them back by check once a month. These suppliers will automatically report your activity to bureaus and establish a credit report for your business. Once you have credit, you’ll qualify for a business credit card and build from there.
There are some financial organizations that will help small-businesses recover from having a lack of credit — at a cost. One option for small-business owners leasing a commercial space is to show three years of previous payments to their landlord. Some organizations will allow you to pay to expedite the credit establishment process if you’re in a bind, like, say, if you’ve just landed a major contract only to find out your credit score isn’t up to par.
If you’re just launching your business and you have good personal credit, King advises getting a couple of business credit cards with favorable interest rates — even if you don’t need them. If you have bad personal credit, you can pursue subprime options.
“The credit is the problem that leads to all these other problems,” King says. “If we fix that, then we can materially decrease the death rate of small business in the U.S. and eventually the rest of the world, which sounds like a crazy ambition, because no government or for-profit or nonprofit has ever accomplished it, but I truly believe we can actually pull it off.”