If you are planning to start a new business or expand an existing one, having access to business credit can be a very large part of the funding needs you will require. It makes sense to understand business credit requirements and regulations and how they are different from or similar to personal credit requirements.
Often businesses are started with personal resources of the owner, but as the business expands, additional forms of purchasing power are required. What many people do not realize is that applying for and receiving business credit such as through a bank or other financial institution is a procedure much more regulated than that of applying for personal credit such as a credit card or automobile loan.
Business loans are usually either short term loans coming due in one-year or less. Often these loans are to cover immediate business cash flow problems, such as paying for an inventory shipment or other immediate costs. The short term loan is typically paid off as soon as inventory or accounts receivable is converted to cash. An intermediate term loan usually has a maturity date of from one to three years and is often used for the purchase on new equipment, a business start-up or business expansion. A long term loan can be used for capital improvements, business start-up costs or providing business capital. It is often repaid in monthly or quarterly installments and generally does not last longer than three to five years.
A business line of credit allows your business to borrow money repeatedly up to a certain level without having to reapply. This type of business credit is particularly useful if the revenues in the business are seasonal or fluctuate widely for whatever reason. Usually the business owner must provide updated financial statement once each year at which time the line of credit limits may be adjusted.
When applying for business credit, it's usually prudent to begin with wholesalers or business that are willing to extend credit for a thirty-day account. If you plan on paying cash for 2-3 months, you can gradually extend the repayment time for your business account. This gives you a good basis for showing that your business is a good credit risk.
Other types of business credit are credit cards or borrowing against your accounts receivable.
BUILDING BUSINESS CREDIT DO'S AND DON'TS
Most new business have serious cash flow issues during the early months and years of operation and would be wise to establish and build good business credit records. There are a number of things you can do to help establish credit for your business.
The first thing to do is establish your business in such a way as to separate your personal and business assets and liabilities. This can be done by establishing a corporation, applying for and receiving a Taxpayers Identification Number and a D-U-N-S number which is a unique Dun and Bradstreet number for your business. Dun and Bradstreet is a rating service for businesses which shows how good a credit risk they are.
Your business will need a business listing in the telephone directory with a business address. It's helpful to have a presence on the web in these days of e-commerce.
You should make a point of borrowing from or purchasing products from companies which will report your performance business credit reporting agencies such as Experian and Dun and Bradstreet.
Unlike personal credit building where you can get a good FICO score with a small income, in order to build a high business credit score you usually need to be a large, well established company with several employees. However, that needn't stop you from establishing good business credit. The high scores provided by the business credit rating agencies will follow.
Things to avoid if you are trying to build good business credit include:
- Trying to buy good credit: Some unscrupulous business will offer to sell good trade references in return for a sizable sum of money. Not only is this illegal, but if you are found out, the credit reporting agencies will purge the references and you are back to square one.
- Shelf corporations: Some companies sell corporate filings that are aged anywhere from months to years. These are corporations which have been set up but never used, or sometimes they've been used, but no longer are active. The companies that sell these shelf corporations assure you that the aging of the corporation will guarantee that you can receive credit based on the age of the corporation.
Bad personal credit: Although you should try to separate business and personal credit as much as possible to protect your personal assets, establishing a business in an effort to repair or ignore your bad personal credit is not a good way to solve financial problems. Your best plan is to work on repairing the personal credit problems but continue to build a good track record with business credit.
SEPARATING BUSINESS AND PERSONAL CREDIT
Many new entrepreneurs don't realize that when they apply for business credit, the lending institution will also pull personal credit reports. For this reason, it is doubly important to separate your business and personal credit information right from the beginning. Not only does this allow you to gain credit for the needs of your business, but it protects your personal assets from liens incurred by the business.
In order to separate personal and business credit, you must first make sure your business appears on the business credit reporting networks as a separate entity. You can do this by establishing it as a corporate structure rather than some of the other business structures. You should get a telephone listing in the business name and of course, a corporate bank account. Business cards and business letterhead and a business web site are all ways to make sure your business is perceived as a separate and distinct business entity.
You will need to establish a Taxpayer Identification Number and a D-U-N-S number for your business.
Once these are on file, you can begin the process of building your business credit separately. Using businesses which report credit history to Experian or to Dun and Bradstreet, you can apply for merchant credit. It may help to pay cash for purchases for a month or two, before applying for a charge account at the merchant. You can also apply for credit cards in the business name and begin building credit resources by that method.
Be very prompt about managing the credit you create by such methods. Although, you can pay items off promptly, most credit counselors will tell you to create a small balance and pay on it with minimum monthly payments. This will demonstrate that your business can handle business revolving fund accounts and credit card payments in a prompt and professional manner.
The next step is to use your good rating developed through the revolving and credit card accounts to apply for a business loan from a bank or other financial institution. This could be to purchase equipment or vehicles for your business.
The important thing to remember is that you are establishing a prompt payment and active credit history in the name of your business.
