Gerri Detweiler, Education Director for Nav, a free marketplace that matches entrepreneurs to financing options.
1. Over the past few years at Nav, you’ve focused on helping small business owners and entrepreneurs navigate the waters of credit and financing. What is the number one question you get the most?
I’ve been educating consumers on consumer credit scores for many years, and the questions I get now about business credit are similar.to those I’ve heard about personal credit. The most common question I get is, “What’s a business credit score?” In fact, Nav’s American Dream Gap Survey found that about half of all business owners are unaware they have a business credit score, much less how to check or build theirs.
Although commercial credit reports have been around for a long time — Dun & Bradstreet began in the mid 19th century — there simply is not the same awareness about commercial credit as there is with personal credit. Part of the reason is that there are significantly fewer disclosure requirements; a business owner may not know why her application was turned down, much less the credit data behind the decision.
2. These days, people often freelance and startup businesses on the side of their “nine-to-five.” When should people to turn their side gig into their main gig? Any advice?
Starting a business can be hard, and it often takes longer to be successful than many entrepreneurs anticipate. At the same time however, it’s never been easier to start a business, and many do so on far less money than might be expected.
My advice to anyone thinking about turning their side gig into their main gig is to get a mentor. Find another person you trust that’s a small business owner — they don’t have to be someone in the same type of business as you — and ask them tough questions, share your concerns and pick their brains on what works and doesn’t work. Having someone who has gone through the trials and tribulations of being a small business owner before you can be a real asset, especially when you start to encounter various challenges. Another great way to find a mentor is through your local SCORE office or Small Business Development Center (SBDC). Both offer free consulting to small business owners.
Remember, there may never be a perfect time to make the leap from employed to self-employed. A side business can be a great way to test the waters and develop the myriad skills it takes to successfully run a business so you can go out on your own with confidence.
I was self-employed for more than a decade myself and I essentially started that way, by writing my first book while I was still working full-time. When I went out on my own, I had enough consulting and freelance writing work lined up to replace my previous income.
3. At what point does an entrepreneur need to start thinking about and improving her or his business credit score? How does that differ from consumer credit scores?
It takes time to build a business credit profile and strong business credit scores, just as it takes time to build strong personal credit scores. I recommend entrepreneurs start the process as soon as possible. If you wait until you need it, you may miss out on important opportunities.
Business credit data can be used for purposes similar to personal credit, including financing and insurance applications, for example. But unlike personal credit, anyone can check your business credit without your knowledge or permission. That means your business credit may be checked by potential business partners, suppliers, or customers.
Even your competitors may check your business credit. Nav’s CEO and Co-Founder Levi King learned this the hard way in his first business, a sign manufacturing business. He lost out on a bid for a lucrative job and his business credit report was a major factor in that decision. At the time, Levi didn’t know anything about commercial credit reports, and didn’t realize his business credit report contained negative information. He had purchased the manufacturing equipment of another business and the credit bureau treated it as if he had acquired the entire business, not just those assets.
4. How does an entrepreneur establish a business credit score? Do they need one to start a business or can they use their personal credit score? How do the two differ?
Business owners should take the time to check, monitor and build strong personal and business credit. According to the 2019 Federal Reserve Small Business Credit Survey of employer firms (1-499 employees), 13% relied only on their business credit, 45% relied only on personal credit, and 41% relied on both.
At Nav, customers with a free account can view and monitor their business credit data from Experian, Dun & Bradstreet, and Equifax as well as their personal VantageScore based on credit data from Experian. (Premium accountholders also see a VantageScore based on TransUnion data.) We believe both strong personal and business credit scores are important in order to have access to the widest range of financing options.
Ultimately our goal at Nav is to improve the small business borrowing experience for both applicants and lenders. Through the company’s Enterprise Solutions, partners can integrate more than 110 business financing offers, API-powered credit alerts, bureau reports, and cash flow data into an existing platform or a customized product of their choosing. Nav’s one-stop-shop financing marketplace can be configured to improve customer engagement and retention, serve underfinanced small business customers with no additional risk and create new or additional revenue streams for partners.
You establish business credit like you do personal credit: by getting accounts that report. The challenge is that there is much less data consistency with commercial credit than with personal credit, so it’s not unusual for businesses to find that some accounts they pay faithfully aren’t showing up on some (or any) of their business credit reports.
Two easy ways to get started: get vendor accounts with companies that report payments to commercial credit agencies and get a small business credit card. Most small business credit cards report to at least one of the major business credit agencies.
At Nav we’ve also partnered with eCredable, which charges a nominal fee to verify and add bills the business is already paying — such as utility bills or a cell phone used for the business — to their business credit report.
Tip: Entrepreneurs who purchase an existing business should always check that businesses’ credit first as it will likely carry over after the purchase.
5. And in contrast, what advice to you have for homeowners thinking about tapping into their home equity to start a small business?
Many businesses rely on personal credit and savings to start their business, and that may include include home equity loans, savings, retirement funds or personal credit cards. Sometimes you just do what you have to do. However, your goal should be to build a profitable company and move away from using personal credit as soon as possible.
Starting a business is risky and lenders know that. If a lender isn’t willing to take a risk on your startup you may want to approach it with similar caution. That doesn’t mean you shouldn’t try, but if you are putting significant personal assets at risk, perhaps you can start your business slowly on the side rather than go all in, particularly if it’s not a business where you have extensive experience.