Credit Ratings | Richard Horning

You know, I need to rent an office space right above the Citibank building across the street. And I need space for 4 people. Hero City's packed, so I have to rent some space. And I go to the landlord and I say, I'd like to get a lease on 4 offices across the street above the Citibank. And we'd like to have it for, let's say, 2 years. Landlord said, hmm, how much money do you have? Well, we opened the account at Bank of the West with $10,000. Okay. What's your credit rating? You don't have one. You're a new company. So the landlord is saying, what risk am I taking to lease this space to you? I can kick you out if you don't pay the rent. But it doesn't happen overnight. So the landlord will typically say, I need a deposit to cover my risk that you don't pay me. The amount of that deposit is very much dependent upon whether you have a credit rating. So how do you get a credit rating? And how— what's this credit rating business about? Because nobody knows about your company, nobody knows about your financial activity, it's not published anywhere. And because of the way the United States entered the modern world in banking, interstate banking, because nobody knows what's going on in Kansas, nobody knows what the First National Bank of Kansas was doing when it was issuing dollar bills. that said First National Bank of Kansas promised to pay $1, what's that worth? So credit rating agencies came into being in the 1870s. So when First National Bank of Kansas dollar bills showed up in New York, somebody said, what are they worth? They called the credit rating agencies. Oh, the First National Bank of Kansas has an excellent reputation. They're well capitalized. Those things are worth par. They're worth the dollar. Or they said, you're taking a big risk because the First National Bank of Kansas is on tough times. The Kansas economy is not doing very good. If you can— if you trade that for 50 cents, you might be okay. So these credit rating agencies had to deal with the distance. So now our little company— wants to get into the credit rating business, get a report generated by Dun Bradstreet or TransUnion or Experian, which are the 3 principal credit rating agencies. How does that work? TransUnion calls your bank, say, hey bank, I understand that you bank this little company that was just incorporated in Delaware You know, 6 weeks ago. What can you tell me about this little company? Oh, we couldn't possibly tell you anything about this little company. It's all confidential, our relationship with our customers. Okay, well, let's do this. Let's play this little game. I'm guessing, since I've seen the company's website or I know something about it, that this company probably processes 15 to 20 transactions a month through the bank. Is that about right? That's a little low, okay? I'm guessing that the average transaction, the range is between $25 and $6,000. That's a good range. I'm guessing that the average amount that they keep on deposit During a month is somewhere between $3,500 and $6,500. That's a little low. And I'm guessing, of course, that they're a perfectly good customer of the bank, you haven't had any problems with, all of their checks have been honored. Oh, absolutely. They're a wonderful customer. So they write that down. Now, that's on the basis of that and some other information, you're now in the credit rating system. So how do we leverage your activity to even get a better visibility in the credit rating system? You go to your bank and you say, hey bank, we would like a corporate credit card. Not a debit card, which is using your own money. We'd like a credit card where we have— you're going to give us a $5,000 line of credit. With a piece of plastic, Visa or MasterCard, and we get to use it. And because it's a credit card, that same exercise happens. Visa or MasterCard, whoever the issuing bank is, calls Bank of the West and says, tell me about this little company. They go through the same exercise, and suddenly you've got Another entry in your economic activity. Now, why would the bank give you a corporate credit card when you have no money? Hey bank, here's the deal. We'll set aside $5,000 in a special account earmarked. If we don't pay our credit card bill, you grab it. So it's secured. We got a $5,000 line of credit on the credit card secured by our $5,000 deposit. And we use it. You go to Fry's, you go to Starbucks, you go to the Pizzamici's across the street, you use it, bill comes, you got 30, 25 days to pay it, you pay it on time, bingo. Credit rating agency says, oh, these guys are great, they pay their bills on time. They've got all these transactions every month and you— it's 2 for the price of one effectively because the bank sees the payment to the credit card company as part of their report on you. So get one. I had a Swedish company, a Finnish company that was going to be a competitor to One Kings Lane. Their idea was we're going to have relationships with all of the Scandinavian designers. whom we know. And we're going to be in the Scandinavian furniture business online, have a warehouse in the United States where this stuff is stored, blah, blah, blah. They spent a lot of money on a very elaborate website which was built in Finland. The person here was doing the infrastructure part, goes to Wells Fargo Bank and says, we're about to launch. We need a $250,000 e-commerce line of credit. Tap, tap, tap on the computer. I'm sorry, your company has no credit rating. She says, why? How can that be? How can that be? I've been dealing with you for a year and a half already. Absolutely, you have a brilliant credit rating because you were using The ability to charge things for the company when you go to Fry's, when you lease an office, all those things are on your personal account and you got reimbursed by the company. Same economic effect, but it didn't add up in the column of the company. Now she talked them into giving her an e-commerce line of credit, but again, why go through that hassle? Just think about the credit rating game and get into it. Okay, now these are practical things. These are practical things.