Beyond the Credit Bureau: Social Sourcing Your Creditworthiness?

Just when you thought it was hard enough to remain creditworthy as a small business owner or solopreneur, a new report published at American Banker highlights a potential banking trend that could change the way credit is built and maintained. According to the report that discusses nine trends affecting risk software in the banking industry, some banks have begun to consider additional data when determining a person’s creditworthiness.



So what exactly is this “additional data”? From the report:

One idea banks are toying with is that of incorporating social media data into assessments of credit risk, for instance, by considering the credit scores of a person’s friends in addition to that person’s own score. However, information posted on social media is not always 100% accurate. Under the Fair Credit Reporting Act, banks have to be able to verify customer data. “If I went on LinkedIn and said I have a PhD in astrophysics, which is not true, a number of people might comment on that, but the bank would still need to check that,” Jennings points out.

Though the use of social media to assess credit risk is still just in the realm of theory for banks, some small financial institutions, such as online microlender Lenddo, have already begun to experiment with the data.

While visions of social credit snobbery immediately fill my mind: “Friends with you?! Sorry, buddy, you’re credit’s too low!” It does raise an interesting question of how our social circles can relate to our ability to maintain good credit, and it may make you think a bit before accepting that new friend request.

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The Biggest Business Mistake?… Borrowing Money!

The other week over at Small Business Trends, I saw an interesting poll. The sole question: “What’s your biggest business mistake?” Though there are various options to choose from, such as “Failing to market my business,” and “Selling myself short,” the overwhelming favorite response (at the time of writing it is holding at 86% of almost 2,000 respondents) is “Borrowing money.”


While this may come as a shock to those who still believe that the banks should be handing out more credit to businesses in order to jump start the economy, several well-regarded reports, such as this recent one by the NFIB, have pointed to the fact that many small business owners these days are not looking for credit, and a significant amount of businesses are actually focused on dumping the balances they’ve already racked up.

But this brings up a dilemma of sorts: part of a healthy cash flow strategy when running a business is having options to borrow, both in the short and long term, and without investment (usually of the borrowed kind), growth will typically be impossible.

So how do you know if it is good for you to be borrowing money for your business? Here are a few questions you can ask yourself to help ensure that your business borrowing doesn’t end up being a business blunder:

1. What are you borrowing the money for? While this may seem like a pretty straight forward question, there are actually certain categories of business borrowing that tend to be more problematic then others. For example, aside from short-term microloans or a revolving line of credit, if you are taking out a significant loan to cover your every day expenses, then it could be a red flag that your borrowing will get you in hot water.

On the other hand, if you are investing the funds in a business upgrade, then can you expect that upgrade to pay for itself in either increased productivity, sales, or market reach?

2. How will you repay the amount borrowed? This all leads to the next question which is how you plan on repaying the loan. Are you currently generating enough income to cover the debt? Do you expect your bottom line to increase as a result of the investment and when? Are you able to secure the loan with some kind of collateral? What would happen if you defaulted on the loan and had to lose that collateral?

3. What is your current debt load? A look at your current debt obligations is also vital to avoiding a business lending mistake. If you are already struggling to repay your business debts, then it could be a signal to avoid taking on an additional financing. If the loan is meant to consolidate your debts, then make sure you get qualified financial advice before jumping in.

4. Are there alternatives? If several red flags are going up, then perhaps you should consider any alternatives, such as cost-reduction strategies, or asset-based financing arrangements, such as accounts receivables financing or business cash advances.

Five Creative Strategies to Improve Cash Flow with Limited Business Credit

Remember the good old days when credit lines flowed like water and all you needed to do was call the bank to get set up with short-term financing when you needed it? Those days are long gone and small business owners are being forced to find other ways to free up much-needed capital.


Here are five creative strategies to help keep the cash flowing in your small business:

1. Join a barter network

Ever heard of a barter network? Here’s how it works. Let’s say Company A wants to open a booth at an exhibition but it needs cash to do so. Company A has broken-down farm equipment that Company B is interested in fixing and selling. After selling the equipment he can use the cash as bartering dollars to pay for another network member’s (Company C) display booth. Bartering is an excellent means to conserve cash and it can really pay off, quite literally.

2. Check your recurring charges

Recurring charges augment a company’s expenses automatically and endlessly. It pays to take a good look at your bills, particularly those that recur automatically. Most companies can cut down on a lot of expenses without even feeling any pain. Just two examples: Replacing an expensive monthly bottled-water service with a far less expensive filtration system and using a PR firm on a per-project basis rather than a set retainer.

3. How about billing twice a month?

Many companies bill clients on a 30-day cycle. But if you have to pay your employees twice a month, this can cause cash-flow difficulties. Why not invoice clients twice a month? One company did so and reported that more than 90% of its clients didn’t mind the change because it still allowed them 30 days to pay. The holdouts can be billed once a month.

4. Prevent bad debt by sending pre-lien notices

An effective way to prevent bad debt is to send pre-lien notifications to each customer on all jobs exceeding a certain sum (say $5,000). The notices should state that the company is protecting its right to place a lien on the merchandise that was purchased if the bill isn’t paid within the pre-set time. One large company reports that after sending out the notice, bad debt shrunk by $350,000 within a year and a half.

5. Think positive – drive your profits

If you are worrying that your bank might call your existing loans, look for ways to drive your profits. One company reports that it found ways to purchase inventory more efficiently, changed pricing strategy, and used incentives to raise the team’s productivity. As a result the company drove profits from 1% to 7%, and the bank expanded its credit line despite the crunch.

Surprise! Big Banks Are Again Pushing the Plastic

According to a recent Federal Reserve report on small business credit card usage, though small business financing remains sluggish in the areas of business loans and business lines of credit, small business credit cards are fast becoming a popular, short-term financing option. Isn’t this a bit of deja-vu?


When the government stimulus program dried up in June, the biggest banks quickly responded by refusing to provide small business loans. Instead, they have been pushing credit card accounts on small businesses, claiming that credit card loans are the best thing since sliced bread. Has no one learned anything from the economic crisis?

In 2009, about a fifth of small businesses attempted to obtain a new credit card. Among those small businesses applying for cards in 2009, 80% stated that their most recent request was for a business credit card. In the end, about three-fourths of all applicants were approved for a card. On the other hand, the success rates for small businesses applying for lines of credit or bank loans in 2009 were about one-third and one-half, respectively.

Since credit card terms can change in an instant and lines of credit can disappear overnight, it’s clear that the banks that stand to make a hefty profit from the return to plastic. Credit card loans can be disposed of easily by the banks but place far greater pressure on business owners than standard bank business loans.

Nevertheless, with business financing so hard to come by (even those pesky SBA loans were notoriously hard to obtain), business credit cards used along with alternative methods of financing may be the only way businesses can secure the capital they need in this brave new recessionary world.

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So Your Business Turned One-Year Old… Now What?

As a new small business owner it may be very gratifying to develop and sustain a business for an entire year- especially if you are doing so under adverse economic conditions. But keep in mind as you celebrate this one-year milestone that there will still be a significant amount of work to do to help ensure that your venture remains viable in the years to come. According to statistics, about half of all new small businesses will fail within the first few years of operation.

After the initial start-up stage, it is extremely important to shift your focus to financial planning, operational efficiency, and strengthening your market position- all of which can only fully occur once a business has been up and running for some time.

Below is a list of some important things to consider when your business turns one year old: 

  • Is the business registered under an appropriate corporate structure? Different corporate structures produce different fiscal, taxable, and legal realities for their owners, and it is quite common among small businesses that they change from one structure to another as they grow and develop.
  • Are you taking steps to build your business’ credit profile? Building your business’s credit is essential if you want to have access to various forms of financing, but it is not a passive process. Make sure you are entering into transactions that will positively affect your business’s credit history.
  • Evaluate your marketing strategies. After operating for a year, it is a good idea to examine your marketing initiatives to see how much Return on Investment (ROI) you are achieving. You should also consider if you are effectively conveying to customers that which makes your products or services unique.
  • Evaluate your business’s operations. It is a good idea to take stock of how smoothly and effectively your business is operating so that any changes and improvements can be made. Think: quality control and productivity. Make sure that you also consider how your business is utilizing available resources, including worker input, supplies, and materials.
  • Keep tabs on employee and customer satisfaction. If either of these two groups are unhappy then it does not bode well for your business.
  • Cash flow, Cash flow, Cash flow! Is there enough available capital to cover operational expenses? What about growth? Make sure you are in touch with any impending cash shortfalls and that you have access to quick, short-term sources of financing.

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