Updated: Apr 10
There is quite a bit of information on the web about building business credit, however, there are only a few timeless principles that work consistently, regardless of the economic climate. Let's talk about a few of these proven techniques that will help you quickly build strong business credit and start off the New Year with the capital you need to grow. 1. Protect your consumer credit rating. One of the major misconceptions about quickly building a strong business credit rating is the need have good personal credit. Although it's very possible to build business credit without using your personal credit, a good personal credit rating will certainly accelerate the process. In most cases, banks are looking for a personal credit score of 650 or higher. The score is important, however, how the score was derived is just as important. Bankruptcies, foreclosures, tax liens and other public records are huge red flags that will get your application denied before you submit it. Most traditional lenders don’t want to see any collection accounts reported within the last twelve months and frown upon too many credit inquires within a short period of time. The other critical factor is your balances (Debt-to-credit ratio) on revolving credit accounts, which should be maintained below 30% to prevent you from being seen as a credit risk.
2. Establish business credit sooner than later. I often ask business owners in search of capital how soon they need funding, and inevitably I hear the same desperate response, "As soon as possible!". This tells me one of two things are true: (1) They’ve been looking for capital for some time and been denied, or (2) they haven’t adequately planned for the growth of their business. In either case, they feel pressured to accept whatever type of financing comes along which isn't the best way to seek capital. Start building your business credit today, even if it means getting an unsecured credit card from a local bank or a small credit line with a major retailer like Staples or Home Depot. The longer your business credit is established (as long as you're paying your bills on time), the more credible your business is to larger creditors and lending institutions.
3. Build and exercise your credit frequently. Once you’ve established a business credit profile with Dun & Bradstreet, Business Experian and Equifax Small Business Financial Exchange, you need to start applying for credit immediately. Most companies with strong credit started the credit building process early and leveraged their good payment histories to secure additional, higher limit credit accounts. Building strong credit is like exercise, you can't workout once and expect the results to last a lifetime. The more frequently you exercise (use) your credit and develop good payment habits, the stronger (more credible) your business credit will be. Also, make sure you ask for credit limit increases every three to six months, regardless of whether you need it at the time. Asking for a limit increase is like adding more weight to your gym workout, it strengthens your business credit profile even more over time.
4. Don’t rely on a single source of business capital. There are several good reasons not to rely on one bank or lender, but the most important one is risk. If you have all of your eggs in one basket and your bank decides to change policies or reduce the limits on your account, your business could take a huge loss if you're relying solely on one source of capital.
By diversifying your credit resources, you significantly reduce the risk of jeopardizing the cash flow and stability of your business in the event a banking partner decides to reduce your credit limit or closes a business line of credit.
5. Consider alternative lending sources. Over the past few years, as traditional banks have become more resistant to lend to small businesses, alternative lending sources have become a great resource for entrepreneurs seeking capital.
There are a growing number of opportunities which focus on your businesses collateral rather than your credit worthiness. Factoring, for example, lets you borrow against your accounts receivables and business revenue lending allows you to borrow against your companies monthly revenue. Using these alternate channels can increase your ability to secure credit in the future and many of these sources will report your good payment history to the business credit bureaus.
Contact us to schedule a free funding strategy session and learn how to secure the capital your small business needs so you can thrive (and not just survive) in 2019 and beyond.
About the Author Kylon J. Trower is 20+ year serial entrepreneur with a background in residential and commercial lending, business credit development and financing. Most recently, he's built a national network of financial professionals dedicated to preserving the lifeblood of our economy, the American small business sector.
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