07/12/12

Building Business Credit

Paradoxical

Building business credit can seem as mind-bending as M. C. Escher’s “Paradox Waterfall.”

Building business credit is an important part of qualifying for a business loan. Ironically, the only way to get that loan is to have an established history of paying off loans. This paradox makes many small business owners wonder how to even get a loan in the first place.

In reality, building business credit just takes time. Business loans are available everywhere, but there’s really no way to speed up the process of building credit.

All you can do is start small, start soon, and start right.

Below, there are a few ways to help you establish strong business credit.
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Six Steps to Start Building Business Credit

There are six common steps that entrepreneurs take to set up their credit building profile. In an article by business expert Nellie Akalp on Mashable.com, the steps are outlined as follows:

1. Set Up a Business Entity

If you are the sole proprietor of your business, lenders can only offer you personal loans, which would build your personal credit only. In order to get business loans and build business credit, you need to establish a legal business entity such as a corporation or LLC. This entity formation reassures both the banks and the IRS and helps you by reducing your personal liability to the loan.

2. Get a Tax ID Number (EIN)

In order to have a business banking account, your business must have a Tax ID Number from the IRS. This is basically like a social security number for your business.

3. Establish a Business Bank Relationship

Starting a relationship with your bank (i.e. business savings/checking accounts) will help you get a loan in the future. Unfortunately, this relationship may take a long time to build, so the earlier you start, the better. Over time, as the banker gains confidence in your ability to pay a loan, you will qualify for certain credit options. This usually begins small with credit cards and business lines of credit then grows over time.

4. Get Listed with the Business Credit Bureaus

Once you set up a business entity and get an EIN, you can register your business with one or more credit bureaus. The most popular bureau, Dun & Bradstreet, allows you to set up a free DUNS number, which lenders will use to measure your business’ creditworthiness. Other credit bureaus include Experian and Equifax.

5. Maintain Positive Business Credit History

Though your available amount of credit may start small, as you maintain positive cash flow and make payments on time, your available credit will grow. When you have little options, a good way to start is to find trade vendors that offer business credit without a personal check or guarantee. However, the only way this is effective is if you make sure that all payment history is being reported to the credit bureaus; if payments aren’t reported, you may miss out on good credit growth opportunities. If this is the case, you can compile a list of trade vendor references to offset this loss.

6. Maintain a Good Personal Credit Rating

Even if you have a good business credit score, lenders will be interested in your personal credit score before they hand out a loan. In addition, the bank often wants your personal guarantee that the loan will be paid off. You will likely need to leverage any of your assets as collateral – this can include home and vehicle equity, spousal income, and even retirement funds. Read about the 5 C’s of Credit for more information on what banks look for.

Getting Loans Without Building Business Credit

A lot of small business owners get turned down by bank after bank and don’t know where to turn. Whether it’s bad credit, not enough business experience, or too much money being asked, the reasons shouldn’t stop you from getting a loan. Banks aren’t the only option. If you don’t have enough time to build your business credit, a variety of alternative lenders are often more willing to work with you. The terms and rates offered by these alternatives may not be as ideal as a bank, but it can help you get on the right path.

You can find what loan types and lenders work best for you here and start building your business credit.

It takes a little cash to change the world.

So what are you waiting for?

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