While the average cost of starting a business today is approximately $10,000, droves of aspiring entrepreneurs walk into their bank each year seeking loans for much larger amounts.
Here’s what they hear from their banker: “Sorry, come back when your business has two years under its belt.”
Given that startups lack the 2-year track record banks like to see before providing a business loan, any financing you do receive will require solid personal credit. Your personal credit will be the underpinning for the business until you can start to show that the business performs according to plan. If your personal credit is a mess, it’s probably a smart idea to clean up your personal credit before you seek a loan at all.
In this step, we help you optimize your credit picture both personally and in business so your chances of acquiring money from lenders are the best they can be.
Your Credit Score
In the eyes of your customers, your employees and your vendors, the most important person at your business is you. The same view is held by lenders, and the way you are often financially translated is through your credit. Banks don’t place bets on horses – they place them on riders. That means you’ve got to build their confidence sufficiently as the operator of the business such that they’d be willing to gamble on you.
The higher your credit score, the easier time you’re going to have securing their support in the form of loans and lowest available interest rates on the money you borrow.
To begin to establish a solid credit rating, be sure to pay bills on time, that’s rule number one. Consider using automatic bill payment with your business credit or debit card to make sure your monthly bills are paid on time. As we advise below, get a credit card, start using it, and pay the complete balance every month for a year. Bingo! You have credit.
Ideally, it’s a good idea to make sure your personal credit is in good standing before launching a new business. If your credit is already “damaged goods,” you may want to pursue a few strategies we share here to transform a low, undesirable score into an attractive credit score worthy of bank lenders’ confidence. Note, though, that improving your credit is not an endeavor for the impatient. It takes time, maybe months on end, to get that credit score where you want it.
Clean Up Your Personal Credit
A good first step in dealing with your personal credit is to know your credit score. You can obtain a free annual report as assessed by the three largest credit-reporting agencies in the country, Equifax, Experian and TransUnion. Banks and other financial services also offer these reports for minimal fees. Once you have your credit report, it is important to fix any delinquencies or blemishes as soon as possible.
If you have bad credit, there are plenty of ways to fix it. Make sure to pay your bills on time and pay more than the minimum amount due on credit cards. If you don’t have a credit card, try to get one that is secured by a deposit and pay off the balance every month. Avoid adding to your debt position by staying away from 90-day and one-year same-as-cash offers, and similar propositions.
If you have a lot of debt that needs to be cleared, you can also borrow against your assets. Home-equity loans are a good way to raise a lot of cash at lower interest rates than credit cards.
But in the instance that you have no credit, simply get a credit card, use it, and make sure to pay it on time.
Get a Dedicated Business Credit Card
If you already have a credit card for personal use, do your best to acquire a credit card just for the business. Be sure to look for benefits and rewards, like airline miles and discounts on business purchases, and also look for detailed reporting that often come with business credit cards. Another alternative is to get a business debit card. This won’t help improve your credit rating, but you’ll still be able to make purchases with funds available in your business checking account.
Build your credit early by starting with small accounts.
To build credit and credibility among vendors, establish Net 30 Day payment terms with a few vendors for very small amounts. Pay them perfectly, according to those payment terms.
You will quickly prove yourself to those vendors, strengthening your credit-worthiness as you seek to establish similar extended payment terms more broadly and on a larger scale with other vendors.
If you don’t pay on time and you’re reported to a credit agency, future vendors will be reluctant to extend terms to you, whether for lease payment terms, inventory payment terms, or other common payment terms.
There are plenty of credit card offers out there, and it can be tempting to accept too many, and before you know it, run up a pile of debt.
To monitor and throttle back on credit card spending, by the way, get out that cash flow forecast and check to make sure you can service future payments on purchases you make using the card.
Getting the business credit card in place will go a long way to separating your business from personal financial activities. This applies to checking and savings accounts as well. As much as you can, try not to commingle your personal financial activities with your business activities.
Managing Your Business Credit
Once you’ve started using your business credit, you should consider getting an account through Dunn & Bradstreet, a firm that issues credit reports for small businesses. Dunn & Bradstreet’s reports vary in cost between about $30 and $150, depending on the level of information you seek.
To make sure that D&B report is favorable, never neglect one of the most vital aspects of maintaining your credit – making your payments on time. Whether it’s the leasing of equipment, credit-card statements or loans, paying those bills on time will only help you, while doing otherwise will lead to a negative rating. And if you can’t pay on time for some reason, make sure to ask for an extension. If you’re in good standing, many vendors will comply and not issue a negative report to credit-monitoring firms. Remember, the better your credit score is, the more likely banking institutions will give you loans at favorable interest rates, further fueling the growth of your company.
Leasing equipment and making payments in a timely manner can also give your rating a boost.