There’s no way around the fact that building a business takes money and resources. From the initial start-up capital to funds for expanding into new markets, entrepreneurs must understand how to access financing and plan ahead.
Credit remains one of the most important forms of financing for new businesses, but common mistakes can end up standing between you and the money you need. Therefore, it’s essential to understand how to begin building your business credit from the moment you open your doors.
Build Your Personal Credit
If your business is new and doesn’t have any financial history, lending decisions will be based on your personal credit. From the moment you decide to open a business, you should work to clean and build your personal credit. Maintain both revolving credit lines, such as credit cards, and term loans, such as car loans. Also, be sure you aren’t consuming all of your borrowing capacity before you start looking into business lines of credit.
Properly Establish Your Business
Building a credit record for your company means it must be established as a Corporation, Limited Liability Company, or other legal entity. By definition, a sole proprietorship or partnership is not separate from the business owner’s credit. Leverage the expertise of a financial advisor and business attorney to be sure all the proper considerations are being taken, including obtaining an Employer Identification Number and company bank accounts. Be sure to never comingle your personal finances with that of the business.
Work with Suppliers to Build Credit
Some suppliers will work with you to build your credit by providing credit terms on your future orders. If suppliers will agree to report your timely payments to a commercial credit reporting agency, such as Dun & Bradstreet, you’ll begin to develop a business credit history. Additionally, by having that line of credit increased over time, you will be exhibiting growth patterns to future lenders.
Proactively Apply for Credit
While it may seem unintuitive, you should apply for increasing credit lines before you need it. By the time you see an unexpected financial need on the horizon, your lenders will likely see it as an increased risk. Your ability to get new or increased business credit is based upon your perceived ability to repay the loan in a timely manner. If you’re approaching or experiencing cash flow issues, the lender will be more likely to deny your request.
In today’s business world, having access to business credit is an essential element of financial stability. For new businesses, it can be a challenge, but with proper planning, that challenge can be overcome.