Commercial Credit Essentials: What Every Business Owner Needs to Know

Understanding the unique rules that come with commercial credit is essential for maintaining your business's purchasing power. 

In today's episode, we explore both the challenges and opportunities available for businesses looking to acquire essential equipment.

Join us as we welcome two equipment finance experts, Robert Jackson and Anthony Alvarez.

With extensive experience in the finance industry, they have helped countless businesses overcome the hurdles of equipment financing.

Robert and Anthony will share their knowledge on what it takes to keep your commercial credit in the best position to get the equipment that your business needs. 

Transcript

Hello, and thank you for tuning in to Smarter Equipment Finance's newest podcast release. Today, myself, Anthony Alvarez, is gonna be meeting with? Robert Jackson. That is right. We are two, coworkers here at Smarter Equipment Finance. As a matter of fact, some might say he's my mentor.

Not him, though. No. But with that being said, today, what we would like to talk about is personal credit as well as commercial credit. Correct? Yep. So the reason that, Jackson and I were were asked to do this video, Jackson had mentored me when I first came into the industry and by far has an extensive background in credit. And I just I'd love to hear some of the insight that you might have for our viewers.

And let's start off with personal credit. How does personal credit affect a commercial financed opportunity?

Well, it can affect it tremendously.

So when business owners contact us to get information that they want about scaling their business and acquiring new equipment, whatever the case may be, there's a couple of factors we consider.

The first being the length of operational history that their business has been around. That's the most important because that establishes credibility. Correct. The second thing we look at is personal and commercial credit. And I say personal and commercial credit because it is possible to get a commercial loan having none. If you've got nothing on your Dun and Bradstreet, you've got nothing on your PayNet, but you have a very strong Equifax, Experian, or TransUnion credit report, we have a profile that will fit your needs.

It just depends on other factors. Obviously, there's no one size fits all parameter when it comes to credit.

So the guidelines and the information that we're sharing with this podcast, these are general information. They're not specific to you.

But if you want to know what's specific to you, you can contact us, and we can we can get granular with it and dissect it if you want to. But this is for the purpose of just general information that would put you in a position to get a better deal. That's really all it is. Whether it's with us or with somebody else, it does not matter because there's a coworker that we both work with that says we kind of all play in the same sandbox.

That's true.

It just depends on who you prefer to work with.

Yeah. It's true.

And it's true. There's a lot of companies out there, some good, some bad, that do what we do, and it's up to you to discern, what you wanna do. And the reason that we put this these kind of videos out is because it's educational purpose is because a rising tide lifts all boats. And there's plenty for everybody. You know? It's not like just because somebody has something that nobody else can get that. I mean, some people have that kind of mentality, but not me.

So with that said, the most important things you wanna consider in your in your personal credit is make sure your payment histories is on time. Late payments can hurt you more than anything.

So to talk to us about payment history. So when does on personal credit, when does a trade line reflect a late?

Well, so that's an interesting thing that you could bring up because each one is different. So mortgages, cars, credit cards, they typically have grace periods where they will give you sometimes a five to a day window where it's not considered late. Sometimes it's thirty days. It just depends on on on how it's structured. I try to maintain personally that everything is made at least a minimum payment if I can't make more, to make sure that exceptional payment history because payment history, weirdly enough, is thirty five percent of your aggregate credit score. So it's the largest single contributing factor.

Let's recap that. How much?

Thirty five percent.

So over one third Mhmm. Of your payment just your payment history.

One late payment could take a seven hundred borrower to a six hundred borrower. Wow. Just like that. Thirty percent of your credit score is called credit utilization. That's where you have available credit versus credit use. Those are your revolving credit lines, credit cards, personal loans, bonds, landline?

Well, if you're carrying too much debt, no one's gonna borrow you. No one's gonna lend you anything. You couldn't finance a ten cent pencil with nine cents down.

So business owners should be cognizant before they go to the well to make sure that they have good control over their revolving. And if they don't, let's just say that they have about fifteen percent open and revolving, then the bank statement should be humongous.

You've gotta have enormous bank statements to offset that debt. So if you get below thirty five percent available, that means you've utilized sixty five percent of your total available credit. That's when red flags start popping up.

Okay.

So it's very, very important that you wanna stay at half of your revolving and under. You never wanna exceed that half benchmark. And I know it's a lot easier said than done. And sometimes the business owners are having to float their cost because they've got net thirty, net sixty, net nineties. Yep. So sometimes they have to take those kind of things, and I understand.

We understand. We will all run into it. We get it. Yeah. It's okay. It's not a big deal.

But I'm wanting you to be aware that if you want the best deal, these are the positions that you should be in in order to make sure that that happens, whether it's with us or anybody else because everybody's gonna look at the same criteria. So we should look at lates or be cognizant of what our pay is.

Late payments. Because if you show that you have a pattern of late his of late of of paying people late and you've made it, like, a habitual thing, no one will lend you anything.

So let's assume the candidate has a a seven hundred FICO, seven zero one. And let's assume the utilization is eighty percent.

Mhmm.

What are what are some other items that that a lender will evaluate on personal credit to make a decision, not even including the commercial credit yet?

It's a very good looking question.

I would probably say that, based on the qualifying amount that they're looking for, we're looking for comparable trade references. Yes. Comparable. A comparable trade reference, it's just like if you were searching for a home and you're in a new in a new city.

If, your budget is a million dollar home, you look for a million dollar home.

If your budget is a three hundred and fifty thousand dollar home, that's what you look for. You look for a three hundred and fifty thousand dollar home. So So you as a business owner, if you're looking a piece of equipment that is just out of reach when it comes to affordability, it's just not gonna make any sense.

And isn't it true that some lenders are gonna have a comp requirement at different at different, different percentages of past lending. So some lenders are gonna ask you to have fifty percent of that comparable credit. So if I came to you and I wanted a hundred thousand dollar loan, you're looking for a fifty thousand dollar trade line.

Mhmm.

There's some lenders that are gonna wanna see a one to one. There's some lenders that are Be at twenty five percent. Yeah. It could be twenty five percent. Some of them that aren't even concerned about it because they're more, say, credit based.

It's not so much regarding the the components that we discussed with, but it's the longevity of that history and how long that person has maintained that where they kinda puts them in another upper echelon.

Some other things that I've noticed that we look for are homes. Mhmm. Correct?

Mhmm. We can actually use, we have a program that will allow certain individuals, with homeownership over a two year period of time. They've gotta be in the property for at least two years.

We can actually use that as a trade reference.

But but do does that have any tie to their loan? No. Absolutely not. It has no tie to the loan, and it is simply used as past borrowing experience.

Yeah.

Where most lenders don't use that, there is a lender that within our portfolio that would consider that. Correct?

Mhmm.

Okay. So we've talked about a couple things. Number one, obviously, the score. Number two, the history of payments.

We've talked about comparable credit. We've talked about credit utilization.

What about length of credit? Does that have bearing?

Somewhat.

Not as I guess it wouldn't be as critical as it would be. So if someone has had only had been on the credit bureau for, say, five years, but in that five years, they've maintained perfect payment history. They've got a couple of car loans, maybe, maybe not. They bought a home. They have some credit cards.

That's somebody that we can work with.

Now if it's somebody who, has one credit card, you know, maybe two credit cards from Macy's or whatever the case may be, and and they have a seven hundred credit score, that's a bit of a challenge because they they haven't shown the ability to be trusted in the past with anything Yeah.

And shown no ability to pay anything back other than just a small, you know, a few credit cards. But everybody puts a lot of emphasis on a credit score. Credit score. Credit score is not the credit score. We can go as low as a five fifty and still get people pretty good rates, believe it or not. I had a customer several years ago. I won't name names.

But he was a he was a sub five fifty credit score being forget that. He'd been around forever.

Been in business since I think the the the time that we started recording. He got one of the best deals. Best deals ever on a long haul truck of all things.

He got one of the best deals I've ever seen.

I couldn't believe it. But, again, it comes down to what lenders value. Each lender's gonna have a different value, and they're gonna weigh personal credit differently than commercial credit and then other lenders vice versa.

Yeah. This particular individual had just phenomenal commercial credit. It had been around since forever, but for whatever reason, couldn't maintain his personal credit as to the same degree. So we were able to just not use the personal credit to get the deal done. We did, but it didn't really play a much of a factor Correct. In in getting it in getting it finalized.

Now when when you just talked about he had been in business for a a long time, and we keep talking about time in business. And I know this is a credit discussion, but how does time in business how does that all affect people's deals?

Well, if you were to walk into a store and you see Coca Cola in the refrigerating section, and then right next door you see Coca Cola, but it's spelled with a k, which one are you gonna reach for? Yeah. That's true.

I'm so I'm just I love this job.

So we we've talked about personal credit. We've even gotten in-depth as far as how utilization affects everything, what comps look like, what lenders are looking for on personal credit. But I think you and I and there's one other rep too that this, as a matter of fact, I believe it was you know, I think it's Adi. But there's there's three of us that have experienced this as of recent where the clients had absolutely impeccable credit.

But there were some things on the commercial credit that stood out that didn't match the behavior of personal credit.

And I'd like to start the commercial credit, if you will, portion of this of this, podcast.

I'd like to talk about when is a payment late. Before we go anywhere else on commercial credit, we have to we really have to establish an understanding for business owners because each in each one of our cases, none of our owners knew. None of our owners knew that credit is reported late when you pay how many days after your payment?

One day.

One day.

So, traditionally, a lot of us have grown up in the credit world understanding that if you're late over thirty days, that's when something is gonna finally report, or if you're past a grace period, or whatever the case might be. But in commercial credit, unless it's in your agreement, none of that is on the table.

Right? Mhmm. So under most EFAs or equipment finance agreements or people who are looking to purchase, equipment for their business with a commercial lender, most of them are reporting a late as of day one after the payment is due. So one of the reasons that Robert and I wanted to do this is to to kind of bring an awareness to that, Number one, making sure that people understood when a payment is due commercially on that day, it's imperative that you put it on automatic debit. We're gonna talk about some scenarios throughout the the the second half of this podcast and just the experiences, but why don't you tell me how it's affected some of your clients?

Just the understanding of when a payment is due commercially.

Was it it's it's kinda just piggyback on the same thing you said there is that if your payment is due on the thirtieth, you pay it on the thirtieth. It's not due on the thirty first or the first. That's just the way it is.

What if it's a leap year?

It's still the same. It does not matter. So you don't treat your payments like suggestions. You treat them like responsibilities and obligations because that's what they are.

Yes. Absolutely.

You know, pay for your equipment as it pays you.

So if it's paying you, pay for it. Correct.

Easy as that.

And when you're looking at commercial credit, what are some of the things that you look for personally? When I I and I know comparable credits gonna pop up in this conversation, and I think that's the second most, important point for business owners is comparable credit because some guys or gals have lived their entire business life paying cash.

And then when they come to the well and they finally meet someone like yourself, they may not have that comparable credit built up. But what are some things that you personally look at when you're looking at a PNET?

I look for the number of trades.

Okay.

That will tell me how the longevity. The only thing I look at is the frequency of late payments because you'll see thirty, sixty, ninety, one twenty.

And it will it will tell you which accounts are late, how often they've been late, whether they're being paid as rolling lates, which is where they get stuck just in a perpetual pattern of late payments.

Correct. The funny thing about commercial credit reports that I've noticed, and this is just me from my experience having done over five hundred deals, personally speaking, that the commercial credit report is not really, a deal killer on late payments unless you've made a habit of it.

If you if they can see that there's a behavior, that needs to be addressed, then it then it can become an issue.

But if you've got a few late payments here and there and, overall, you're a pretty successful business owner, you've got a good grasp on what you're doing.

You know, you've you've you've got a couple of employees. You're doing a couple million dollars a year in in in top line revenue.

Those kind of things can be overlooked. I mean, we look we we give people the six thousand foot view of their business. We don't just look at this one specific point and say this is what it is because there's a lot of other mitigating factors that could soften that blow.

You're right.

For example, maybe the equipment, the collateral is so valuable because you gotta remember these are self collateralizing loans. There's no blanket liens on your business. There's no blanket liens on your accounts receivable, your inventory, your house. You don't have to worry about any of that stuff.

So it's only tied directly to the equipment that's being financed similar to a car. So if you don't make the payment, they're gonna come get it because that's just the way it works. But Correct. If you didn't make your payment on your house, the bank's gonna seize the asset.

If you don't make your payment on your car, the bank's gonna seize the asset. If you don't make your payments on your credit cards, they're gonna ruin your credit.

So it's it's all about what price are you willing to pay in order to get what you wanna get.

Some things that, that I kind of I wrote down after looking at a Paynet report prior to the podcast. I wanted to just these are things that stood out to me that I wanted to kinda share with our our viewers, vendors, business owners, maybe other, maybe even other commercial equipment brokers in the industry. And some things that I've noticed that really stood out is a pay net is always gonna contain the name of the business. You know? That's just a given. But what a lot of people don't realize is it carries all affiliated names.

So the one time you cosigned for one of your drivers, right, for his business, guess what? Chances are it's gonna pop up under an affiliated name. You have to be cautious in cases like this when you sign on any of these agreements because I've actually run into a case where someone had recently done a deal like that for someone else that was not a part of their business.

And now my lender wanted that person to go ahead and sign off on the deal that I was gonna do for the true owner of that business.

So it's gonna pick up all affiliated names.

If you if you've been a, let's just say you were a a well servicer, but you decide to become a a driller and a well servicer, whatever those name changes are, it's all gonna appear and follow you forever.

Well, an SIC code Well, an SIC code is what the banks use and and in lending institutions on a commercial and and financial level to categorize your business.

So for example, if you're a long haul truck driver trying to buy a, what would you say, an excavator, That really wouldn't fit the mold so much as to find out why.

And yet we run into that so much. But what is your idea as to why? Why why do you think people do that so much?

Because they don't understand.

And and they're probably truly opening another new business.

Maybe. Right?

Yeah. And that's that's kind of the reality of it. So SIC codes, the reason those are so important is underwriters use these to validate whether or not this equipment is conducive to your business. And if it's not, just like you said, it's why would a baker need a trailer?

Or maybe he's gonna haul his own wheat. Okay. Okay.

That much?

So it it just again, the SIC code could play in part on a lender's decision whether or not that equipment is conducive to that business.

Another item is it's gonna list the primary equipment that that business buys. You know, what is this business buying? It usually lists those top rated the top rated item that you were turning over on Paynet. Another reason that, that plays in part is it could be like an industry question, or maybe it's a related piece of equipment that you're buying that supports the items that you typically buy. So I just mentioned this stuff so that way you understand when a commercial equipment lender is speaking to you about these items, you understand as to why they're asking you about your SIC code or what typical equipment you usually buy. We've already talked about the fact that the reporting schedule goes one through thirty, not thirty days plus. So it's one through thirty, thirty one through sixty, sixty one through ninety, and then the final category being ninety one plus.

Now we deal with this on the personal side.

On Paynet, there are six boxes, so you get an evaluation of inquiries.

I have a story about inquiries recently on Paynet, but I know you do too. We, we were talking about one of your files, and I think it was about two days ago.

And no. I believe that was another rep. I I apologize. But, in fact, I think that was Nick. We were talking to Nick, and the guy that he was trying to help had well over thirty pulls or twenty some odd pulls in a in in a year's time.

How do pulls on PayNet affect business owners?

I don't think it's pulls on PayNet so much as it is exposure. Because what happens is when you have a lot of pulls on your PayNet and you're not getting them through or they're not actually, finalizing or concluding, it looks like you're desperate. It looks like you're panicking. It looks like there's something There's been a change in your income. There's been something that doesn't fit with the traditional path.

Maybe other lenders have declined? Right.

And and so because of that, it's gonna raise more red flags.

I personally ran into this one.

I I I have two separate clients. One in particular, very endearing relationship that that we've developed.

I became very protective of the client, after developing a really strong relationship with him. His wife gets on the phone and started to ask me questions like, where's this information? Why don't I know?

And unbeknownst to them, they had been pulled eighteen times on Paynet since the month of December.

And the reason that I bring up this case is be be be aware. Okay? Here at Smarter Equipment Finance and this isn't a plug for us. This is I'm I'm just edifying something.

Here, we are we're not allowed to shotgun credit. If we shotgun credit, we could be in a lot of trouble through ownership.

And the idea what I mean by shotgunning credit, and there have been episodes in previous seasons regarding shotgunning credit here at Smarter Equipment Finance. But it's when you broadcast that app out to several different lenders as a financer, as a finance broker in hopes that one of them buy it. We're very precise.

Why don't you tell the audience about that?

Well, it's just like anything else in life. The more information you have, the better decision you can make.

So if we gather as much intelligence about your specific situation as we possibly can, it gives us better ammunition when we go to fight the fire for you. Yeah.

It's as easy as that. There's really no reason to overcomplicate it.

Yeah.

Another thing that I've noticed is we have clients that'll come in and ask and say, well, I'm not gonna sign. I won't guarantee.

That's fine. Fantastic.

What are some of the requirements that we hear from lenders in order to offer somebody a no personal guarantee agreement or approval when related to credit. Okay. What are we looking for on that PayNet?

Well, first things first, when you do a when you're doing a corporation only, no non PG, which is completely normal, The first thing is we have to have somebody as a point of contact, whether it's a CEO, a CFO, someone that's in a position of authority with that company has to be addressed. So whoever that is, however the organization structure of the company is, we have to have somebody. It can't be a committee. Mhmm. It has to be an individual. Yeah. Even if that individual acts as the governing body for the committee.

I had this circumstance with a company because they had multiple locations, multiple franchises, and they had, business in Delaware, another one in Texas, another one in California. I was like, this is just too much. This is just this is just too much. I for for a for a thirty thousand dollar for you know?

No. Yeah. It just wasn't worth it. I was like, look. Just figure it out. You know?

I I if but for for for commercial credit, I guess, we're kinda getting off off topic a little bit is is on the Paynet, we look for a little bit of history, preferably a year or longer.

Four more trades is what we like to see. Mhmm. It obviously depends on the size of the transaction. So if you've got one or two trades, but each trade is a three hundred thousand dollar trade line, then that's obviously gonna provide more strength than somebody who's got, say, a fifteen thousand dollar trade line.

Correct.

So I guess, you know, what we and then sometimes when we have to get a tax return to verify ownership, of the business, but we won't have to collect any personal information like Social Security numbers or things of that nature.

We'll gather your EIN number, your tax ID number in lieu of the Social Security number, and then have the owner sign off on the application as that way. So it's it's it works the same way as it would with a PG. It's just we're not using the social.

And then the way that would appear on a Paynet, just so that the audience knows, there's there are actual buckets there on the far left of a Paynet, and it'll let us know whether or not someone has PG'd that transaction.

So in cases where you're contacting, say, a finance broker or a a lending institution and you're asking to not personally guarantee that loan, Some of the things that we are asked, you know, by our lend our lenders, our commercial lenders are they wanna see, in some cases, well over a couple hundred payments already made in that capacity.

They wanna see established, history of no guarantor.

Some lenders wanna see five or over seven years. Some lenders wanna see a multi owner corporation versus a single owner LLC, if you will. And the reason is because each lender has its own appetite, and they're all governed differently based on them being an actual institution and an investment group or or things of that nature. But it's I bring up the the the guarantee portion of of of what's reported on Paynet because these are things that every business owner should know where they stand.

I personally recommend to, my clients that they not only go to PayNet and attempt to go ahead and log in and monitor their their history, their information, whatever it is.

But on top of that, if they really wanna go ahead and step into the realm of not guarantee the not guarantee these loans because of the strength of the business, they should really be cognizant on what's reporting and how many of these deals they have there. So that when when they approach a lender, they're informed.

They're not just reliant on the information that they're receiving from someone like yourself or myself, but they're empowered now. Now they know.

Anything that you think anything else that that that we've that we haven't touched on when it comes to credit, so personal credit. Talked about the length of time, the amount of trade lines. The amount of trade lines, we probably should have touched on that a little more, but five to seven is the typical on personal credit. Right?

We've talked about lates or we've even talked about comparable credit when it comes to personal credit. And then on the PayNet side of things, I would I would I would say there's a lot more detailed info, but the biggest main difference that I would want everyone to walk away from this experience and listening to you and I is, if you pay one day late commercially, it could grossly affect the way lenders are viewing you. And so just be informed.

So with that, we've we've discussed and we've recapped not only what it takes on the personal credit side of things, on the commercial credit side of things, but if you find yourself in a situation where you would like to talk to someone for some extensive help, feel free to contact Robert Jackson, myself, Anthony Alvarez. In fact, many of these, episodes are gonna have our information at the bottom of this actual, podcast. So please click, like, follow, and more importantly, engage with us. Lastly, if you are a vendor, if you are a business owner and there's something on here that really touched you today or something that you would like us to talk about in the future or clarify even better, please reach out.

Both Robert and I are seniors here. We pride ourselves on being the face of the company in a me in a sense. We really like to step up and make sure that we are presenting these things and representing everything correctly, And we'd love to engage and develop a relationship with you guys over time. Thank you so much for listening, Robert.

I appreciate your time, bud.

Thank you.

And, as always, I'll see you at the desk.

Yep.