The bureau of labor statistics states that over 99% of all businesses are small businesses. This glaring statistic is due to the fact that in the United States, the government considers a business with 500 or fewer employees as a small business.
For the purposes of this article, we are going to exam a subset classification of businesses called micro businesses. A micro business is a business with 9 or fewer employees with the owner(s) included in that figure. Thus, over 90% of all businesses in the United States fall within this category.
It is also clear that the number of people who will start their own business is going to trend upwards. In fact, this is going to be such a significant trend that we as credit professional will need to grow and adapt to this trend in order to fully understand our client and prospects.
We will need to get a head of this curve in order to best evaluate the credit worthiness of the micro business customer and prospects. If you and your company haven’t begun to address this growing trend and haven’t really thought about it too much, now is the time to do so.
While many of these microbusiness start up may very well be in the technology sector, such as the recent explosion of fintech startups, many will be in the more mature sectors of the economy such as building and trade and transportation. Many will have brick and motor locations, but many will not.
No matter what the reason or motive is behind the entrepreneur spirit, these micro business will be coming to your company requesting a line of credit. With the additional issues and problems associated with these customers in regards to determining credit worthiness, their will come many opportunities for your company’s sales growth when managed correctly.
One of the main reasons in the dramatic growth of microbusinesses has been the pandemic. Covid 19 has and will in the years to come have caused a significant disruption in the economy and across virtually all industry sectors. I think you will see in the future more and more industries being dominated by a fractured decentralized environment. As a side note, worthy of close examination in subsequent writings and discussions, we can only look at how bitcoin, alt crypto currencies, decentralized finance, decentralized autonomous protocols (DAPs) and the blockchain environments which are rapidly changing how things get done, it’s not hard to see that the rise of microbusiness will disrupt the marketplace.
If an entrepreneur has a way that a product can be built better, then they can disrupt the marketplace. Build it less expensively they will disrupt their industry. Provide a better customer experience, do things more efficiently, these microbusiness owners will have a chance to thrive. Microbusiness will create unique opportunities and challenges for the credit professional.
The bureau of labor statistics has identified the two groups of people who will make up a significant portion of these microbusinesses which will be the millennials and GEN Z generation. This isn’t to say that people from Gen X or us old folks who are baby boomers like myself will not continue to own or start microbusinesses. These are people who have developed significant skill set in their chosen field of expertise and forever what reason may have waited until their mid to late forties or older to start their own business. Although this article is written to address the trend in new start up microbusinesses, I would venture to guess that a certain percentage of the credit professional portfolio may already include microbusinesses.
So, for whatever reason, make no mistake about it, it’s a person or persons who start and control a microbusiness. It’s their own personal goals and ambitions that drive the business. The business becomes an alter ego of the owner(s). Webster’s dictionary defines an alter ego as a second self. In law, however, an alter ego is defined as a person or entity liable for another. Regarding Webster’s definition as a second self, it’s still the same person!
The lines between the business owner and the business itself sometimes and very well may become very blurry. In many cases and the optimist in me tends to think that what’s good for the health of the business is also what’s best for the person. Meeting the financial obligations of the business is priority one. In other words they put the health and welfare of the alter ego, the business, ahead of their own individual wants and desires.
But what happens when the health and wellbeing of the business is in direct conflict with the needs, the wants and desires of the owner(s)?
Thus, what if a microbusiness owner is suddenly is faced with a cash flow issue? As we all know as credit professionals, small and microbusinesses are constituently facing issues with cash flow and working capital. There are more reasons why a small, microbusiness cannot pay their suppliers and vendors on time than we could possibly exam within the scope of this article. Regardless of the reason, it happens more that we would like.
Put a business owner in a difficult position where they have to choose paying their mortgage of paying a business creditor, the self and the alter ego are going to have a conversation!
Keeping out of pre-foreclosure can be pretty compelling. Perhaps they make a decision to skip paying the business taxes and or personal taxes which prompt the tax authority to place a lien on their residential property. This should worry the credit professional as a sign of financial deterioration, especially if you have a personal guarantee.
Another thing to consider is that in my experience, many business owners have either started and ran businesses in the past and may have additional business interest which are ongoing entities. The question then becomes how did they perform with these additional businesses? If the business is dissolved, did they cease operations in an orderly fashion? Did they honor their obligations or leave a trail of unpaid bills. Did they file previous businesses into bankruptcy? If the business owner currently have ongoing business concerns, how are they performing? Are they meeting their obligations satisfactorily?
Regardless of the myriad of reasons why people start businesses, and if in fact the lines are blurred between the business (alter ego) and the person’s individual goals, financial or non-financial, this issues can and will affect how they honor their obligations to you company.
- Personal credit bureau reports are a good place to start. If you customer will consent to having you pull their credit report, there is much information that you can get that will help in getting to know your customer. Things such as if they have a mortgage, how much is it? What are the monthly payments? What the balance? Who the lender is? Are there any instances slow payments or missed payments? Any refinancing activities. Same goes for auto loans, revolving charge accounts. Any instances of charge offs, being placed with a third party for collections or litigation.
- Secretary of State Business searches. Most states give you the option to search by the individual’s name to uncover if the person has owned any businesses in the past or currently in addition to the business that is applying for credit with you. Additional due diligence on these entities can be a good indicator of how they will perform in the future.
- Internet searches. By searching the owner on the web, which many of you maybe already doing, can tell you a lot.
- Social Media Searches. Facebook, Linkedin, Twitter, etc can provide much insight in the individual business owner.
- The Investigator’s Little Black Book. This a reference book used by all private investigators. It contains thousands of sources of information including criminal records, financial information, finding people and finding assets. You can purchase the reference book through Amazon. There is a free online version as well. Go to blackbookonline.info. This a good resource, it’s free, but not nearly as robust as the reference book.
- Public Records Aggregators. There are several companies that pull public data records from hundreds of sources which allow the credit professional to uncover hidden connections between people, companies and assets. Since these are public records, the subject of the investigation will never know that they are being investigated, unlike pulling a consumer credit bureau report.
Here is a list of some of the data you can collect on the business owners as well as their related businesses.
Full name, date of birth, partial social security number.
Work affiliations. This will name any business that your subject is named as either an owner or officer, either past or present. This includes real estate holding companies.
Real Estate records, purchase records, sale records along with how the property was purchased or sold. Is there a mortgage or was the property purchased or sold for cash. Cash transactions will not be reported on a credit bureau report. Pre-foreclosure and foreclosures can be identified as well.
Department of Motor Vehicles records. Certain states allow access while other only allow access with a court order. With the states that do allow access, you can find information on any vehicles registered to the business or the person including recreational vehicles such as motorcycles.
Watercraft, (think expensive yachts). Aircraft records from the Federal Aviation Administration.
UCC-1 filings naming the person as the debtor along with any co-debtors
Liens and judgments
Non financials records such as arrest records, criminal records, world watch list which is for persons who have been convicted of a financial crime.
Marriage and divorce records
Cell Phones and landlines
Relatives including spouses
Associate records such as business partners including silent partners.
If you want to consider purchasing a public records aggregator, please keep in mind that they can be very expensive and time consuming.
- Investigative Services. Hiring a firm to perform the investigations can be a realistic alternative. Connecting the dots between people, businesses and assets is a skill that gets developed over years of experience. Knowing why you are looking for certain information and why can be very time consuming, especially if performing this kind of work isn’t something that as a credit professional isn’t at the core of your responsibility.
Regardless of how you as a credit professional obtain data on the ownership of your customer/prospective customers, it’s a function that needs to be addressed to safeguard your company from threats and to identify opportunities.