Most of us are familiar with personal credit scores and the importance of keeping them strong. But as a restaurant owner, you need to know your business has its own credit profile that’s totally separate from personal. It’s one of the first things that lenders, suppliers, and potential buyers look at when deciding to do business with you.
Your business credit score is similar to personal scores, but is based on whether your business pays its bills on time and who your business is connected to (your trade lines). The scores come from some of the same reporting bureaus (like Experian), but the score is usually on a 0-100 scale instead of 300-850.
After some trial and error, I’ve learned the best ways to build and leverage my business credit profile. I went from getting turned down for net-30 day supplier terms to getting $500,000 in bank lines of credit that allowed me to do what I needed to grow my business.
Let’s look at the main ways business credit may impact your restaurant and how you can take advantage of it.
1. Financing for expansion
Expanding a restaurant or buying more locations usually requires external financing. Your growth plans could be in trouble if you haven’t built up a business credit profile. Poor business credit scores are one of the main reason restaurant financing gets denied.
Take the case of Le Bateau Ivre, a Berkeley, California restaurant that’s been in business since 1972. The owner’s husband recently passed away, and he had relied on personal funds to run the business. Now, his wife is struggling to keep the business afloat. They desperately need $60,000 to catch up on bills and pay for upgrades.
Unable to secure bank financing, Le Bateau Ivre had to turn to crowdfunding. But this effort only produced $25,000 of its $60,000 goal by the campaign's deadline. They are still trying to figure out how to raise the remaining $35,000.
This type of story crushes me because I know how much love and energy it takes to keep a restaurant open for over 40 years. If they had previously built solid business credit, securing bank financing wouldn’t be an issue.
2. Protecting your personal credit
If you opened your own place, you probably did so with personal credit and funds. That’s normal, since getting bank funding to start a restaurant is nearly impossible.
The problem is that many people who use personal funds to get started never make the transition to using business credit. Things are so busy that it can easily get lost in the shuffle. This can wreck your personal credit scores.
If you’re maxing out your personal credit cards to run your business, your personal credit score will always be artificially deflated. At some point your business should pay the bills on its own without jeopardizing your personal credit. (And, yes, you can still get the reward miles.)
The good news is that a business can access up to a hundred times more credit than a consumer. Not only that, but a business can get financing at more favorable costs. For example, you may be able to get personal line of credit to fund operations, but the interest rate will never be as good as an SBA-backed line of credit.
To build credit in your restaurant's name, start with these simple steps:
Open business credit cards tied to your company, not to you personally. For those who don’t have much of a credit profile yet, it may be easier to start with a gas card, office supply or hardware store, then work up to a big name bank. Always pay on time.
Apply for trade credit through your suppliers and then make sure they report your good payment history to the business credit bureaus.
3. Managing cash flow
Speaking of trade credit, if you’ve been in the restaurant business for a while, you know that revenue tends to be lumpy. Having extra time to pay your suppliers can help smooth out cash flow in a big way.
How much time do you currently get to pay? Is it cash-on-delivery or do you get net-30 days? Your food suppliers want to extend your credit terms—they don’t like making their drivers collect a check every time they show up—but you must have good business credit.
When deciding whether or not to extend credit, suppliers typically check your Dun & Bradstreet Paydex score. This score ranges from 0 to 100. Getting it to 75 or higher indicates you are reliable, and should allow you to ask for an extra 30 or 60 days to pay.
Even if you already have payment terms locked in, you can always renegotiate as your business credit score improves. You just have to put in a new request.
Here a few other ways that building business credit can lower your costs:
Payroll service providers. They look at your credit when deciding to work with you and when setting terms.
Business insurance companies. They check your scores before setting rates. Better scores mean lower insurance rates.
Merchant processors. They use your scores to set the discount rate they charge on credit card transactions.
4. Selling the business for maximum value
Whether it’s good, bad, or non-existent, whoever buys your restaurant is inheriting your business’ credit. Having solid credit in place makes your asset worth more.
Think about it. It’s going to be a lot easier to market a restaurant that has good supplier relationships with net-30 or net-60 terms already established. This robust business credit history should be part of the advertisement. It proves that you’re not just selling because the business is going downhill. You’re selling a true turnkey operation.
Your existing business credit health is also something the buyer’s bank will look at if they’re financing the deal. Strong, established business credit makes your restaurant a safer bet in their eyes.
As you can see, whether you are familiar with your business credit profile or not, it deserves the same amount of attention as your personal reports. You should know where you stand, monitor your scores regularly, and start separating business from personal credit as soon as you can. The good news is, this doesn’t take much time, and you don’t have to learn a lot or become a credit nerd. Technology exists that make taking care of your business credit very fast and easy. The important thing is to start managing your profile now, and not putting it off until you really need it. By then, it’s usually too late.
The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.