Abhishek Maharaj, Author at Winquote SME Finance

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Overcoming the five biggest hurdles to gaining property funding

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The onset of the Global Financial Crisis has meant that borrowers now face significant hurdles in obtaining funding for property transactions. This new lending environment has seen Australia’s Big Four Banks tighten their purse strings, making it much more difficult for property investors to secure loans. Five hurdles stand out above all others with respect to property investment, however there are proven strategies for overcoming them.

1. Beating the loan to value ratio

The majority of Australian bank and non-bank lenders will demand a loan to value ratio of 80% for an investment property loan. This means that you will have to stump up a larger deposit in order to secure a loan. Lenders Mortgage Insurance (LMI) offers you the chance to purchase an investment property at a higher loan to value ratio of say 95%, however you can expect to pay thousands of dollars for LMI over the course of your loan.

2. Poor credit history

Recent changes to Australia’s credit reporting regime that took effect in 2014 have made it much easier to ruin your credit history. Every time you apply for an investment property loan, lenders will scrutinise your credit history. A poor credit history could mean that banks view you as a credit risk, leading to a higher interest rate on your loan. To overcome this, keep a very close eye on your credit card bills, in-store finance and personal loans. Also, assess your credit history annually and be sure to fix any discrepancies as they are identified.

3. Location, location, location

Choosing the right property will set you well on the way to achieving a higher LVR for your property. Lenders, like investors will be far more sympathetic if a property is close to public transport with a strong rental market and two bedrooms or more. Properties that are located in far-flung locations or are too small will not curry favour with lenders.

4. Diminishing rental returns

Finding the perfect property in the right location is only half the battle. Lenders are far less generous when it comes to considering the value of your rental income. If you’re applying for your third or fourth investment property loan then expect the banks to consider only as much as 75% of the value of rental income. The way to overcome this is to ensure that you are charging the full rate of rent for your existing properties through yearly reviews. It may also be possible to increase your disposable income to entice the banks further.

5. Fewer lending options available in the market

The number of small-scale lenders and diversified lending products (i.e. lo doc loans) active in the marketplace has dramatically fallen post-GFC. This has led to less competition and more stringent requirements among those that remain. Obtaining finance from fewer sources and product variations has allowed lenders – particularly banks – to only deal with investors with a proven track-record. To overcome this, it makes sense to engage the services of a financial specialist. Winquote specialises in helping self-employed individuals and SMEs secure the right loan for an investment property.

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How We Helped a Client Restructure His Debt Finance Tax

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Debt restructuring and consolidation often sounds (to the uninitiated) like a failing business’s last-ditch effort to restore liquidity; however, there is much more to the process than just rehabilitating a company in financial distress. It is a tool that allows a business to improve cash flow and manage their finances more effectively by renegotiating payment arrangements or restructuring their borrowings. Seen in this light, debt restructuring becomes an effective vehicle to grow a business.

Sadly, the success rate among companies who have undergone a restructure has been markedly low over the past few years—only 4.4 percent in February 2014already a significant drop from 2008’s 7.1 percent and a pittance next to the 14 percent high of 1999These statistics, however, apply only to those companies that were already facing insolvency before they began the process. No word on whether early restructuring would have upped their chances of success, but a stronger cash flow does have its benefits regardless of your standing.

restructuring v insolvencies

Image: Dissolve

If you’re contemplating a restructure, the thing to remember is that it requires a realistic appraisal of all your existing financial relationships. What could happen (and does happen in a lot of cases) is that you get a wakeup call about certain financial structures which you thought were cost-effective but were actually missed opportunities in the context of your overall capital management strategy.

Such was the state of affairs in today’s featured case. Below is a breakdown.

The Problem

When our client first came to us, he was looking for a simple refinance of his parents’ residential property, the apparent end goal being to try and reduce the cost of their current funding. While we were quickly able to reduce this by $1,500 per annum, the savings proved to be insufficient in light of our client’s busy lifestyle.

Upon further inquiry (which is part and parcel of Winquote’s ‘duty of care’ approach), we realized that our client’s needs went beyond the refinance. We decided to do a thorough financial health check, the new goal being to explore alternative financing structures which, implemented the right way, would maximise the benefits and exemptions to which our client was entitled.

A bit of background on the client and the financing structures he had in place prior to consulting Winquote: Our client owns a business in IT services and had purchased a commercial property which was leased out to a manufacturing business. On the surface, the arrangement seemed beneficial. But as there was absolutely no debt against this property, the client was ineligible to receive any interest deductions from it.

His parents provided a temporary solution by gifting him a portion of the money for the purchase, which they obtained from their equity in their residential property. They weren’t getting any interest deductions from this debt, either—another downside.

Finally, the client was paying back the gift to his parents as a soft loan, which meant that he was doing so on a post-tax basis—again, no benefits.

The Solution

What we helped the client realise was that he could stand to save much more than $1,500 per annum IF there was debt on the property payable on a pre-tax basis. Our recommendation was that he draw against his commercial property and repay his parents the funding they had gifted him. The proviso was that he had serviceability of the debt, which he did—through his own income and the rental income from the property itself.

The solution seems so simple—saving on tax rather than on interest—but it’s not uncommon for SMEs to overlook these benefits. This kind of problem stems from focusing too much on a particularly problematic financing structure and failing to recognise that it is only a small part of one’s comprehensive capital management framework.

The Results

Our advice saved our client approximately 30 percent of the interest payments. He was able to realise this amount due to the fact that he was now able to pay his debt using his pre-tax income rather than his post-tax income.

At Winquote, we understand the true cost of capital and are therefore able to take a big-picture approach to debt and financing. We make a point of investigating all viable avenues for financing during a restructure. If there’s something like a tax-effective facility you’ve been overlooking all this time, we’ll be sure to let you know.

Conclusion

We’re more than just a finance intermediary; if you’ll let us, we’ll be your key relationship manager, giving you the full advantage of our solid understanding of finance, our knowledge across other associated professions, and our accreditations with multiple lenders. Our goal is to help you achieve the optimal financing structure for your needs, and peace of mind throughout the process to boot.

To learn more, feel free to get in touch with our representatives. We’ll be happy to provide a free finance health check for your situation.

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How We Helped a Client Develop a Successful Property Portfolio

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The Australian Bureau of Statistics’ Social Trends Report released in December 2011 said that more than forty percent of the average Australian household’s assets consist of property assets.This tendency among Australians to gravitate toward property seems natural, given the promise of accelerated capital growth, cash flow, and tax benefits.

But anyone new to the game will soon realise that developing a property portfolio isn’t as easy as it sounds. It requires a sound financial strategy founded on a thorough understanding of how to (a) capitalise on your borrowing power, (b) use equity to grow your portfolio, and (c) maintain a sizeable financial buffer.

The old adage therefore applies: “Fail to plan…and you plan to fail.”

One of the most difficult aspects of building a successful property portfolio is finding the right funding partners. Without up-to-date insider knowledge, industry expertise, and the right contacts, you’d be hard put to know the difference between clever sales talk and a lender’s actual capabilities.

It’s important to keep in mind that each individual’s case is unique and that there is no one-size-fits-all strategy to growing your property portfolio. And if a highly critical consideration in this strategy is to have the right funding partners on board, then it is equally critical that these same partners be able to tailor their funding to suit your strategy. The logic sounds a bit circular, yes, but asking questions along the following lines should help:

  • What is it that I want to achieve?
  • Why do I want to achieve this?
  • How am I going to achieve this?

so that's why - winquote

Finance advisors call this “so that” thinking. Think “I’m choosing/doing X so that I can do Y,” Y being your goal: retiring early, improving your long-term retirement prospects, creating wealth, you name it. Assuming you already have a strategy in place, the next question to raise is: Can this potential funding partner provide the optimum financing structure for the specific needs I have mapped out?

This was the core issue in today’s case: the hunt for not just one, but multiple funders. Winquote believes that it is feasible, even easy, for the average Australian investor to develop a well-structured portfolio within a relatively small time frame, given that he is able to connect with the right people and organisations. This case is proof positive.

The Problem

We were approached by our clients, a self-employed couple, as a result of their desire to increase their property portfolio through their trusts. As things stood, they already had an investment strategy in place but had only an initial deposit and as yet no property in their portfolio.

They knew they needed the assistance of multiple funders to reach their objective of growth in net asset value through property. (This was their “so that” statement.) The problem was that they weren’t sure how to go about the hunt in a timely and cost-effective manner.

That was where we came in.

The Solution

What they had going for them was their early realization of the fact that their spending an inordinate amount of time and effort to canvass all the banks to try and find the right solution for them would have meant a substantial loss of income and productivity. Having approached us, they were able to appoint a Winquote expert as their key finance relationship manager. Our representative was able to manage all of their requirements easily, thanks in part to our ongoing relationships with multiple lenders—a significant advantage our clients had the opportunity to leverage.

The Results

Through the one relationship with Winquote, our clients were able to get in touch with, and borrow from, multiple institutions. And they were able to achieve this hassle-free, in a timely manner, AND at a great price. Our contact base was the key to their success. With Winquote as their de facto relationship manager, they benefited firsthand from our solid understanding of finance and our existing relationships with some of Australia’s biggest lenders.

Conclusion

Winquote will be happy to be your one point of call for all your financing matters. But we’re not just an intermediate; we’re an advocate, and we’re rooting for your success. Our specialty lies in taking an integrated, holistic, and consultative approach to your financing needs, ensuring that all bases are covered and that you’ll have as little to worry about as possible throughout the entire process.

If you’d like to get in touch with us for a consultation, call our office at 02 9929 9733 or drop by Suite 7, 345 Pacific Highway, North Sydney 2060.

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How We Helped a Client Obtain Car Finance Easily

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The Australian Securities and Investments Commission calls the purchase of a car “one of the single biggest purchases you are likely to make,” and yet all car buyers (we’ve yet to hear of an exception) just want the process over and done with quickly. People in general are more likely to spend time and energy poring over their choices of car make and model and working out detailed running costs than they are to do the research and paperwork required to seek and secure the best finance arrangement. This is a missed opportunity, if ever there was one.

The sheer number of lenders (reputable and otherwise) offering car loans all over Australia just ups the chances of pitfalls and costly mistakes. But because buyers are so eager to drive off in their new cars, few bother to really read the fine print and make serious enquiries about more cost-effective financing options.

If you’re in the market for a vehicle, you’ll soon realise just how many finance options are open to the general community—direct bank loans, dealership finance, and other finance brokers, all of which are both highly visible and easily accessible. The trouble with these options is that they are often structured with complex arrangements and terms—a red light for the inexperienced car buyer.

stop ask an expert

We at Winquote have always believed in the value of professional counsel. Not just because we’re in the business of providing financial advice, but because we have seen firsthand how experienced, disinterested professionals can make decision-making easier by providing options that address the prospective buyer’s personal and specific requirements.

Which brings us to today’s featured case study, which is the case of the average Australian seeking affordable financing for a vehicle. There is nothing overly remarkable about our client’s situation, as you’ll see in a bit, but focus instead on how we go about solving the problem of car finance.

The Problem

Dealership finance is a common option for car buyers because it can be relatively quick to obtain and is exceptionally convenient. The downside to this is that not all dealerships will take a holistic look at your entire financial situation, robbing you of the opportunity to explore all your real alternatives, much less find the optimal finance structure for your needs.

Keep in mind that just because you’re getting a good deal on a car doesn’t necessarily mean there aren’t better options out there. And your chances of seeing a disinterested presentation of your finance options are slim if you’re getting it straight from the dealer. This was a rather rude awakening for our client.

The Solution

Having made our client realize the possibility of a better finance repayment arrangement than what the dealership could provide, we then proceeded to find it for him. Our client was staggered by the savings he gained through our financing: $12,000 over the term of the finance contract. What’s more, our price was competitive from the start, as our policy is to give our clients a great price upfront, saving him a lot of time and worry.

Winquote SME Finance isn’t limited to a particular type of vehicle. We offer solutions for buyers looking to finance new or used cars, trucks, forklifts, excavators, and all manner of electronic and mechanical equipment. Our services are open to individuals as well as business clients.

The Results

Through Winquote’s big-picture approach to car finance, our client was able to benefit from a package tailored to work comfortably with his monthly budget. We even managed to reduce interest by drawing equity from other sources, such as his property and other assets.

Finally, our client was able to walk away only 24 hours later knowing that because interest rates are all fixed for specific car finance, he could rest assured that there were no nasty surprises waiting for him in future.

Conclusion

Our goal in offering car finance is to provide value to the client: time for the time-poor, affordable options for the budget-constrained, solid advice for the inexperienced. Through our broad product range and accreditations with multiple lenders, Winquote is set to assist individuals and businesses with any financing need.

For help with car finance and other concerns, get in touch with our office by calling 02 9929 9733.

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The Five Essential Questions Every Business Owner Should Ask a Candidate During a Job Interview

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As a business owner or hiring manager, during any job interview you should spend at least 30 minutes asking your candidate a set of behavioural or competency based questions relevant to your specific role.

But then, assuming you’re satisfied with their responses, you should definitely ask them the following five essential questions that will prove absolutely invaluable to any hiring manager.

Whilst these specific questions don’t focus at all on a candidate’s past behaviour or personal attributes, they will tell you (very quickly) just how serious the person sitting in front of you is about their job search and ultimately about working for your organisation.

1: Why are you really sitting in front of me today?

The answer to this question will reveal whether your candidate is running away from something (eg a hostile working environment, bad manager, job they have grown to dislike etc), or whether they are running toward something (eg a better job, a new career direction, or a new challenge through a more senior position etc).

Candidates that I like to refer to as “run aways” are more likely to simply take the first new opportunity presented to them even if it’s not the right one just to get out of where they are today.

Believe me you don’t want to be their “rebound employer” because the likelihood of them sticking around with you for very long is pretty much zero.

“Run toward” candidates will be more strategic in their job search, will have more questions for you as their next potential employer and will be less likely to have just applied for every job they possibly can.

2: What are you ideally looking for in your next position?

This is where you basically ask your candidate to create a wish list for their next role. Get them to talk through it right there in front of you (and remember to write it all down). Ask them to think about everything from:

- What type of manager they want to work for;
– What hours they want to work;
– Whether they want any more flexible working arrangements (eg to work from home one day per week);
– Whether they expect any particular benefits (eg car allowance, parking, mobile phone re-imbursement); or
– What additional training they may be expecting etc.

Once you have a full understanding of what they’re looking for, you will know whether you are able to meet their wishes.

3: What salary are you on now?

It’s an unfortunate fact but the majority of people will typically ‘stretch the truth’ slightly in response to this particular question. Even if it’s just by a few thousand dollars, candidates will always inflate their current salary. Fortunately there is a way to prevent this.

Ask for proof.

If a bank is allowed to ask to see a pay slip to approve a credit card for $2,000, why can’t you ask to see a pay slip when discussing a salary of $50,000?

Another way to phrase the question might be, “If I were to ask to see a payslip, what salary will it indicate you are currently on?”. Whilst it might cause the candidate to become fidgety for a minute, or to break eye contact for a second, you are more likely to get a straight answer.

4: Who else is involved in your decision making process?

No matter how independent or confident a candidate may appear to be to you, nobody ever makes a decision about a job change completely on their own.

It’s your job to find out who else is involved.

You don’t want to get to offer stage and then have a candidate say, “actually my wife isn’t happy with the long hours we’ve talked about”, “my husband doesn’t want me doing so much travel”, or even “my parents aren’t comfortable with me taking this job”. I have heard all these (and many more) before.

I’m certainly not suggesting you invite husbands, wives and partners into your office for the interview with your candidate. Nor am I saying you run the interview over a Sunday dinner with the parents. But by stating up front that you are aware there will be other decision makers involved, it will get them talking up front … not when it’s too late.

5: How will your manager react when you resign?

 Again this might seem like bit of an odd question to ask the first time you meet a candidate, but it will tell you a lot.

If your candidate tells you that the manager would completely understand and respect their decision or perhaps even that they wouldn’t be at all surprised, then you’re OK.

But if the candidate responds by saying their manager will probably offer them more money, there is only one thing for you to do. Send them back to work, suggest they call a meeting with their current employer and to actually ask for a pay rise. If the request isn’t granted, tell them to then come back to you.

After all, why should you waste your time going through the entire recruitment process with a great candidate who, when they resign, is offered more money and then turns your offer down? They’ll be happy but you’ll be back to square one. 

 

About the Author:

Paul Slezak is a cofounder of RecruitLoop – a marketplace of independent recruiters available on demand helping SMEs save 80% cost and hours of time compared to traditional recruitment.

Paul has had 20 years experience in the recruitment industry and is a regular speaker and writer on trends in talent attraction and selection locally and internationally. He spends his time traveling between Sydney and San Francisco.

RecruitLoop is always updating its Resource Library with tips for any business owner feeling daunted by the idea of having to recruit new staff into their business.

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How We Saved a Valuable Client $52,000 pa

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Since the 2008 fiscal crisis, SMEs in Australia have had a tough time of it. Even up to today, there is an ongoing difficulty in accessing finance—a handicap left over from the years of slow consumer credit growth, low overall confidence, and a volatile capital market. In the 2011 Asia-Pacific Small Business Survey by CPA Australia,only 30 percent of the respondents reported having been approved for business loans. And of this number, more than a third found the process especially challenging.

CPA Australia attributes SME’s funding troubles to a lack of communication between lenders and potential borrowers and believes that better dialogue on the latter’s credit worthiness is one key to success. This particular client’s story is an excellent case in point. Abhishek Maharaj, General Manager of Winquote, shares the story with us.

The Problem

Our clients owned a restaurant business in the SME space and were hoping to try and grow their portfolio of assets. To do this, they needed secured, lower-interest funding to refinance their property loans.

While they were sufficiently asset-backed and able to fund their cash flow requirements, they were having difficulty establishing their capacity to service the debt—evidently a no-no for the bank. Their inability to secure bank financing boiled down to two things: first, they did not have a relationship manager to oversee their financial dealings, and second, they had only recently restructured their business.

In the interim, they had to resort to expensive private lenders. By expensive, think high application fees and interest rates well above 10 percent. The expense led them to consider offloading their business or investment property—a measure which would have eliminated their debt, but not without hurting their cash flow.

The Solution

The problem with their temporary solution was that it didn’t really solve anything. It was just a Band-Aid, a means of adjusting to the new normal (i.e., having to go without bank financing). And it was no longer effective.

When the clients approached Winquote, one of the first things we did was urge them to find a relationship manager, someone who can understand the ins and outs of their business finances and represent them properly to the bank. We also stressed the importance of mapping out their short-, medium-, and long-term objectives so that they could start preparing financially for future projects.

Below is a summary of the strategies we implemented.

1. Sourcing the right bank. Once their objectives were made clear, we were able to find the right bank for their current situation and future needs.

2. Utilising our Debt Tendering Service. This is designed to help clients get in touch with multiple lenders with the aim of arranging a new and improved setup that will add value to their business.

3. Organising approval and settlement. We worked closely with the bank and the clients’ chosen relationship manager to achieve the desired results.

4. Managing the ongoing relationship. We continue to be their personal Finance relationship managers and to maintain the relationship between themselves and the lender.

5. Providing ongoing support. Clients’ needs don’t end once a bank loan is secured. We continue to work with them and their relationship manager to make sure the house stays in order. It’s an ongoing beneficial relationship.

The Results

The end result was that we were able to secure financing at an interest rate of under  5.5 percent through one of the Big Four banks. We helped our clients by putting their best-foot-forward to the bank allowing them to save $52,000 a year on interest costs alone—an immediate boost to their cash flow. And (perhaps best of all), we were able to help them hold on to their business and investment property.

At Winquote, we work hard to be our clients’ advocate throughout the process. We push to best position your credit application for improved pricing and ultimately reduce barriers for approval. Our specialist knowledge and years of working in the banking industry place us in a prime position to meet with top lenders and ensure that all your financial affairs continue to run like clockwork.

Conclusion

The takeaway for this case study is simple: find sound financial partners who can help you maintain a healthy cash flow and keep you on your toes. Relationships are important in all aspects of business, but most especially when securing funding and when growing your portfolio of assets.

banking relationships

If you need help with SME Cash Flow Funding, Self-Managed Super Fund Lending, Property Finance, and more, talk to Winquote SME Finance. We’d be delighted to hear from you.

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How Vital Cash Flow Is to Businesses in Australia

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You’ve heard it said before, but this fact bears repeating: “Revenue is vanity, profit is sanity, but cash is still king.” So the question of how vital cash flow is to businesses in Australia is a no-brainer: it’s very, very important. It is, in fact, the lifeblood of all businesses, from start-ups and small enterprises to large multinational corporations.

One of the strongest indicators of a business’s financial health, cash flow refers to the difference between how much cash is coming in and how much you’re spending on operating, financing, investing, and other supplemental business activities. A positive cash flow is a hallmark of a successful business—more so than huge profit margins, cutting-edge facilities, and a solid customer base.

Below are some of the main reasons why cash flow is important.

1. Cash flow gives you a better chance for survival

If the global financial crisis taught us anything, it’s that no business can survive long without a strong cash flow. According to Dun & Bradstreet, the trifecta of a high Australian dollar, low consumer confidence, and global economic volatility only made competent cash flow management all the more crucial.

The latest D&B Business Failures and Start-ups Analysis (Q4 2011) showed a 42 percent overall increase in insolvencies—a figure doubled among small business start-ups. This staggering closure rate, which affected more than 3,000 businesses in total, was attributed to failure in various business fundamentals, such as planning, strategic management, and business analysis. But the overriding cause for failure was poor cash flow management.

business failures by size - statistics

The trend isn’t even unique to Australian companies. An independent survey of 2,200 small businesses showed that as much as 68 percent ended up insolvent as a result of cash flow problems.The bottom line is, it doesn’t matter how profitable your business is. Until you get your cash flow sorted out, you will be operating at high risk.

2. Cash flow gives you a competitive advantage

If you want to attract investors, you need to make maintaining a positive cash flow a priority. It doesn’t matter what industry you belong to or how little competition you have—any potential investor will scrutinize your cash flow (your operating cash flow, to be specific). Why? Because it is the litmus test of your true profitability and future outlook.

Investors know that the steps you’ll need to take in order to develop a healthy operating cash flow are the exact same things that will increase their chances of getting a return on their investment. To them, it’s proof that you know how to score the best deals with your vendors, are able to settle your payables promptly, and have a steady stream of sales, among several others.

3. Cash flow gives you flexibility

Money is a necessity for emergencies and other situations that require mission-critical business decisions. A business that keeps second-guessing its investments and purchase decisions because it isn’t liquid enough will soon stagnate. Moreover, cash eliminates the need for contingency plans like short-term credit facilities and other temporary cash-management solutions that may end up draining more of your resources in the long run.

4. Cash flow gives you opportunities for growth

Maintaining a consistent cash flow teaches you to constantly find ways to make the most of your capital. This isn’t a freedom afforded to business owners who are still stuck trying to make the proceeds from their sales cover the cost of their day-to-day operations. Only when you get to a position of excess will you be able to channel your capital into growth-friendly investments: staff training, better infrastructure, bigger marketing campaigns, etc.

It takes a lot of work and a strategic mindset to improve your cash flow, and while it won’t exactly be smooth sailing once you’re in the black, pushing for a positive cash flow is well worth the effort. When it comes to boosting your business’s cash flow, the best time to start was yesterday.

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Why You Should Consider Building Business Credit

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It’s common practice for rookie entrepreneurs to bankroll their business ventures using a combination of savings and personal credit. What’s surprising—and worrying—is that not all business owners make the transition to business credit once they get the ball rolling. Business credit is hands-down one of the most valuable assets your company can have. As is the case with personal credit, it offers a reflection of (a) your trustworthiness as a potential borrower and (b) your past payment behaviour. For all practical purposes, it makes up the entirety of your company’s financial foundation. The importance of building business credit is the same regardless of the size of your business—even micro-businesses that pull in less than $250,000 a year aren’t exempt.

Below are four reasons why you need to build business credit (starting yesterday).

1. Basic financing

It’s difficult for a company with little to no (traceable) commercial credit history to obtain access to financing. And start-up, day-to-day operations, expansion, you name it—every stage of every business’s life cycle is funded at least partially through credit. So the short answer to why business credit matters is this: you’ll be hard put to survive without it. As of 2012, Dun & Bradstreet has credit information on more than 10 million businesses, not to mention more than 1.05 million unincorporated entities. And that’s just counting Australia. Why do they bother putting together this information? Because lenders need it. If you visit the D&B homepage, this graphic is the first thing you’ll see:

businesses filing for bankruptcy

That very fact is the reason why businesses like Dun & Bradstreet, Equifax Commercial, and Experian Business Credit exist. Lenders want to make sure they’ll get their money back (with interest), and one way to guarantee that is to lend only to low-risk entities. And you’ll need a business credit profile to prove that you’re low-risk.

2. Business partnerships

Lenders aren’t the only parties with a vested interest in your credit score. Suppliers, manufacturers, distributors, utility companies, and other vendors are in the same boat. And all of them will pull business credit on you to know whether or not you’re the type to renege on your bills.

3. Risk management

Business credit doesn’t just mitigate risk for lenders and business partners; it also protects the owner. Remember the graphic above? If you financed your business using personal credit, life savings, and/or money borrowed from family and friends, you will be in a difficult position if your venture goes belly-up. Business credit is designed to limit your liability as a business owner, and not just financially. Ensuring that your business is recognized as a separate entity with a separate credit score will give you a measure of protection in the event that your business goes bankrupt or is involved in a business lawsuit.

4. Scalability and transferability

Business credit will come into play if you’re thinking of expanding or selling your business. You’ll need it if you want to finance a delivery vehicle, lease equipment, sell your products via retail chains, or hire a contractor to renovate a new office space. Likewise, your credit portfolio will matter to prospective buyers because it is central to the business’s future outlook. The better your business credit looks, the better your chances are for expansion and/or a profitable sale. Building business credit takes time, but it could make or break your company. Think of it as the difference between a rookie going to a job interview with little more than a cover letter versus another who goes in armed with a full resume, up-to-date references, university transcript, and portfolio. It’s one thing to know that your business has what it takes to succeed; it’s another thing entirely to prove that it does.