The Keys to Successful Small Business Ownership, Finance

The Keys to Successful Small Business Ownership, Finance and Credit™

Sharpen Your Financial Focus®

Small Business Owner Financial Education brought to you by:

With financial support from:

Counselor Curriculum - Personal vs. Business Credit

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1 This document remains the sole property of the NFCC. All financial counseling advice delivered through this program is for educational purposes only and does not constitute legal or tax advice. Please consult an attorney or an accountant for specific legal or tax matters.

This program is exclusively supported by TD Bank, America’s Most Convenient Bank®, and The TD Charitable Foundation.

The Keys to Successful Small Business Ownership, Finance and Credit™ National Foundation for Credit Counseling® (NFCC®) - Small Business Owner Financial Counseling and Education Program Counselor Curriculum Version 4.0 January 3, 2018 This document contains an outline of the counseling model which forms the basis for the NFCC’s Small Business Owner (SBO) Counseling Phase I Deep Dive. This document remains the sole property of the National Foundation for Credit Counseling® (NFCC®). By accepting this document and participating the NFCC Small Business Owner Counseling Program, you agree not to share this document, nor any of the information contained therein, with any person or organizations beyond your member agency without express written consent of the NFCC. The goal of this program is to help empower SBO clients to make informed decisions for themselves and their businesses with new information, resources and tools. As SBO clients develop a greater understanding of personal and business finance best practices through the targeted education and deep dive materials they can choose the best course of action for their situation. The role of the NFCC Counselor in this process is to educate, inform and support the client, not to advise the client on what decision to make. We would like to thank and acknowledge TD Bank, America’s Most Convenient Bank®, and The TD Charitable Foundation, the charitable giving arm of TD Bank, for their support of the NFCC Small Business Owner Financial Counseling and Education Program supporting small business owner financial wellness.

Program Overview: We aim to reach 10,000 small business owners over the next three years using our existing credit counseling capacities and the Sharpen Your Financial Focus® (Sharpen) program to deliver high impact interventions as well as data collection to learn from this program and evaluate our success in helping small business owners better manage their personal and business finances. Our initial focus is on the financial health of the small business owner. Looking forward past Phase I, we envision building counseling services that enable us to complement our role as trusted navigator to include educator, mentor and advocate.



About Small Business in the United States:

Since 1995, small businesses have created more than 60 percent of the net new jobs in our country. Of America’s 28.7 million small businesses, half of all firms are home based, and 23 million are sole proprietorships. The remaining 5.7 million small firms have employees. Despite the impressive numbers and economic impact generated by small business owners, they have limited financing options to fund their dreams and operations. In addition, small business owners are stretched thin as “Chief Everything Officer,” and lack the knowledge of both personal and business finance best practices. According to the 2016 Small Business Credit Survey, released by the Federal Reserve, 45 percent of small businesses applied for some form of financing in 2016. Of those that applied for financing, 76 percent of applicants received at least some financing, but only 40 percent of applicants received the full amount sought. The financial health of a small business owner is critical to the success of their small business. The top reason small businesses fail is due to cash flow problems or running out of money, according to a study by Insurance Quotes. Source: https://www.insurancequotes.com/business/why-do-businesses-fail

https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf

https://www.insurancequotes.com/business/why-do-businesses-fail



A recent TD Bank survey of small business owners complements some of the macro data, and brings their day-to-day challenges to life in the following infographic.



Identifying Small Business Owner Clients for Counseling and Education

For purposes of the program, we are focusing on NFCC member agency clients who are self-employed or self-identify as a small business owner during intake. Self-employed status excludes contract employees as defined by GAAP (someone who works for the same employer day-in-day-out, but has not been hired and benefited by the employer). If a person is a contractor for more than one company/employer that would constitute a level of independence that would qualify. The Center for Financial Services Innovation (CFSI) defines small business as those individuals who manage their own business, with little to no professional staff dedicated to accounting, finance, human resources, or other supporting functions. They may or may not have employees or contract workers, may or may not incorporate, and may or may not have growing revenues and profit. Some examples of these segments and possible business activities include:

On the SideProvides Supplemental IncomeCommon for "Gig" Workers using a platformi.e. Uber drivers, photographers, tennis instructor, ebay reseller

Making a LivingPiecemeal income from several sourcesCombined with W-2 Incomei.e. Food truck, caterer, hair stylist, dog groomer, personal trainer

Making a CareerControl of Career and Job PathMay still include W-2 Incomei.e. Accountant, lawyer, real estate agent, consultant

Small Business Owner

Represents Change in Mind setMay Hire Employees or Subcontractorsi.e. Contractor, retail, restaurateur, ecommerce



The following scenarios may come up and clients with these circumstances are welcome to participate in the SBO counseling program.

• Clients who say they are self-employed but might not call themselves a small business owner

• Clients who self-identify and call themselves a small business owner, but part-time or on the side

• Clients who have a desire to continue or expand their income through self-employment or small business ownership

• Clients who wish to formalize and grow their business including hiring workers • Clients who may have business credit that does not qualify for a DMP are welcome to

participate • Clients who are self-employed or claim small business ownership who may qualify for a debt

management plan for personal credit are welcome • Clients with significant income or business revenues are welcome to participate as are

clients with limited income even those considered Low-to-Moderate Income • Self-employed or small business owners clients in bankruptcy, foreclosure or with

student loan debt are welcome, but counselors should use their judgment and prioritize resolution of these matters, while being sensitive to how small business ownership or success is introduced

The Small Business Owner Counseling Program Phase 1 includes Three Modules:

1. Managing Personal vs. Business Income and Expenses 2. Understanding and Managing Cash Flow 3. Personal vs. Business Credit

The curriculum and Keys to Successful Small Business Ownership, Finance and Credit client materials should help you lead clients through real life personal finance best practices, encourage them to apply what they have learned and help them connect with other resources in the community or online to meet their financial goals. Counselors are encouraged to share the MyMoneyCheckUp® web tool with clients in advance of any interaction, so they are more prepared for the conversation with you. While it is our goal clients take advantage of content and engage in a deep dive session, for funding purposes, counselors only need recommend it to the client and document the suggestion in Sharpen. Additional modules are being developed for Phase 1 and will be shared later, so look for more content as we continue to build out education topics and resources. Modules may be shared individually based on client need. During the pilot, about half of the participants reviewed more than one module. Funding however is only available for one module per client.



Clients participating in the Small Business Owner Counseling Pilot shared the following suggestions for the NFCC and Counselors: 1. Please try and bridge the gap between small business owners looking for startup capital.

-Pending action plan and client’s needs, consider content on personal vs. business credit, alternative lenders and resources such as www.venturize.org or www.score.org

2. Provide more detailed levels for more experienced business owners. -Acknowledge we are in Phase I, we are working to expand our capabilities. Refer to resources tab or other local partners in your market.

3. Talk more about what business owners can do to help resolve debt issues. -Perhaps client is eligible and well suited for debt management plan. Pending financial review assess circumstances and provide steps to resolve debt with action plan such as budgeting etc. Consider resources about refinancing debt if appropriate.

http://www.venturize.org/

http://www.score.org/



Module 3 – Personal vs. Business Credit The focus of Personal vs. Business Credit is to help clients better understand how these two forms of debt financing are integrated, avoid common mistakes and plan for applying for business credit.

Overview • Separating personal finances and expenses from business ones is important but there is

some overlap when applying for credit so it’s best to be informed and prepared to ensure you get the best products and terms

• Social Security Number vs. Employer Identification Number • How to establish business credit

Key Points Review these key points with clients

• Pros and Cons of Bootstrapping “self-funding” and avoiding tying business needs to personal assets such as your home (unless you are well informed)

• Online Lenders and other sources of finance “crowd sourcing” • SBA Loans • Community Development Financial Institutions (CDFI’s) • D&B Credit Process • Business creditors are less likely to offer DMPs

Discussion Questions To encourage client engagement about the topic, ask open ended questions

• How have you funded your business to date? • How much and what types of finance might you need in the future to achieve your goals? • How does your personal budget and action plan support your needs and goals for business

credit?

Possible Client Questions/Counselor Response I’ve been turned down for business credit and that’s why I used my personal credit cards. I understand. Many small business owners report similar issues accessing financing. You are taking the right steps now and setting financial goals so you will be more prepared in the future. In you packet there are some resources listed that may be able to provide interim financial products that could help you graduate to business loans or credit from main stream financial services including Community Development Financial Institutions or CDFI’s. My business is growing and I want to refinance some of my debts and get better terms. That’s great news! In your packet is a resource guide and I would encourage you to check out www.venturize.org and business borrowing 101. Also, let’s review your personal credit score and have you had business credit in the past?

Counselor Instructions: Please review both the curriculum overview and the client content below

prior to presenting deep dive. Clients report having access to the materials prior to a counseling session is helpful so they can best prepare

and ask questions.

http://www.venturize.org/



Business Credit 101 The separation between your personal and your business finances (income and expenses) can be tricky for small businesses, especially when you ARE the business. Experts recommend having a clear distinction between your personal and business finances as far as that’s possible. Building business credit aside from your personal credit is part of that equation. To some extent, your business and personal credit may remain linked, no matter how hard you work to keep them separate. For example, if you’re applying for financing and don’t have a long enough business history to qualify, you may need to add your personal guarantee into the mix. Your personal credit is connected to you by your Social Security number. Your business credit history ideally is linked to you by your Employer Identification Number (EIN) or Tax ID Number, which is how the government recognizes your business for tax purposes. You can apply for an EIN online and receive it almost instantly. Technically, if you’re a sole proprietor, you don’t need an EIN for taxes, but to establish business credit, you will. Your personal credit history is curated by the three major credit bureaus, Equifax, Experian, and Transunion, and you have one profile with each. Experian and Equifax also have business credit reporting services. Your business profile is separate from your personal credit history. There are credit reporting services that only deal with businesses, with Dun & Bradstreet being the largest and best known. If you have more than one business, you can have a separate report for each, as long as it has its own EIN. Personal vs. Business Credit Scores Your personal credit is frequently summarized into a single number that helps creditors see where you stand at a glance. FICO is the most commonly used method of scoring personal credit. There is no equivalent for businesses; each commercial credit bureau scores and reports its own way. The most important factors for scoring businesses are usually how you pay your bills, how much debt you carry, and what type of industry you’re in. Generally, business credit scores have fewer variables than FICO scores, and it is easier to improve the score for a business than it is for an individual.

Client Overview Personal vs. Business Credit

Why it Matters Unable to complete business transactions without credit or compete. Lenders will use a business’s credit history when figuring out whether or not to loan the business money. You’ll also need credit in order to get business insurance. In many instances, you won’t be able to buy goods and services for your business without access to credit. Personal credit may be only option for a time to finance the business, but you should understand the risks and have a plan to build business credit and increase it to meet the needs of the business. Using personal credit to fund your business can put your family and personal assets at risk. If the business fails or experiences money trouble, creditors will then come after YOU, as you will be personally liable for the expenses incurred by the business.

http://www.google.com/url?q=http%3A%2F%2Fwww.irs.gov%2FBusinesses%2FSmall-Businesses-%26-Self-Employed%2FApply-for-an-Employer-Identification-Number-%2528EIN%2529-Online&sa=D&sntz=1&usg=AFQjCNE51D-anRk0knbss6N9by2qfswUUw

http://www.google.com/url?q=http%3A%2F%2Fwww.irs.gov%2FBusinesses%2FSmall-Businesses-%26-Self-Employed%2FApply-for-an-Employer-Identification-Number-%2528EIN%2529-Online&sa=D&sntz=1&usg=AFQjCNE51D-anRk0knbss6N9by2qfswUUw

http://www.dnb.com/



On the downside, there are fewer legal protections for business credit. Consumer credit laws allow you to challenge anything on your report and have incorrect negative entries removed. There are no such laws when it comes to commercial credit, which means if there are issues with your business credit report, you could have a much tougher time getting those dealt with. You can challenge discrepancies with the agency that has them listed, but they don’t have to respond.

6 Ways to Establish Business Credit The easiest way to establish business credit is to keep all of the finances separate from the get-go. You can also:

1. Open a separate business checking account. Use your business checking account topay the business’s bills and employees, including yourself. If you’re incorporated,you have to do this, but it’s good advice for ALL businesses. Use the EIN we discussed aboveto identify the account, and use a separate business telephone number, even if it’s for amobile phone.

2. Apply for and use a business credit card. Pay business expenses with this card, not withyour own personal card. This not only makes tracking expenses much easier, it helps youbuild credit for the business as you use and pay off the card. If you can’t qualify for abusiness card immediately, start with a secured card, which is backed by money you put inaccount to guarantee you’ll pay.

3. Ask for credit terms from your vendors. Even if the credit limit is small to start, and thetime frame is relatively short, it will help. Pay the bills on time, and after a few transactions,ask to have the limit and/or term increased. Success with even one or two vendors will giveyou positive credit references to build on with other business and for possible loans in thefuture.

4. Apply for a very small loan (known as a microloan) from Accion or another micro-lender. These loans are easier to qualify for than those from other financial institutions, andyour payments will be reported to the credit bureaus, helping you build credit going forward.

5. Register with the business credit bureaus like Experian and Equifax and open abusiness credit file. Apply for a DUNS number from Dun & Bradstreet.

6. Select your business structure carefully. The best way to separate your business andpersonal financial lives is to do it legally. Instead of a sole proprietorship, take yourself outof the mix and form a corporation or LLC. See our article on the Legal Structure of aBusiness for the how and whys.

When Personal and Business Credit Mix There are times your personal and business credit will affect each other, especially if you’re a sole proprietor. In most cases, your personal credit will impact your business far more than the other way around.

Some business credit card applications will require your Social Security number. A landlord may want to run a personal credit check before leasing you space. A small business loan may need a personal guarantee. In fact, under some circumstances, the Fair Credit Reporting Act does allow lenders to review the personal credit history of sole proprietors for business lending purposes. If you can avoid giving your Social Security number (and hence, access to your personal credit history) for business purposes, that will help keep the two separate. Credit bureaus don’t distinguish between business and personal inquiries, and too many can have a negative impact on our credit score.

http://us.accion.org/#apply

https://www.experian.com/small-business/app/account/register.do

http://www.equifax.com/business/small-business

http://www.dnb.com/get-a-duns-number.html

http://us.accion.org/business-resources/articles-videos/legal-structure-business

http://us.accion.org/business-resources/articles-videos/legal-structure-business



For small businesses, your personal and business credit scores can be very closely linked, so it’s smart and important to protect both. *SOURCE: Accion http://us.accion.org/business-resources/articles-videos/business-credit-vs-personal-credit

Major Differences Between Business Credit Cards and Personal Credit Cards We talked about the importance of maintaining separate accounts for personal vs. business income and expenses. When you’re setting up shop or taking your business to the next level, you’ll probably want to apply for either a small business credit card or a personal credit card to cover company costs. But while these two products have plenty in common, they also have a few notable differences. Here are four you should know about before applying. 1. Small businesses may not be covered by consumer protections. You may think of yourself as a consumer, especially after you hang up the “closed” sign on your small business’s door every evening. But consumer protection laws, such as the Credit CARD Act of 2009, generally don’t apply to your business. Potentially, your APR could change overnight, or you could be charged exorbitant late fees for small infractions. Because most issuers extend consumer protections as a courtesy to small businesses, you probably won’t have to worry too much about this – but it’s a good thing to keep in mind, since those protections aren’t available in every case. If your issuer is among the few that does not extend these protections, or doesn’t clearly express a position in the terms and conditions, ask about what you should expect. 2. Business credit cards affect business credit (and sometimes personal credit, too). For most small business owners, the line between personal and business credit is blurry. If you sign a personal guarantee for your business credit cards, as almost all require, you’re liable for the company’s debt should your business miss payments. Several issuers also weigh your personal credit score heavily when deciding how much credit to extend to you. It’s not surprising that the reporting, too, is a mixed bag. Many small business credit card issuers report business activity to both consumer and commercial credit bureaus. Others just report to commercial credit bureaus, but may report to consumer bureaus in certain cases (for instance, if your company falls behind on payments). If your business credit activity is reported to consumer credit bureaus, it’s generally included on your credit reports and factored into your FICO scores, just as consumer activity would be. If you’re not sure how your credit card reports, call your issuer to find out. 3. Business credit limits tend to be higher. If you’re making a lot of expensive purchases, a business credit card may be a better fit than a personal credit card, since they tend to have higher credit limits. Business credit scores from Equifax and Experian (but not Dun & Bradstreet) use your credit utilization to calculate your business credit score, so a higher limit can make it easier to use less of your available credit and improve your standing.

http://us.accion.org/business-resources/articles-videos/business-credit-vs-personal-credit

http://us.accion.org/business-resources/articles-videos/business-credit-vs-personal-credit



4. You’ll earn different types of rewards.Many business credit cards offer bonus rewards on phone bills, Wi-Fi or office supplies, a boon for companies spending heavily in these areas. But this may not be as helpful if you’re a sole proprietor and tend to use office supplies sparingly. If you’re having a hard time finding a business credit card that matches your needs, you may be better off with a flat-rate rewards program that lets you earn bonuses on all your purchases, or a personal credit card.

Note that if you use a personal credit card, you’ll have to use it only for business expenses and pay with it only with business money if your company’s a limited liability company, S-corporation or C-corporation. If you commingle expenses in this case, you may lose your personal liability protection. But even if you’re a sole proprietor, it’s easier to separate expenses so you can identify deductions more easily during tax season.

Which card should you get? If you’re still on the fence, here are some guidelines to consider.

A business credit card may be better for:

• An entrepreneur who wants to establish business credit for his or her business.• A company with major business expenses that align with most business credit card reward

categories.• Someone looking for a higher credit limit for his or her business.

A personal credit card may be better for:

• A sole proprietor with minimal overhead costs.• Someone whose spending doesn’t align with business credit card spending categories.• Someone who doesn’t anticipate applying for a small business loan anytime soon and isn’t

interested in building business credit.• The sooner you find a credit card that fits your business’s needs, the sooner you’ll be on

your way to better rewards and improved terms.

*SOURCE: https://www.nerdwallet.com/blog/credit-cards/major-differences-business-credit-cards-personal-credit-cards/

https://www.nerdwallet.com/blog/credit-cards/major-differences-business-credit-cards-personal-credit-cards/

https://www.nerdwallet.com/blog/credit-cards/major-differences-business-credit-cards-personal-credit-cards/



Alternative Online Loan Basics Because it can difficult to qualify for bank loans, a new generation of online, alternative lenders are stepping up to get business owners capital. These aren’t your grandparent’s loans. These lenders offer loans that are basically the same as bank loans, but the rates tend to be higher, while the credit score criteria is more lax. Typically, these loans are for 1 – 5 years and come with a fixed monthly payment. Online term loans can be used for virtually any business need.

What You Need to Know About Online Business Loans

Pros: Cons:

Reasonable interest rates (7 – 30%) Higher interest rates than bank loans

Quick turnaround time (compared to banks) Little or no mentorship

Less effort and documentation needed May have pre-payment penalty

Fixed, predictable monthly payments Requires good personal and business credit

Helps improve business credit score Available for many uses

May require collateral Available for many uses

Typically, must have 2 years in business

Best Uses for Online Loans: • Working capital• Purchasing inventory• Purchasing equipment• Refinancing• Acquiring other businesses

If you’re unable to qualify for a bank loan or simply need a faster turnaround time, online lenders are a great option. Applying usually takes less than 2 hours—and you can do it from the comfort of home. The rates are a little higher than bank loans, but the convenience can’t be beat. By making timely payments, these loans can also help you build your business credit rating.

Source: https://www.nav.com/business-financing-options/online-loans/

https://www.nav.com/business-financing-options/online-loans/

Alternative and Online Lenders https://www.nerdwallet.com/blog/loans/what-is-an-online-loan/ https://us.accion.org/resource/alternative-lending-landscape/

Assessing Your Business’ Financial Needs http://virtual-advisor.org/td/assessingcompanyfinancialneeds/

Business Advising www.businessadvising.org

Business Borrowing 101 http://www.venturize.org/borrowing-101/

Business Borrowers Bill of Rights http://www.responsiblebusinesslending.org/

Business Loan Checklist http://www.venturize.org/get-started/loan-app-checklist/

Business Loans for Poor Credit Score https://loans.usnews.com/business-loans-for-bad-credit

Cash flow http://www.score.org/60_guide_managing_cash_flow.html

Cash flow management as part of the SBA's financial management series http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_capgrowth.doc

Community Development Financial Institutions/Mission Driven Lenders and Education Resources http://www.venturize.org/mission-driven-lenders-locator-map/

Marketplace Lenders http://www.venturize.org/borrowing-101/types-of-lenders/online-only-marketplace-lenders/

Mentoring, Resources and Tools for Small Business Owners www.score.org

National Association of Latino Community Asset Builders https://www.nalcab.org/

National Black Chamber of Commerce http://www.nationalbcc.org/



https://www.nerdwallet.com/blog/loans/what-is-an-online-loan/

https://us.accion.org/resource/alternative-lending-landscape/

http://virtual-advisor.org/td/assessingcompanyfinancialneeds/

http://www.businessadvising.org/

http://www.venturize.org/borrowing-101/

http://www.responsiblebusinesslending.org/

http://www.venturize.org/get-started/loan-app-checklist/

http://www.score.org/60_guide_managing_cash_flow.html

http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_capgrowth.doc

http://www.venturize.org/mission-driven-lenders-locator-map/

http://www.venturize.org/borrowing-101/types-of-lenders/online-only-marketplace-lenders/

http://www.score.org/

https://www.nalcab.org/

http://www.nationalbcc.org/

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RESOURCES & HELPFUL LINKS

Small Business Administration Resources and SBA Loans https://www.sba.gov/

SBA Loans https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs

Women’s Business Centers https://www.sba.gov/tools/local-assistance/wbc



https://www.sba.gov/

https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs

https://www.sba.gov/tools/local-assistance/wbc

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RESOURCES & HELPFUL LINKS

Founded in 1951, the National Foundation for Credit Counseling® (NFCC®) is the nation’s first and largest nonprofit dedicated to improving people’s

financial well-being. With offices serving 50 states and Puerto Rico, NFCC

Certified Credit Counselors are financial advocates, empowering millions of

consumers to take charge of their finances and their futures.

NFCC member agencies assist individuals and families regardless of income

or circumstances to ensure they never have to face their challenges alone.

NFCC Certified Credit Counselors nationwide are trained, certified and ready

to complete a comprehensive financial review and action plan to help clients

meet their financial goals—in person, over the phone or online.

NFCC member agencies provide affordable, one-on-one, customized financial

reviews and actions plans to address:

• Credit card debt

• Student loan debt

• Debt management

• Prepurchase housing decisions

• Foreclosure prevention

About the NFCC®

• Bankruptcy

• Overall money management

• Financial education needs

• Asset building

National Foundation for Credit Counseling

2000 M Street, NW, Suite 505

Washington, DC 20036

202.677.4300

NFCC.org

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Small business owner finances

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Documents

The Keys to Successful Small Business Ownership, Finance