Building Business Credit

There is an old Chinese proverb that says: “The best time to plant a tree was 20 years ago. The second best time is now.”. Many entrepreneurs feel the same way about growing their businesses, because there is so much to do and everything needs to be done now.
After starting a business and realizing the growth potential of a market, many business owners are overwhelmed, and the lack of time and resources becomes a real concern. Bootstrapped startups are seldom immediately profitable, and projections can only get you so far – lenders want to see revenue. Without a strong personal and professional credit history, a business will never be taken seriously by lenders. Here are some tips on how to establish business credibility:

Review Credit Ratings

While many businesses owners elect to keep personal credit unrelated to the business, some don’t have this option. The truth is, that a high personal credit can allow a business owner a significant amount of flexibility for the business. According to Entrepreneur, the very first factor that banks look at before lending, is the credit strength of the borrower. In order to be a prime candidate, a person should have a FICO (Fair Isaac Corp) score in the mid-600s. This score is evaluated through various credit reporting agencies, and gives consideration to: bill payment rates, outstanding debts on credit cards, credit lines, and balances of limit.
If you are aware of your score before making application, then you can assess your chances of approval without the potential decline on your credit report. If your score isn’t as high as you’d like it to be, consider the following:

  • Refinance any high interest outstanding debt
  • Restructure credit card debt so that any outstanding balances are below 30% of the available credit limit
  • Review personal credit reports and verify that all information is correct
  • Should this not be effective in increasing the overall score, then one may want to consult a credit repair agency.

It is also worth noting that the credit score of all business partners (possessing more than 20% ownership of the company) may also be subject to scrutiny by lenders.

Ask for Terms

Similar to individuals, companies have ongoing purchasing needs, whether it is office supplies or raw materials. Since this is an ongoing expense it can be a great opportunity to establish trade lines with your partners. In order to do this, ask for terms on your ongoing purchases – even if you don’t need them.
Having the flexibility and access to extended term financing (even Net-7) is more than just a convenience, and can be especially helpful if that supplier reports payment history to the credit bureaus.

Note – You need at least three trade lines to be reported to Dun & Bradstreet in order for a score to be recorded for your company.

File for Incorporation

A business needs to be registered (as its own entity) in order to be eligible for a credit profile with the credit reporting agencies. If a business is a sole proprietorship then it is owned by an individual, and credit decisions are made by using only personal credit. A company that is incorporated will have it’s own EIN and that is used by the credit reporting bureaus of Transunion, Equifax and Dunn & Bradstreet to track payment history as well as business information. It is also helpful to visit the credit reporting bureau’s websites to make sure that the business’s account information is up to date.

Note – Be sure not to delay fillings or cut corners while preparing your tax documentation, as this will be reviewed during the loan application. If you are unsure about the standings of the company’s tax compliance, then it is recommended that you work with a licensed professional to ensure that this is handled properly.

Get a Business Credit Card

Even if it is a secured line of credit, having access to a revolving line of credit will improve a business’s credit score significantly. Some lenders and banks offer credit cards specifically for businesses that offer assistance in tracking spending and have minimal fees. A few good cards to consider include for businesses include Amex, and Discover.

Apply For A Loan Before You Actually Need It

As an owner or executive, it is your goal to be anticipating and planning for the future of the business, and financing is a key aspect of this. Changing market conditions will inevitably affect business growth, and so having easy access to credit can be a competitive advantage allowing well organized companies to take advantage of favorable interest rates and stock up in times of plenty.
Anticipating long-term growth and applying for a loan well before it is needed can be vital to success. Even if you are declined for the loan, you will then be made aware of the requirements, and have ample time to work towards fulfilling them.