Small Business Financial Article

You spent years building your personal credit. Starting with small-limit credit cards, you gradually build your credit history by making on-time payments, getting bigger loans, and, eventually, a mortgage. If you did it right, you have a credit score that allows you to obtain financing for various needs at a reasonable interest rate. It’s not very different when obtaining and building credit for your business, except it takes some extra steps and a little time.

Lenders look at businesses differently than they do individuals. Young businesses present a lot of risk to lenders, especially those that don’t have much collateral. Your goal should be to present yourself as an acceptable risk with the potential for a long-term and profitable relationship with a lender.

Follow these steps to get to "yes" with any lender:

Create a Solid Business Plan

The banks are starting to lend to small businesses again, but the ones getting the loans are those who can demonstrate they know what they are doing and have the capacity to repay the loan. To do that, you need a well-conceived business plan that conveys your seriousness and legitimacy. Your plan should include all the essential components, including your vision and mission statement, market analysis, operational plan, management background, and financial projections.

You should be able to show a history of cash flow and profits and how your business expects to meet its projections. The internet is full of templates you can use to write your business plan, but this project would be worth outsourcing to an experienced business plan writer.

Separate Your Personal and Business Lives

You need to give your business a financial life of its own. That means separating your personal financial records from your business’s records. Mixing personal and business finances can create problems for you with the IRS. It can also lead to legal issues if your business ever faces a liability claim. If your business and personal finances are comingled, it could put your personal assets at risk.

If you haven’t already done so, you need to open a business checking account. That will give your business legitimacy and keep the IRS happy. You may consider organizing your business as a separate entity, such as a Sub Chapter S-Corp or LLC. That is as much for your protection against liabilities as it is to create a distinct identity.

Steps to Building a Credit History

You probably remember being turned down for credit at a young age because you had no credit. Your business faces the same dilemma. While lenders will consider your personal credit when evaluating your business, they also want to see how your business manages credit.

So, you should start where you did as an individual by getting a credit card. Some credit card companies cater to small businesses with little or no credit. The APR can be high, but your goal is to make budgeted purchases and pay the card balance in full each month. That’s the quickest way to build a good credit history. If you are unable to obtain a credit card, go to your vendors and suppliers to see if they will extend you a small line of credit or a trade credit account. They can become an excellent credit reference for your business.

You can also try retail stores such as Office Max or Home Depot, which are more accommodating of newer businesses. Gas cards are also relatively easy to get in your business’s name. The main goal is to start building a payment history.

How Your Business Credit is Reported

Credit reporting and scoring work differently for businesses. Once a business receives its federal tax identification number (FIN), the business credit bureaus begin tracking trade credit and other credit activities. The three business credit bureaus - Equifax, Experian, and Dunn & Bradstreet - compile a credit profile for your business and will generate a credit report upon request. The business credit report includes background information on your business, financial information, banking and collection history, and history of liens or judgments.

They also produce a risk score, which measures creditworthiness like a credit score. Unlike credit scoring of your personal credit, which is based on a standard set of factors, each credit bureau uses its own factors for calculating your business’s risk score.

You can’t let your personal credit slide when building your business credit. When applying for financing, lenders consider both your business and personal credit when evaluating overall credit risk. The key is to keep your credit balances low on your personal and business lines and always make on-time payments.