How good are you at getting other people’s money? To have a successful business you may have to convince customers, vendors, investors and lenders to give you their money. The latter group can serve as a lifeline for millions of businesses. According to data from the end of 2016's second quarter, courtesy of the Federal Reserve Bank of St. Louis, U.S. business debt outstanding stands at a record high of more than $8 trillion.
Just because there are trillions of dollars being lent to businesses doesn’t mean it’s easy to get a loan or line of credit. Your business may have to pay higher interest rates or agree to very strict conditions on how to run your business while the loan is outstanding. That’s why small-business owners may want to prepare themselves before applying.
These four steps represent the broad strokes of what may be done to help establish your business credit. It takes time, so it may help to be prepared to start as soon as possible.
Step 1: Get Your Own House in Order First
If your business doesn’t have a credit profile yet, then most business lending decisions will likely be tied to your personal credit. Even after you establish your business credit, your personal credit may still be an important decision-making point for lenders, so it may help to make sure your personal credit record is accurate and in the best shape possible. Consider reviewing your personal credit records from Experian, Equifax and Transunion and following their procedures for correcting errors and attaching your response to negative items that can’t be removed. You should try to pay down existing debt on a timely basis and not consume 100 percent of your borrowing capacity. You may also want to include a healthy mix of revolving lines of credit (like credit cards) and term loans (like car loans).
Step 2: Perform a Corporate Cleanup
If you want your business to have a credit record separate from your personal one, you must legally separate the two. The business needs to be established as a Corporation, Limited Liability Company or other legal entity. A sole proprietorship or partnership by definition is not distinct from its owner and therefore can’t have a separate credit record.
Your business should also have an Employer Identification Number and a DUNS number issued by Dun & Bradstreet. Companies that serve or plan to serve as government contractors can obtain a DUNS for free. This also means having banking accounts under the company name, and funds should never be commingled. Both in theory and practice, your business should remain a distinct entity from you to meet these requirements. Finally, you should set up business profiles with Dun & Bradstreet and Experian.
Step 3: Ask Your Suppliers to Help
Your suppliers may play a critical role in helping your business establish and improve your credit. First, you can ask them to provide credit terms on your future business. As your business pays its invoices on a timely basis, you can then ask the vendors to report those timely payments to Dun & Bradstreet to help ensure your company is given credit for it. Over time—and after paying on time consistently—you may want to ask your vendors to increase the credit limits they have provided. Showing growth over time may be important from a credit point of view and may also help improve your business’s working capital.
Step 4: Apply for Credit When You Don’t Need It
This may seem counterintuitive, but one of the worst times to apply for business credit may be when your business really needs it. Lenders may succeed or fail on their ability to assess risk, and avoid too much of it. They will likely evaluate your company based on its ability to pay back the loan or line of credit without delay. A business having a cash flow shortage, or that needs to pay a large unexpected expense, probably doesn't represent a good risk. The fact that they need the financing sends a signal that the owners may not have properly managed for the unexpected. Instead, consider applying when your company is having a great year and you can do just fine without the financing.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
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A version of this article was originally published on September 25, 2015.