You should be congratulated when starting your own business. Working on a startup can be rewarding, especially as you move closer to your goals. However, it can also be tiring. Did you know that nearly 90% of all startups fail and an even higher percentage will need to adjust their business model somewhere along the way?
Whilst the exact reason for failure varies from startup to startup, one of the biggest impediments to success is building credit. Let’s face it money does make the world go around and anyone who has ever tried to self-finance will tell you it is not easy.
So herein lies the dilemma. You need money to grow your business, but banks are often reluctant to grant credit lines to a startup (at least until you have proven yourself – which means two years in business and a strong credit history). I swear it seems like sometimes banks want to make it impossible to get credit!
As such, many businesses owners often rely on their personal credit cards and other loans., but this is extremely dangerous. Not only are they risking their personal credit scores, but in some instances, they are even risking their homes or retirement savings. While starting a business is about taking risks, those risks should be managed.
Assuming you already have a registered business entity, an Employer Identification Number (EIN), and a business banking account, then let’s look at the other steps needed to establish credit for your business.
One of the first steps is to list your business with the business credit bureaus, such as Dunn & Bradstreet. By doing so, you are setting up a credit profile for your company. This will help prospective lenders to better review your business and determine whether you are worth the risk.
The next step is to work on building your business credit history. A great way to start is to develop a relationship with a working capital lender. This is a fast-growing sector of small business finance and lenders such as Mulligan Funding have helped thousands of businesses get the credit they need.
Remember working capital loans and lines are best when used as short-term financing options. This has a big plus when it comes to building credit for your startup as it shows that you can take out increasingly larger loan amounts and pay them off quickly. This is what lenders are looking for as it shows a high-level of fiscal responsibility.
Don’t forget the tax man. Be it local, state, or federal taxes – make sure you file and pay on time. Lenders will not provide credit to businesses with incomplete tax returns. The risk is just too big, as they (the banks) view it is a signal that you won’t repay their loan.
Ok, these are simple enough tips to follow through on, but the next one is a bit trickier and it goes back to the catch-22 which is starting a small business. In the beginning, you are bound to be using your personal credit to get the business up and running. After all, the money needs to come from somewhere!
Whilst this is quite common, it is also extremely risky. Overusing your personal credit for your business could end up having a negative impact on your credit score. The catch is that most lenders will look at the personal credit scores of any business owner with more than 20% share in the company when deciding whether to issue additional credit.
You might even be asked to sign a personal guarantee. This basically says that you, the owner, will be personally responsible for making sure the loan or line of credit is repaid, regardless of what happens to the business.
Running a startup is not without risk. The most important thing to remember when building credit for your business is that it does not happen overnight. You need to walk before you can crawl and that starts by following some of the basic steps outlined above.
Whilst personal credit scores are often required when you are first establishing credit for your business. There are alternatives. These include purchase order financing and working capital loans and lines. Remember to start small, get the right type of credit to match your need, and most importantly pay it off on time. In this way, you will be able to build the credit your startup needs to get to the next step.