Starting up a business – or expanding an existing one – is often a lot easier if you can find someone to lend you some extra capital. When correctly applied, a business loan or line of credit can repay you tenfold for your efforts. Unfortunately, a new or struggling company will have a very tough time getting approved for the credit they need. It’s a truism that banks will only lend to people who don’t need it. Banks and other lenders tend to be very risk averse, because it’s not actually their money that they are lending out. The money belongs to their depositors, so if a bank loses enough cash on bad debts it can find itself in very deep trouble.
Luckily there are some things you can do to help show the lender that you are a worthy risk. If you don’t need credit now, there are also some steps you should take to prepare so that if and when you do need credit, it will be easily available for you.
First off, you need to get your personal credit as squeaky clean as possible. One positive assurance you can offer lenders, particularly if your business is brand new, is your own borrowing history. So before you apply for business credit try to pay off any personal debt you may have. As a general rule, the more available personal credit you have the better. One thing to keep in mind is that if you have any ancient, outstanding debts now is NOT the time to pay them. That probably seems counter-intuitive, but the fact is that recent items on your credit report have a much stronger effect on your credit score than older items. If you pay an old debt now that debt will become a recent item on your report, and often this will drop your credit score by a noticeable amount.
If your personal credit is lousy, however, don’t despair; there are still a few things you can do to get business credit. For one thing, you could incorporate your business. This will help because a corporation is a legal entity in its own right, whereas a sole proprietorship or partnership is not (the latter businesses use the proprietors’ social security numbers for identification purposes; a corporation has its own tax ID number). Essentially a corporation is a step removed from you, so your own personal credit has less affect on its ability to borrow money. This will only take you so far – lenders will still run your social security number when you apply for business credit – but if your personal credit is marginal rather than horrible, it can be enough to make a difference.
Another idea is to apply for trade credit, which is typically much easier to get than general credit. Trade credit is credit extended by one of your vendors which you can only use to purchase things from that vendor. If you were to get a business credit card from your computer vendor, for example, that would be a trade credit card. These trade lines enable you to build up a credit history for your business, so assuming you use them wisely and pay promptly you should find it much easier after a while to get other types of credit.
Once you have decent personal credit, and perhaps a trade line or two, go ahead and apply for one business credit line through a general lender. Do this even if you don’t need any more credit right now. Why? Remember that banks don’t like to lend to people or businesses that are in tough financial straits, because at those times you’re typically a poor risk – and of course those are the times when you need credit! By setting up a line of credit now while your business is in good shape, you are essentially hoisting an umbrella against a future rainy day. Use your credit line occasionally to continue building up a good credit history, but always pay it promptly and make sure you leave plenty of available balance for emergencies.