Summer 2012
Conquer the Credit Crunch By Mark Battersby

Having a store of sound credit is basic common sense for all gift retailers. Here’s what you need to know to build a strong credit line for your gift shop.

Things go a lot easier when potential lenders, suppliers and partners can decide to take a risk based on a gift shop or business’s credit history and capability of repaying obligations. With strong business credit, a business can borrow at a lower cost, with more favorable terms. In fact, many small gift retailers with good business credit, have discovered it is possible to get loans without an onerous personal guarantee.

The catch is: Sound business credit is difficult to establish. For any small business owner 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 a would-be borrower has proven themselves with a strong credit history. But it’s difficult to develop that good record when no one will lend in the first place.

Credit 101

When a business issues another business credit, it’s referred to as “trade” credit. Information about trade credit transactions is gathered by the credit bureaus to create a business credit report using the business’s name, address and federal tax identification number (FIN), also known as an employer identification number (EIN). The business credit bureaus use this compiled data to generate a report about a company’s business credit transactions. In many cases, those extending credit will rely on that business credit report to determine if they want to extend credit—and how much credit they’ll give.

The major business credit bureaus that compile and provide copies of the reports are:

  • Dun & Bradstreet
  • Experian Business
  • Equifax Business
  • GHTA’S GAIN Credit Interchange

Unfortunately, because information provided to the business credit bureaus is sent in voluntarily—no business is required to send it in—the credit bureaus may never receive much, or even any, information about a gift shop or business’s credit transactions. In fact, many businesses go for years racking up business credit without any of it being reported to the credit bureaus.

Establishing credit basics

You can establish business credit and gain recognition from the credit reporting agencies by following some basic steps:

If not already incorporated, form a corporation or LLC (Limited Liability Company) to operate the retail gift business, and consider obtaining an FIN or EIN from the IRS. Corporations and LLCs afford business owners liability protection, and a business credit profile can be created that is separate from your personal one.

Register with some, if not all, the business credit bureaus. Dun & Bradstreet (D&B), for example, is one of the main business credit bureaus and runs its own business credit score. An established business with an EIN can begin the process by applying for a free DUNS number. The number is how lenders will determine the operation’s credit worthiness (most business credit card and lending companies will ask for a D&B number during the application process).

Apply for a business credit card. Although most major credit card companies require that cardholders be in business for two years before extending credit, there are many small local banks that are more accommodating to small businesses. They may be even more accommodating if an owner or manager is savvy enough to set up a business bank account with them! Even if you may not actually require more credit cards to finance operations, consider applying for more business credit cards. In business, the 5-3-2 rule is key—a business’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 all business requirements. Not being in compliance with local, state and federal rules, ordinances, regulations and laws can raise red flags with both credit bureaus and grantors. Potential red flags include such things as lack of a business license or a phone line. Many suppliers will not grant credit to another business that hasn’t taken the steps to set the operation up with the proper licenses or meet local, state and federal requirements.

Financial statements and a professional business plan are a necessity, particularly in today’s economy. These documents are also required by many credit grantors.

Finding companies willing to grant credit to the gift shop or business without a personal credit check or guarantee is also a good strategy. When a supplier grants a business credit, it is important to ensure they report the payment experiences to the business credit bureau. This step can help build a business credit report as well as provide a financial foundation for the operation.

Manage your debt so you won’t have trouble making payments, which will negatively affect your business’ credit score.

Make monthly payments to credit grantors; this will keep your business credit profile active.

Get a website. Having a webpage may not seem like a must in building or maintaining business credit, but D&B now shows and lists websites on credit files. Many banks also use the fact the operation has a website as a positive factor in determining the credit-worthiness of a borrower.

Suppliers often allow their customers a grace period before requiring payment for the goods or services they provide. This is called vendor or trade credit and it permits every gift shop and business to generate at least some revenue from the sale of goods before they have to pay for those goods. Even better, vendor or trade credit is often easier to obtain than bank credit because it doesn’t require collateral.

Building credit

It is important to keep credit in mind when setting up shop; remember that business credit cannot be built overnight. Having access to credit can help any business adapt to changing conditions and position itself for success. What can you do to improve the creditworthiness of your business?

Always pay on time. This has the greatest impact on credit score. On-time payments are the most direct way to improve a credit rating.

Ensure creditors regularly report your gift shop’s payment history to the credit bureaus. If timely payments to suppliers and lenders are not included in your profile, you may not get the credit you deserve for paying bills on time. It goes without saying that the credit profile should be monitored at least twice a year to ensure that all vendor payment relationships are included.

Contribute to the business’s credit profile. The more information provided to credit bureaus, the more robust its credit profile will be. In addition, wherever possible, choose suppliers and vendors that report their experiences to credit bureaus.

Maintain good personal credit. After all, well-managed personal finances can indirectly impact your business’ credit-worthiness. However, personal and business credit ratings are separate and do not directly affect one another.

The best place to start building or rebuilding business credit is with wholesalers. Many wholesalers, including major brands, extend lines of credit to businesses giving you the opportunity to finance purchases and conserve cash.

In addition to goods and merchandise for resale, a gift shop or business can obtain products such as office supplies, computers, and marketing materials with payment terms ranging from net 30 to net 60 days. The focus should remain on applying for credit with wholesalers who provide products and/or services needed on a regular basis, so you can make regular purchases using your credit line.

With a strong business credit report, you can stop relying on personal credit to qualify for needed financing. Because a creditor, lender or supplier can now easily determine the operation’s risk level with a business credit check, qualifying will be a much easier process.

Building business credit can also improve your business’s image, protect your personal credit, limit liability, and increase credit capacity since businesses can obtain 10 to 100 times greater financing than an individual. But the time to think about credit for your retail gift shop or business is now—hopefully before it is really needed.

Mark Battersby

Battersby is a freelance writer with offices in the suburban Philadelphia community of Ardmore, PA. For more than 25 years, his tax and financial features and columns have appeared in leading trade journals, magazines and newsletters. He has authored four books.

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