RPF0368-Ty_Crandall_Interview
00:00:00.000 | Enjoying your podcast? We'll be brief.
00:00:03.000 | If you're looking for the perfect holiday gift,
00:00:05.000 | give Scratchers from the California Lottery.
00:00:07.000 | With so many to choose from,
00:00:09.000 | you're sure to find the right gift for anyone on your list.
00:00:12.000 | Now that your holiday shopping list is figured out,
00:00:15.000 | enjoy this bird singing Jingle Bells.
00:00:17.000 | [Birds chirping]
00:00:21.000 | Give the gift of Scratchers from the California Lottery.
00:00:24.000 | A little play can make your day.
00:00:26.000 | Please play responsibly.
00:00:27.000 | Must be 18 years or older to purchase, play, or claim.
00:00:32.000 | Welcome to Radical Personal Finance,
00:00:33.000 | the show dedicated to providing you with the knowledge, skills,
00:00:36.000 | insight, and encouragement you need to live a rich and meaningful life now,
00:00:42.000 | while building a plan for financial freedom in 10 years or less.
00:00:46.000 | My guest today is Ty Crandall.
00:00:48.000 | Ty has written a book, among other books,
00:00:50.000 | called Business Credit Decoded,
00:00:52.000 | Discover the Secrets and Power of Business Credit.
00:00:57.000 | And Ty, I've been looking forward to this conversation
00:00:59.000 | because this is going to take me back,
00:01:02.000 | what is it at this point?
00:01:03.000 | Probably 12, no, yeah, about 12 years.
00:01:07.000 | When I was, I'm 30 years old now,
00:01:09.000 | and when I was 18 years old,
00:01:11.000 | I was obsessed with building my credit.
00:01:14.000 | And I don't know if you were writing self-help books at that time,
00:01:17.000 | but I was digging into every Build My Credit guide.
00:01:20.000 | I started with the gas card,
00:01:23.000 | and I got my little starter credit card on my 18th birthday
00:01:27.000 | and was building it up,
00:01:28.000 | and I would call every few months and increase my credit scores.
00:01:31.000 | And I was pretty good at it to the point where at one point,
00:01:34.000 | I think in college, was it $100,000 or $150,000?
00:01:38.000 | I'm blanking on the numbers,
00:01:39.000 | but by the time I was a senior in college,
00:01:41.000 | I'd systematically built up.
00:01:43.000 | I was unemployed or minimally employed,
00:01:46.000 | but I'd built up to the point where I had about over $100,000 worth
00:01:51.000 | of credit line available to me across all the credit cards I'd built.
00:01:56.000 | That's impressive.
00:01:58.000 | Then my personal story is then I walked away from all of it.
00:02:02.000 | I closed all that stuff, did the Dave Ramsey plans,
00:02:04.000 | said, "I don't need a credit score,"
00:02:06.000 | and went hardcore in the other direction.
00:02:08.000 | [laughter]
00:02:10.000 | So I've gone to extremes, but this business credit topic,
00:02:13.000 | and we'll talk about personal credit.
00:02:14.000 | I'm not quite so extreme anymore.
00:02:16.000 | I think we're going to have some fun.
00:02:18.000 | So welcome to Radical Personal Finance.
00:02:20.000 | Thank you so much for having me.
00:02:21.000 | I'm excited to be here.
00:02:22.000 | How long have you been writing and teaching on this subject?
00:02:25.000 | I've been in the financial space for about 16 years.
00:02:29.000 | I started on the consumer side,
00:02:31.000 | so I spent a lot of time helping consumers fix their personal credit
00:02:35.000 | or understand their personal credit, how it works,
00:02:37.000 | and work within the Fair Credit Reporting Act to correct inaccuracies.
00:02:41.000 | Then I've been in the business space now pretty aggressively for going on, I guess, about six, seven years.
00:02:47.000 | So maybe I would have read one of your books back then 16 years ago.
00:02:52.000 | Who knows?
00:02:53.000 | You could have.
00:02:54.000 | I have a book called Perfect Credit that's just on consumer credit,
00:02:57.000 | how the system works, and how to fix it.
00:02:59.000 | So hopefully so.
00:03:00.000 | Awesome.
00:03:01.000 | Well, let's stick with business credit primarily today
00:03:03.000 | because I think that's the under-discussed aspect of credit.
00:03:08.000 | My audience is probably pretty savvy with personal credit,
00:03:11.000 | although I should do more shows on it in the future.
00:03:13.000 | But business credit, even as the introduction in your book lays out, is a quite neglected topic.
00:03:19.000 | It very much is so.
00:03:21.000 | When I decided to become an advocate,
00:03:24.000 | I actually owned a mortgage company at the height of the mortgage industry and through the crash.
00:03:29.000 | I had accumulated a lot of credit that I used for the business,
00:03:33.000 | but I personally guaranteed it.
00:03:35.000 | When I lost everything, it spilled right over to all my personal finances and assets as well.
00:03:41.000 | Years later I would discover business credit and get very frustrated that something like this existed
00:03:47.000 | and so few people knew about it.
00:03:48.000 | That was when I really decided to become an advocate
00:03:51.000 | and let everybody know that would listen that it exists.
00:03:55.000 | I appreciate the transparency of that story,
00:03:57.000 | but aren't you kind of proving a guy like Dave Ramsey's point with the story you just said,
00:04:02.000 | that the access to credit wasn't particularly a blessing to you?
00:04:06.000 | Well, I kind of agree and disagree.
00:04:09.000 | Dave Ramsey's approach is one that's definitely worth following on the consumer side.
00:04:14.000 | I'm a big guy about having no debt.
00:04:16.000 | I believe you should pay off your house as soon as you can and your vehicles and any credit card debt.
00:04:22.000 | I stay away from credit card debt on the consumer side big time, and that was all stemmed from that.
00:04:27.000 | Going through that experience, I definitely learned a big lesson of staying away from consumer credit.
00:04:33.000 | That's just not how businesses work though.
00:04:35.000 | The biggest businesses in this country get to be as big as they are because they're good at OPM,
00:04:40.000 | using other people's money.
00:04:42.000 | I think as long as you run a business and are responsible with it,
00:04:45.000 | that if you want to grow a really highly successful business, business credit is a necessity.
00:04:51.000 | You're not going to find any large privately or publicly owned companies that don't have it.
00:04:56.000 | The largest companies that exist in this country and outside of this country all are as big as they are
00:05:02.000 | because they're very good at using other people's money to get as big as they are.
00:05:06.000 | Yeah, definitely with business, I mean it's a mixed sword because the word "business" can mean a lot of different things.
00:05:15.000 | Dave Ramsey has clearly shown that it's possible to build a business without the use of financial credit.
00:05:22.000 | But as I pointed out recently in an interview on another show,
00:05:26.000 | the major reason for that is because he chose a line of business which is easily leveraged.
00:05:32.000 | He's gaining leverage of other forms, not just simply with finance.
00:05:37.000 | Comparing a business that's not capital intensive like my business, a broadcasting business,
00:05:44.000 | we'll leave Dave alone and we'll have him for lunch another day.
00:05:47.000 | But comparing my type of business with a very capital intensive type of business like new home development,
00:05:55.000 | these aren't quite the same things and many businesses, simply there's no possibility to do them without access to other people's money.
00:06:04.000 | Well, it's very true. I mean is it possible? Absolutely it is.
00:06:08.000 | Every statistic on the topic is to the contrary.
00:06:13.000 | The statistics show that the vast majority of people that start businesses, over 74%, use their own personal assets.
00:06:21.000 | They use their own personal credit. They use family and friends' money to do so.
00:06:26.000 | And the majority of those and even the ones that don't have capital fail.
00:06:32.000 | We all know this. The statistics are 75% to 90% of business owners fail just depending on the time frame you're talking about,
00:06:39.000 | whether it be one year in business all the way to 15 years.
00:06:42.000 | So I saw a statistic the other day that said Twitter could go 412 years without continuing to lose money before they run out.
00:06:50.000 | And normal entrepreneurs don't have that luxury.
00:06:52.000 | We're in a place where we're learning as we go.
00:06:55.000 | Per SBA, the two main reasons for failure is lack of experience, which almost all entrepreneurs can relate with because we kind of figure things out as we go.
00:07:02.000 | We don't know what we're doing. We figure it out along the way, and lack of capital.
00:07:06.000 | So the reality is most businesses need money to succeed, and most entrepreneurs rely on their personal credit, their personal finances to try to fund their business.
00:07:15.000 | That's when the problem really comes in because consumer credit capacity wasn't built to fund a business.
00:07:22.000 | Most entrepreneurs don't know that. They try to do it anyways, and they severely damage their consumer credit.
00:07:27.000 | And then that really, really, really causes a lot of problem in the personal world.
00:07:32.000 | Is it possible to get business credit if you don't have an established business?
00:07:39.000 | Well, that's the first step.
00:07:41.000 | Business credit is linked to an EIN, the same as your consumer credit is linked to your social.
00:07:47.000 | An EIN meaning an employer identification number, a number like the Social Security that you apply for from the IRS.
00:07:53.000 | Right. So your social is the identifier number that the IRS uses to identify you within this country.
00:07:59.000 | The EIN number is an identifying number that's used to identify your business to the IRS in this country.
00:08:05.000 | So just as you obtain a Social Security number from birth and then eventually when you get old enough, you could build a credit profile linked to that social, your business has an EIN number at birth.
00:08:17.000 | The first thing you do is select your entity with your state.
00:08:20.000 | The next step you take is you get an EIN number, and business credit is really the building of a credit profile that's linked to that EIN.
00:08:28.000 | So you don't have to have a really well-established business with tons of sales and collateral and those type of things to get business credit.
00:08:34.000 | But you do have to have the basics of an entity and an EIN to start the process.
00:08:40.000 | Well, in reading your book, I definitely learned that I'm clueless when it comes to business credit.
00:08:47.000 | I didn't even know what the business credit reporting agencies were, and I didn't know how the system worked.
00:08:54.000 | And I never knew – as you give examples in your book, I never knew that you could – well, I never knew all the different retail credit options that were available just simply if you establish them in the name of a business.
00:09:08.000 | And it really opened my eyes to how little information there is.
00:09:12.000 | So give us – walk me through.
00:09:14.000 | Pretend that I'm starting a business and I want to build systematically credit for whatever purposes, whether it's just because – as insurance against difficult times, whether it's because I need the credit right now.
00:09:27.000 | Walk me through the process of how I can systematically build credit that's disconnected from my personal credit history.
00:09:34.000 | Sure, and before I do, to make a reference to that, that's another thing.
00:09:39.000 | Business credit is fantastic because you have access to capital. You have access to credit.
00:09:44.000 | But what's important to note is that anybody can see your business credit report.
00:09:48.000 | It's not like consumer credit where somebody has to have your permission or permissible purpose per the Fair Credit Reporting Act to look at your credit.
00:09:56.000 | I can look at your business credit right now, a potential investor, anybody you may sell the business to, your competitors, your prospects, your clients.
00:10:04.000 | This is public information, so anybody can access it.
00:10:08.000 | We have a service that we paid $365 for, and we can get 50,000 business credit reports.
00:10:13.000 | So we can see anybody's credit profile, score, all their business information.
00:10:17.000 | So even if you're not planning on using it to obtain large amounts of capital, it is important to note that anybody can see this.
00:10:24.000 | So how does that process begin?
00:10:26.000 | Well, we kind of already talked about a couple of the steps.
00:10:28.000 | You've got to choose an entity where you can hire a company to do this, or you can just go to your secretary of state.
00:10:33.000 | Search to see if that existing name of the company you like is already in play in that state.
00:10:38.000 | If not, you can easily get that set up.
00:10:40.000 | In Florida, it's about $65 to do so.
00:10:42.000 | States like California, it's much more.
00:10:44.000 | It could be like $600.
00:10:45.000 | So you set up your first entity.
00:10:47.000 | You really should consider choosing a corporation or an LLC because that by default separates you from the business and eliminates your personal – or lowers your risk of personal liability.
00:10:58.000 | And then the next step is that you get your EIN number.
00:11:01.000 | You can go to IRS.gov.
00:11:03.000 | It's free to get.
00:11:04.000 | You should never pay a company or a service for this.
00:11:06.000 | There's a lot out there that try to pretend like they are a government entity and charge you, but you never need to pay for that.
00:11:11.000 | Then the next step you'll take is to make sure that you have what appears to be a very credible business on paper.
00:11:18.000 | So what I like to recommend is that when you look at an application, you have to keep in mind that every line item on that application is being asked for a reason.
00:11:26.000 | Your business address should be a real business address or a virtual address if you don't have a real physical address, a virtual address that is at least a real business address, not a home address.
00:11:36.000 | The phone number should be a business phone number.
00:11:38.000 | You should have a business website.
00:11:40.000 | You should have a business fax number, a business professional email address.
00:11:45.000 | You just want to make sure that on the application that you reflect that you're a legitimate, credible business.
00:11:51.000 | Once you've done that, then you take the next step, which is really building business credit, which has to do with just getting credit at places that you'll probably buy things from that you could use for your business.
00:12:01.000 | So an example would be Uline or Quill or reliable office supplies.
00:12:06.000 | These companies sell office supplies, shipping supplies that you could use for any number of purposes.
00:12:11.000 | If you buy $50 or more of items from them and apply for credit, then you'll be able to – after sometimes one, two, three attempts, they'll be able to actually issue you credit, and that credit reports to the business credit reporting agencies.
00:12:25.000 | Once you've done that with a few accounts, that's what initially starts a business credit profile and score.
00:12:30.000 | So the idea here is start with the easy, low-hanging fruit.
00:12:35.000 | So in the same way that when you're looking to build personal credit, somebody would go and get something as simple as a gas card, a secured credit card, or some other thing like that, which is simple and easy to get.
00:12:48.000 | With business, go ahead and set up some credit accounts with some of these merchants that are relatively common names, and you're not necessarily getting a $50,000 cash advance.
00:12:59.000 | You're just simply purchasing $150 worth of printer toner from them, right?
00:13:04.000 | That's correct. In the consumer credit world, you're usually starting a credit profile by obtaining a secured credit card, a really small limit credit card, or somebody is cosigning with you on something like a vehicle.
00:13:17.000 | Like me, I was in the Air Force, and my dad, when I was in basic training, cosigned on an old used truck, and I didn't realize at that time how much that would mean to my credit.
00:13:26.000 | So there's a lot of different ways you could build consumer credit.
00:13:29.000 | In the business credit world, there's only one real main way that people usually do it, and that's through what are called vendor accounts.
00:13:36.000 | This is why business credit is kind of a very well-kept secret is that over 97 percent of trade vendors don't report to the business credit reporting agencies.
00:13:45.000 | So you're looking for two very specific things, somebody that does report to the business credit reporting agencies and somebody that will give you credit when you have no business credit already established.
00:13:55.000 | Like I said, Uline, Quill, Reliable Office Supplies, there's a company out there called Monopolize Your Marketplace.
00:14:01.000 | Those are just a few, and when you obtain credit at those kind of places, they report.
00:14:06.000 | Then once that's reported within about 60 days, that's what will give you a business credit profile and score that you can then springboard off of and start getting real revolving store credit next.
00:14:17.000 | Is there a way to know other than referencing a book that someone else has researched who and which vendors actually do report to the business agencies?
00:14:27.000 | No. Our YouTube channel, and not at all to self-promote.
00:14:31.000 | Go ahead. We love promotion around here.
00:14:33.000 | Who loves self-promotion?
00:14:34.000 | If you go to a YouTube.com/creditsuite, you'll see that we have a ton of information on this topic there, and we put it out there, so much free content because it's not readily available anywhere else.
00:14:47.000 | There are a few credit forums that I found out there that have some of this information as well.
00:14:52.000 | The problem is that credit forums, a lot of it we find is typically outdated.
00:14:57.000 | As well as some of it can be if you look at our older YouTube videos, but we're always posting information about those type of vendors.
00:15:05.000 | Again, I mentioned several that will work as well.
00:15:08.000 | All they need is about three or four of those accounts that report to a total of five reporting agencies amongst them to get that initial credit profile and score.
00:15:17.000 | Then they can move on or you can move on. Anybody can move on to regular store credit that you're familiar with, Best Buy, Amazon, Dell, and Apple.
00:15:26.000 | They'll all help you start getting credit and approve you once you get that initial handful of accounts reported.
00:15:33.000 | So does this actually connect to business capital in any way?
00:15:38.000 | Because most people aren't looking for necessarily how to get $150 worth of printer paper and toner from an office supply store.
00:15:48.000 | They're saying, "I need $50,000 of startup capital." Is there a connection here at all?
00:15:53.000 | Well, there's a couple connections.
00:15:55.000 | First of all, when you build business credit, we look at it really in three stages.
00:15:59.000 | You're getting vendor account to get the initial credit profile and score built.
00:16:03.000 | You're then getting store credit.
00:16:05.000 | Then you're moving into what we call cash credit, and cash credit are $5,000, $10,000, $15,000, $20,000 Visa cards or MasterCards that you can use anywhere.
00:16:14.000 | So that's where a lot of people will come in to get funding because when you want a real business loan, you've got to have good personal credit or collateral or consistent cash flow.
00:16:24.000 | Those are the three requirements that every lender will require, all of the three or some of the three.
00:16:30.000 | If you don't have any of the three, you are simply not lendable in the business arena.
00:16:35.000 | So business credit can be built regardless of all of those variables and very quickly.
00:16:40.000 | So in the consumer world, it takes – if you got five secure credit cards, it takes six months of you paying on those for FICO to even give you a score.
00:16:49.000 | In the business world, you could obtain a score within 30 to 60 days of getting your first accounts, getting store credit 30 to 60 days after, and getting cash credit in a total of about four to six months, which is pretty unbelievable that somebody can get multiple $10,000, $20,000 credit cards for their business that's not linked to their personal credit without even a personal credit check in only four to six months' worth of time.
00:17:11.000 | What were those three factors again?
00:17:14.000 | It comes down to vendor credit, which are the accounts we talked about, the Uline, the Quill.
00:17:19.000 | These are vendors that will give you credit on net 30 terms.
00:17:21.000 | It's not revolving.
00:17:22.000 | They give you 30 days to pay it back, but they report to the business reporting agencies.
00:17:26.000 | Then you move into store credit.
00:17:28.000 | You've got to have about five total accounts reported.
00:17:31.000 | I got to clarify.
00:17:32.000 | It's not actually accounts reported.
00:17:34.000 | It's what they call payment experiences.
00:17:36.000 | So what that means is if you have a Uline account that reports to Experian and Dun & Bradstreet, that counts as two payment experiences.
00:17:44.000 | So when you have a total of five payment experiences, then you can start getting approved for store credit.
00:17:49.000 | Best Buy, Amazon, Dell, Apple, these are notorious for giving you fairly large amounts of credit, $2,500 to $6,000, $10,000, even when you have only those five accounts established.
00:18:02.000 | Then when you have a total of ten payment experiences, then you can move into that third step, which is what we call cash credit.
00:18:09.000 | That's Visa MasterCard you could use anywhere.
00:18:11.000 | So you can get a Home Depot commercial card that you could even use at Lowe's, for example.
00:18:16.000 | Do you have to use the credit?
00:18:20.000 | It's a great question because consumer credit, you really do have to use it because of the way that the scores are actually based.
00:18:28.000 | In business credit, you want to use them a little bit because the main aspect of your Dun & Bradstreet and Equifax score, the only aspect of the score, and with Experian, the biggest aspect of the score comes down to payment history, how you pay.
00:18:42.000 | So it's one of the beauties of business credit.
00:18:45.000 | Consumer credit is confusing because FICO has five components to the score.
00:18:49.000 | You have to have a good credit mix.
00:18:50.000 | You have to be in there for a long time.
00:18:52.000 | All these things tie into what your score is.
00:18:54.000 | In the business world, one of the awesome benefits of business credit is it's primarily based on payment history.
00:18:59.000 | So all you have to do to get a good score is get credit, use the credit, pay it quickly around the bill date before as soon as you can, and that immediately gives you a good score.
00:19:08.000 | So you have to use some of the good credit because the payment history is what accounts for basically the entire score.
00:19:13.000 | It's just my biggest concern, and again here, obviously we've got to figure out what scale of business we're talking about.
00:19:20.000 | But most businesses that are started are small side businesses.
00:19:25.000 | I have many of my listeners who run a small side business in addition to their job.
00:19:30.000 | And if you've got to go out and spend a lot of money on new – on stuff just to get the business credit score up, it defeats the purpose.
00:19:40.000 | So it's always that balance.
00:19:43.000 | In fact, even back to the initial discussion of should you even use credit, one of the major benefits of not using borrowed money to build a business is as an entrepreneur, you are likely to be much more efficient with your energy and your efforts.
00:19:58.000 | A major mistake I see and I could see it easily happening if somebody were pursuing a path like you're laying out is people go out and they buy all kinds of stuff before they need it.
00:20:08.000 | They go out and buy all kinds of expensive computer equipment and, "OK, well, I've got to have the physical address, so I'll go ahead and sign up for the expensive lease instead of for just simply rent a mailbox somewhere to get a physical address."
00:20:22.000 | And it's very easy to overspend when you're spending other people's money.
00:20:26.000 | Sure. I think it makes perfect sense.
00:20:28.000 | When it comes to the very first step of building business credit, which is to set up your business credibly, that's not just for the purpose of getting credit.
00:20:35.000 | Those are things that your clients, those are things that prospective customers, those are things that any lender – these are things that anybody is going to look at, aspects to make sure that your business looks credible.
00:20:46.000 | So to set yourself up credibly might have a cost.
00:20:49.000 | Maybe you want to get a virtual address, but you really don't want to be using your home address anyways on your website and those type of things.
00:20:56.000 | So the credibility aspects to me are absolutely not a cost.
00:21:00.000 | They're an initial investment.
00:21:02.000 | If you're going to run a business, these are basic things you have to have.
00:21:04.000 | You can't be using a personal Gmail address.
00:21:07.000 | To pay $12 for a GoDaddy email address and website domain really makes a lot of sense.
00:21:14.000 | So when I look at the credibility aspect, these are things any business should do from the beginning.
00:21:18.000 | I mean these are the first 5, 10 things that I've done with every business I've set up and anybody setting up a business should because these are things that everybody will look at.
00:21:27.000 | When it comes to getting credit and using it, the reporting agencies only want to see $50 or more used to actually report the credit.
00:21:36.000 | So it's not like you have to spend thousands and thousands of dollars.
00:21:39.000 | What you're ultimately talking about here is maybe three or four vendors that you're spending $50 a piece at.
00:21:44.000 | So you're talking about maybe $150, $200 worth of items that you could probably more than likely anybody use at an office-type store anyways.
00:21:54.000 | No matter what you're doing, you need a mouse, you need a computer, you need pens.
00:21:58.000 | These are basic things that any entrepreneur is going to need anyways.
00:22:02.000 | But you've got to keep in mind that it's just like consumer credit.
00:22:05.000 | Hey, it's great. Stay away from consumer credit. OK, but for how long?
00:22:09.000 | So are you going to be paying cash for the house that you're buying?
00:22:13.000 | Are you going to be paying cash for the car that you're going to be driving?
00:22:16.000 | At some point, most people in this society need credit.
00:22:21.000 | They need credit for the larger purchases where it might not make as much sense to pay out of pocket.
00:22:26.000 | A business is no different.
00:22:28.000 | Your business is going to grow to a point where it's going to be – depending on how big you want it to be or successful you want it to be, it's going to need some kind of access to capital.
00:22:37.000 | And if you go into your bank to get a credit card or to get a loan, if you have no business credit, chances are great you're going to get denied.
00:22:44.000 | And we see this all the time.
00:22:46.000 | The index of the world that charge 25, 40 percent for merchant cash advances turn down people all the time because they have no business credit.
00:22:53.000 | We just saw a case last week where people keep $60,000 in their business bank account, great credit, and got turned down by their bank for a $10,000 credit card because they have no business credit established.
00:23:06.000 | So we're just – SBA won't even lend without having a good FICO SBSS score, which is based primarily on your business credit.
00:23:14.000 | The bottom line is you making it through life of your business without having credit is the same as you trying to make it through your life on the consumer side without having credit, trying to pay for everything, including your home and your car with cash.
00:23:26.000 | In theory it's possible. In practice it's extraordinarily rare and often inconvenient.
00:23:35.000 | I'm not saying that nobody has ever bought a home with cash as their first home. I'm just saying I've never had any of those people in my school.
00:23:43.000 | I'm trying to – I agree with you and that's been my experience as well.
00:23:48.000 | I'm just simply acknowledging it as a way to try to quiet the arguments down because in the personal finance space, this is a hotly argued topic and there are many people who have said, "Hey, I'm better off just simply.
00:24:00.000 | I'm just not going to ever borrow money," and have made that choice.
00:24:05.000 | It can work in theory. It is often inconvenient and much more challenging to do and may or may not be optimal depending on what factors you're basing it on.
00:24:15.000 | So I'm agreeing with you just simply trying to quiet the arguments in the comments section for today's show.
00:24:21.000 | No, I agree. When you look at companies like FICO that have become very good at developing algorithms of risk, they disagree with this.
00:24:31.000 | They feel – and this is why credit mix is a large aspect of your credit score.
00:24:36.000 | They feel with the proper credit mix, which is one to two car loans, one to two mortgages, and three credit cards, that those type of things are necessary for you to be able to survive.
00:24:46.000 | As a matter of fact, the biggest aspect of your FICO score is 35 percent of your FICO is based on your payment history.
00:24:54.000 | Thirty percent is based on utilization. So if you have no credit cards, then that part of your credit score, which is a third of your credit score, is severely damaged, not to mention the aspect of credit mix.
00:25:09.000 | So when you look at how FICO is calculated, they look at somebody that has no access to consumer credit as a very, very high risk because if an emergent situation would come up,
00:25:20.000 | then it doesn't look like there's a way that they have enough money to defend themselves.
00:25:25.000 | So I understand where a lot of people come in, and I follow Dave Ramsey and believe in those strategies as well.
00:25:31.000 | But the reality is, is that even FICO looks at this and says, look, you are a very high risk if you don't have access to credit.
00:25:38.000 | Whether you use it or not is up to you, and how you use it responsibly or irresponsibly is up to you.
00:25:44.000 | But not having it creates a big risk. It's the same way in the business world. It's the same in the consumer world.
00:25:50.000 | You make a good point. My argumentative side would simply point out that FICO is being engaged by the companies, and so the risk is to the companies.
00:26:01.000 | FICO is not measuring and calculating what's the risk to the individual as far as their lifelong financial wealth building.
00:26:12.000 | It is very likely and probable that if you have somebody who doesn't have access to consumer credit, that they're likely going to be –
00:26:21.000 | they're more likely going to be late on their bills, behind on their car payments if they wind up losing a job.
00:26:28.000 | However, for the purpose of somebody's wealth, if I were coaching somebody who is – has lost their job and has no money,
00:26:38.000 | I would – rather than saying borrow money on your credit cards, I would say be late on your car loan and go and get a job.
00:26:45.000 | Don't wind up piling more debt to pay for this scenario.
00:26:49.000 | So you have a conflict of interest in that FICO doesn't serve me, the borrower.
00:26:54.000 | FICO serves the lender as a way for making it easier for the lender to parse through the risk profile of different consumers.
00:27:01.000 | Agree, disagree?
00:27:02.000 | Agree completely. FICO by itself, the score is used to determine the same as a paydex score in the business world, somebody's risk of defaulting, which is going 90 days late on an obligation.
00:27:13.000 | So that's what I'm saying is it's not a matter that FICO is designed to serve the lender.
00:27:18.000 | What they're basically gauging is your risk of defaulting, and they're very good at developing algorithms to determine, look, and you're right.
00:27:26.000 | Billions, trillions of dollars are based on their algorithms depicting somebody's risk, and what they found and the way the FICO score is calculated is somebody that doesn't at least have access to credit is high risk.
00:27:40.000 | But as you mentioned, somebody that overutilizes credit, it's not just that you want to have credit.
00:27:46.000 | If you go the wrong way with the credit and you're putting balances of more than 30 percent of your credit limit on the revolving credit you have, you hurt your score almost as bad as if you pay the bills late.
00:27:59.000 | So we're really saying the exact same thing.
00:28:01.000 | FICO is saying somebody that doesn't have credit is a very high risk.
00:28:04.000 | Somebody that has credit and is mismanaging it and putting a lot of debt onto the revolving credit they have is also a very high risk.
00:28:12.000 | A perfect scenario for somebody to be low risk is where they have access to capital, but they use it smartly and wisely, and maybe they put some money on a credit card a month and then they pay it off, but they're not carrying high balances at all.
00:28:27.000 | Tell me about the consumer credit agencies and scores that are involved with business credit.
00:28:34.000 | Well, the consumer reporting agencies are TransUnion, Equifax, Experian.
00:28:39.000 | TransUnion doesn't really have a place in the business world.
00:28:42.000 | Equifax and Experian do have commercial divisions, which are big drivers in business credit.
00:28:46.000 | Experian is very big in the business credit world.
00:28:49.000 | Equifax really isn't.
00:28:50.000 | But in the business world there's a company called Dun & Bradstreet, which has nothing to do with consumer credit in the United States, but they are the biggest player in the business credit space.
00:28:59.000 | So in the business credit space you've got Dun & Bradstreet first, Experian second, Equifax third, and in the consumer space you've got TransUnion, Equifax, and Experian.
00:29:08.000 | And the scores that are associated with them, you said it was called a Paydex score?
00:29:12.000 | Yeah, in the business world there's a lot of scores, almost too many to mention.
00:29:16.000 | Each reporting agency has about five different scores.
00:29:19.000 | But primarily the main reporting scores in the business world are the Paydex score and the Intela score provided by Experian.
00:29:27.000 | The Paydex scores provided by Dun & Bradstreet, those range from zero to 100.
00:29:31.000 | The higher the score you have, the lower the risk.
00:29:34.000 | So you want to have a good score.
00:29:36.000 | But as I mentioned, those are literally based on how you pay.
00:29:40.000 | So if you have an 80 score, that's a Paydex for example, all that literally means is that you pay your bills on time.
00:29:47.000 | If you pay them five days early, well then you'd have an 85.
00:29:51.000 | If you pay them 10 days early, you'd have a 90.
00:29:53.000 | So it's literally based on how you pay your bills.
00:29:56.000 | The FICO score ranges from 350 to 850, and that's comprised of five different components.
00:30:03.000 | So that's based on your payment history. That's based on your actual utilization.
00:30:08.000 | That's based on inquiries. That's also based on credit mix.
00:30:13.000 | And it also takes into account the length of credit history or how long you've actually had credit for.
00:30:19.000 | In the business world, I learned from your book about the importance of your banking habits and those being reported on your credit score.
00:30:28.000 | Teach us what to do with our banking systems.
00:30:33.000 | What a lot of people don't realize in business is that you actually have three different types of scores.
00:30:38.000 | You have consumer scores, which we've talked about, that are linked to your social.
00:30:41.000 | You've got business credit scores, which we've talked about, which are linked to your EIN.
00:30:45.000 | And the third type of credit scores are very, very little known about them.
00:30:50.000 | They're not publicized anywhere. You'll never even know what your score is.
00:30:54.000 | But it's called a bank rating.
00:30:56.000 | And this is an internal score that's used by banks to rate your risk so they can decide whether or not to lend you a credit card, a loan, etc.
00:31:05.000 | And the bank rating basically has to do with how you manage your bank account.
00:31:09.000 | Factors like do you have positive cash flow? Do you have positive ending balances?
00:31:13.000 | Do you have multiple types of accounts like a money market account and an actual checking account at the bank?
00:31:19.000 | But the main factor is how much money you actually keep in your bank account.
00:31:24.000 | What is your average ending balance over the last 90 days?
00:31:28.000 | So with that, they're looking at a 4 or 5 rating and a low 5 rating.
00:31:34.000 | The lowest that's pretty much lendable for a bank loan has to do with you having $10,000 or more in your actual business bank account.
00:31:44.000 | So goal number one or if you're capitalizing a business, the first thing you should do is just put $10,000 in a business bank account and leave it alone as a minimum, right?
00:31:54.000 | Oh, yeah. I mean in theory, right? But there's not a lot of startups that just have $10,000 laying around to do that.
00:32:01.000 | So the most important thing to keep in mind is that realistically, a startup is not going to get a bank loan from their bank.
00:32:10.000 | Bank loans are guaranteed by SBA. You've got to have tax returns for years.
00:32:14.000 | You've got to be two, three years in business before you even think of going to your bank to get a bank loan anyway.
00:32:19.000 | So my advice would not be to try to get $10,000 to put it in your bank account.
00:32:23.000 | You're never going to go to your bank at the beginning and get a bank loan anyways even if you have the $10,000 in there.
00:32:29.000 | But as you get closer and you get more established and you're in business for years and you start looking seriously at a bank loan and you have good credit, you have good business credit.
00:32:39.000 | You have good financials, all the things that are required along with that.
00:32:43.000 | Well then in almost all those cases, naturally you're going to have that much money in your bank account anyways.
00:32:48.000 | But if not, you want to make sure that you have at least $10,000 in your bank account over the last 90 days before you apply for the loan.
00:32:55.000 | That's going to give you an acceptable and lendable bank rating.
00:32:59.000 | So is – there's this picture that we have of the fledgling entrepreneur putting on their best suit and tie, shining their shoes and going down to meet with the bank officer and presenting to them the business idea and it's all going to be make or break based upon that meeting.
00:33:17.000 | Is that – does that happen today in today's world?
00:33:22.000 | Is that totally a myth?
00:33:27.000 | It just doesn't happen.
00:33:28.000 | My dad was a banker and I remember being a little kid crawling around the terminals trying not to hit that big red button that calls the police.
00:33:37.000 | And I remember him telling me stories about the farmer because I'm from a small farm town up in Indiana.
00:33:43.000 | And tell me about this guy who came in and was a farmer and I still get shivers up my spine because I used to love these stories and how he came in with nothing but his word and my dad would lend him money and how he paid it all back.
00:33:55.000 | And so I come from the good old days.
00:33:58.000 | My dad used to tell me up and bring me up on these stories of these people that had that kind of life and world.
00:34:03.000 | But things have changed.
00:34:04.000 | Banks are governed by our – they've got to meet certain requirements because of the insurance and our government being involved.
00:34:11.000 | So we all know banks by default focus on very conservative risk.
00:34:15.000 | We also all know that the statistics do not lie.
00:34:19.000 | Business lending is very, very risky.
00:34:21.000 | The majority of businesses fail.
00:34:22.000 | Lending to businesses is very risky in itself.
00:34:25.000 | When you have other bills and regulations that have come in like Dodd-Frank that tests have shown now reduce the lending of what's been taking place on credit cards revolving credit to businesses by 15 percent, then what you're seeing is you're seeing this tightening of conventional banks where they pretty much will not even lend money anymore unless it's insured by SBA.
00:34:48.000 | And when it's insured by SBA, SBA says, hey, look, you lend the guy 100 grand.
00:34:52.000 | If he defaults, we'll give you 90.
00:34:54.000 | I mean it's pretty much a no-lose situation.
00:34:56.000 | So to qualify, you've got to meet SBA's requirements and the banks.
00:35:00.000 | And like I said, it's really simple.
00:35:02.000 | You've got to have really good personal credit, really good bank credit and business credit.
00:35:06.000 | You also have to have collateral equal to 50 to 100 percent of what you're borrowing.
00:35:10.000 | And you also need to have not only good cash flow but good revenue that increases from year to year on your tax returns and good profits.
00:35:18.000 | Most businesses don't meet that requirement because what happens is when you get to the end of the year, if you have $100,000 sitting in your bank account, if you keep that in there, then you've got to pay the IRS 40,000 or about 40 percent of that.
00:35:30.000 | So most entrepreneurs are buying everything they can at the end of the year.
00:35:34.000 | They're trying not to roll over a bunch of cash until they get big enough where they start thinking about investors or selling or those type of things.
00:35:40.000 | So in our experience, you just don't see conventional bank loans be really practical for a business unless you're well-established many years in business, at least three years in business.
00:35:51.000 | This is why we've seen this massive explosion of alternative lending sources.
00:35:57.000 | We start to see our newsfeed and Facebook and TV commercials all over the place now for merchant cash advances and get approved with bad credit just if you have consistent revenue.
00:36:07.000 | All these alternative lenders are coming in going, "We'll lend on this guy just because he has collateral," or "We'll lend on this lady just because she has consistent cash flow," or "We'll lend on this guy just because he has good personal credit."
00:36:18.000 | So conventional bank loans just aren't the way you go anymore. It's not going to work for most entrepreneurs.
00:36:23.000 | Now these alternative lending sources have become the driver of financing and money pouring into the business space.
00:36:30.000 | So of these alternative lending sources, which of them – are they being connected to the business credit score?
00:36:38.000 | What I like to call this is the three Cs.
00:36:41.000 | So what they're really looking for is a strength in your business, and the easiest way to understand it is that conventional banks look at all aspects of your personal and business life to try to find your weakness.
00:36:51.000 | They expose that weakness as a reason not to lend.
00:36:54.000 | In these alternative lenders, they're looking for not your weaknesses. They look at the opposite.
00:36:58.000 | What is your strength? So if your strength is that you have good personal credit, well, then there's all kinds of unsecured business credit cards that you can obtain.
00:37:05.000 | If your strength is that you have collateral such as inventory, well, then regardless of personal credit, regardless of cash flow, there's lenders that will give you credit lines and loans against that inventory.
00:37:16.000 | If your strength is that you have cash flow of $10,000 a month coming into your business, well, then you can get a cash advance that's based on only your cash flow where your credit and your collateral don't matter.
00:37:27.000 | So that's what they're primarily looking at, but it's important to know that in almost all these cases, they're still looking at your business credit scores as well.
00:37:35.000 | In your book, you mentioned crowdfunding briefly. Do you have any sense of how or to what extent crowdfunding is disrupting some of the traditional models of financing?
00:37:51.000 | I don't really look at crowdfunding as much of a disruptor because when you look at how crowdfunding really, really works, I mean when you pull the curtains back and you really look at it, what you realize is a lot of the things you see in the news is that it's not a disrupter.
00:38:04.000 | A lot of the things you see in the news about these crowdfunding projects that go viral, that's not really how it went down.
00:38:12.000 | How it went down was that they put a post up saying they were looking for $70,000. They already had $300,000 committed already.
00:38:20.000 | They create an environment where it's going to attract attention and go viral, but the reality is a lot of these crowdfunding platforms, these people already had secured the funding beforehand and the funding is funneling through a crowdfunding platform to make it go viral because it looks like you had $70,000 for organic birdhouses you were looking for.
00:38:42.000 | But in reality you had already secured $300,000. So when all of a sudden that $70,000 project has $350,000 raised, well then that gets pushed out. It becomes news. It goes viral.
00:38:55.000 | It's very strategic and very smart, but your average person that has an idea or a concept, they roll it out on a crowdfunding platform.
00:39:02.000 | Those don't typically go viral and start getting hundreds of thousands of dollars more than they anticipated to get from my experience.
00:39:09.000 | So I don't really look at crowdfunding as a disruptor. I think it's a great way to go.
00:39:14.000 | There's not a lot of ways outside of that at Venture Capital to get money based on a concept.
00:39:19.000 | But if you've ever watched the show Shark Tank, you really see that a concept is only part of it.
00:39:25.000 | The entrepreneur is most of it.
00:39:27.000 | You can have the best concept in the world and a crappy entrepreneur and run the business into the ground.
00:39:33.000 | Or you can have not the best concept but a really smart entrepreneur that can still bring that into a very – or turn that into a very successful business.
00:39:43.000 | So from what I see, it really has to do a lot with the entrepreneur.
00:39:47.000 | It really has to do with their knowledge, their experience, their ability to run a business.
00:39:51.000 | And a lot of people that lend money, the majority, want to see a proven concept versus just an idea.
00:39:57.000 | The idea of getting money just based on a concept is harder and harder to accomplish that kind of feat.
00:40:03.000 | I've seen the crowdfunding work effectively in two areas, the first of which, the major one, is what you just said.
00:40:11.000 | It doesn't seem to me that taking your project Kickstarter as an untested prototype is effective.
00:40:19.000 | Most of the really big ones are exactly as you said.
00:40:22.000 | They've already built it.
00:40:23.000 | It's already been done and now they're just looking to try to achieve some sort of scale more quickly.
00:40:28.000 | And then you insert some intelligent marketing, some intelligent ways to build the buying frenzy so to speak of exactly what you said, starting low.
00:40:37.000 | Hey, look. This thing is taking off.
00:40:39.000 | And those can work really, really well.
00:40:41.000 | But there's already history there of that business building it.
00:40:46.000 | The other side I see crowdfunding working well is for very, very small projects.
00:40:51.000 | So somebody has a small following, a small Instagram following or YouTube following, and they're building their book and they want to sell the book out.
00:41:01.000 | And so they're using the crowdfunding as the initial way and based upon the size of their audience and their following, they can go ahead and start that process without coming out of pocket.
00:41:13.000 | You hit the nail on the head.
00:41:15.000 | Crowdfunding is based on really a couple of factors.
00:41:18.000 | Do you already have a bunch of money raised?
00:41:20.000 | Are you looking for something to go viral?
00:41:22.000 | But most importantly, how big is your connection based?
00:41:25.000 | Because how much are you really going to raise?
00:41:27.000 | You can put a project on Kickstarter to help a really, really good cause.
00:41:32.000 | But it's not going to just catch fire and go.
00:41:34.000 | What causes it to catch fire and go is the 10,000 followers you have that are willing to share that.
00:41:40.000 | And then they get shared again and again.
00:41:42.000 | It's really the size of the database you already have.
00:41:46.000 | And the reality is most entrepreneurs don't have 5,000, 10,000, 20,000 follower databases.
00:41:53.000 | So when I looked into the history of crowdfunding and listed every one of the largest, most successful projects that's ever existed from Kickstarter to Indigo to any of them, what I found is that they're all artists.
00:42:06.000 | They're actors. They're directors that are Spike Lee. They're bands that are very well-known.
00:42:12.000 | These are groups that just naturally have extremely big following.
00:42:16.000 | And it's that big following that gets it to raise so much money from those followers not only investing money but them also sharing the idea and the amount of shares that takes place multiplies.
00:42:28.000 | And that's where the money really comes from.
00:42:30.000 | As one of my favorite titles of all time would say by Harvey McKay, "Dig your well before you're thirsty."
00:42:36.000 | I like it.
00:42:38.000 | You've always got to be – unfortunately, you have to do these things often long before you need them.
00:42:43.000 | And if you're trying to do it in the moment, is it possible to dig your well when you're thirsty?
00:42:47.000 | I guess it may be in theory but it's a lot easier to have the well dug long before you ever need it.
00:42:52.000 | Matai, this has been awesome.
00:42:55.000 | Did we miss anything?
00:42:56.000 | I want to make sure. Did we miss any key concepts, any important aspects that you want to make sure we cover before we shut down the interview?
00:43:02.000 | I think you've done a great job. I mean I know you've done a great job.
00:43:06.000 | I think you've asked a lot of pertinent questions.
00:43:08.000 | The most important thing to know is that – look, and this comes from my personal experience.
00:43:12.000 | Don't use your personal credit to finance your business. It was never designed to do so.
00:43:16.000 | And some of the concepts we've talked about here with utilization, for example, you can really, really, really damage your consumer credit and really put your finances and your family's finances in harm's way to fund a business when you just don't have to.
00:43:29.000 | So that's one of the most important messages I want to get across.
00:43:32.000 | Just let everybody know that there's a lot of capital that's out there available.
00:43:36.000 | Just don't think that your bank as a startup is the best play to go – best place to go.
00:43:40.000 | You really need to be wise to look for alternative lending sources. Build credit for your business right from the beginning as you said.
00:43:47.000 | You want to have it available in case you need it. Nobody wants to lend you money when you're in trouble.
00:43:52.000 | So you want to try to get yourself as positioned as possible before you need the money so then that way when you need the money, you have it there ready to go.
00:44:00.000 | I want to affirm something that you said. Just expand on that for a moment from the perspective of liability.
00:44:06.000 | It's important to as much as possible always play the worst-case scenario and to be insulated from it.
00:44:14.000 | So one of the things that is very important, if you're going to start a business, even if you have lots of money – and here I'm talking about understand the laws, understand the rules and understand the nature of the business environment in which you work.
00:44:29.000 | Ultimately, if you get in trouble, you've got to be the one personally to deal with satisfying the creditors.
00:44:36.000 | But with regard to the law, protect yourself and use the mechanisms that are in place.
00:44:41.000 | If I were starting a business and I had $100,000 sitting in my checking account to start a business with it, I would be very, very slow to want to transfer – or what many people do.
00:44:54.000 | Let me rephrase. $100,000 sitting in my 401(k), a lot of people will say, "OK, I'm going to take cash from my money out of my 401(k) early so that I can go and start the business."
00:45:04.000 | Well, you know there's a good chance of the business not working. Statistics indicate that it's very unlikely for it to go.
00:45:10.000 | Obviously, you're an entrepreneur, so you don't believe the statistics apply to you. So you're going to go and do it.
00:45:15.000 | Well, the money that's in your 401(k) is absolutely ironclad protected from any kind of creditor situation.
00:45:21.000 | Don't take the money out of a 401(k) to go and start the business unless that's the last-ditch effort.
00:45:26.000 | Now, let's say you have the money. If you can develop access to the credit and you can use the sources of credit that you can cultivate, you're in a much safer position by maintaining your liquidity and maintaining your personal money set aside.
00:45:43.000 | If you can get the business to finance and fund itself, you're in a much safer situation.
00:45:48.000 | That way, if everything goes bad, you still have the money and you can satisfy the debts and take care of it if that's the decision that you make or legally, you're protected from a situation.
00:45:58.000 | What angers me, frankly, Ty, is I get really frustrated with the average person with little business background going out into the world of business without having done their homework and getting screwed.
00:46:11.000 | They say, "I'm going to start a business." They don't know how to do it. They don't know how to use other people's money.
00:46:17.000 | They don't know how to properly protect themselves with entity selection.
00:46:22.000 | They don't know how to cover their bases and they wind up wiping out their retirement account and then they're left penniless at 55 years old and with no options.
00:46:33.000 | Meanwhile, the experienced entrepreneur, Donald Trump walks in.
00:46:38.000 | He's so distanced from everything he does that it doesn't matter whether his name splashed all over it.
00:46:44.000 | There's not a chance it's going to affect anything else that he does.
00:46:47.000 | So everything that the professional entrepreneur does, the professional business person does is carefully compartmented and segmented and protected.
00:46:56.000 | And so I want to see the average person have the knowledge and the skills that they need in order to protect themselves in case things don't go well.
00:47:06.000 | Very wise advice. Like I said, that's why I do what I do.
00:47:11.000 | It's not a matter of going to rack up tens of thousands of dollars in credit, which isn't a great idea in the business or consumer world.
00:47:18.000 | In my opinion and in my world from experience, it's all about liability.
00:47:23.000 | There's just absolutely no reason or excuse to put your personal finances and your family's finances in harm's way when there are alternatives that were designed to do what you're trying to do.
00:47:36.000 | And business credit is one of those alternatives that was designed for you to move liability from you personally into your business where your business is liable in case things happen within your business, not you personally.
00:47:48.000 | So to me, that's the fundamental driver of business credit.
00:47:51.000 | It's not to get tens of thousands of dollars you're going to blow on nothing. It's a matter of separating that liability so no matter what happens – and with the shift in economy years ago that we saw, there's so many unexpected things that can happen that are out of your control.
00:48:03.000 | At least you and your personal finances are safe and secure.
00:48:07.000 | Yeah. Tell us about your business, your books. Share with us all the action steps that you want my audience to take after hearing this great interview.
00:48:16.000 | Well, they can go and check out our website. We've got a free guide that maps out the exact steps to build business credit, lists a lot of vendors that they can get started with.
00:48:24.000 | That website is Creditsuite.com/ein, and that's Creditsuite, S-U-I-T-E dot com forward slash E-I-N, and I'll make sure that you have that to put on the show notes as well.
00:48:35.000 | Tell me you own S-W-E-E-T as well, right?
00:48:39.000 | No, I – you know what? I'm not going to answer that question.
00:48:43.000 | I'll tell you in five minutes.
00:48:45.000 | You better go buy that and just forward that domain because –
00:48:49.000 | Yeah, ask me in five minutes.
00:48:51.000 | All right. You got five minutes to do it.
00:48:53.000 | I'll show dad. He asked me in two.
00:48:55.000 | Awesome. Thanks, Ty.
00:48:57.000 | All right. Thank you.
00:48:59.000 | Thank you for listening to this episode of Radical Personal Finance.
00:49:02.000 | If you're interested in building financial freedom for yourself and your family, please subscribe to the podcast with our free mobile app so you don't miss a single episode.
00:49:11.000 | Just search the app store on your mobile device for Radical Personal Finance and download our free app, which also contains an archive of every past episode of the show.
00:49:20.000 | If you have received value and financial benefit from the content of today's show, please consider becoming a supporting patron.
00:49:28.000 | Radical Personal Finance is listener supported and it's your direct financial support which enables me to bring you this content.
00:49:36.000 | In addition to your voluntarily paying for the content you've just heard, as a supporting patron, you will receive a number of member-only benefits, including a private Facebook group, access to our weekly Q&A calls, and discounts on future products and services.
00:49:50.000 | Details can be found at RadicalPersonalFinance.com/patron.
00:49:54.000 | Again, RadicalPersonalFinance.com/patron.