By Garrett Sutton, Esq.
When you set up a corporation or LLC you have taken an important step in limiting your liability and protecting your assets. You have also taken an important step towards obtaining credit. But be careful.
This is an area where there is a lot of confusion and misinformation. There are many websites out there that offer to help new businesses obtain credit. Many improve their own credit standing at the expense of the new business.
Here are some other things that you can do to help you with banks and grow your business’s credit:
- After incorporation, you may be inundated with credit card offers. Take a look at what is being offered, and apply for the cards you really want, one at a time. Very likely these offers will be based on your personal credit scores, and each “inquiry” shaves a few points off your credit scores, so you don’t want to apply for a large number of them at once. While your company may only receive a small amount of credit at first, if you establish a good payment history your company’s credit limit should increase
- Certain credit cards are easier to obtain than For example, Costco is an excellent place for new businesses to begin.
- Get a D-U-N-S number as soon as possible. Dun & Bradstreet is one of the major sources of financial and credit history data, and if your company is listed with them it could go a long way towards convincing lenders to work with Know that you may do so without paying for Dun & Bradstreet’s expensive start-up service.
- Pay your bills and file your taxes on time! Banks often request tax returns when evaluating loan applications.
- Have a written business plan that clearly sets out your objectives, and be prepared to bring a copy of this with you to a bank when looking for financial Make sure it is clear and easy to understand – if your banker can’t see what a great opportunity you are creating, how is that person going to be able to lend you money?
- It’s Ok to start small! Often times a loan officer has a limited amount of money they can loan without having to seek approval from higher ups. If you can stay under that limit and you have established a good relationship with a loan officer, that may also help you to secure the loan you Similarly, many small businesses start with “trade credit,” which includes small lines of credit with suppliers from whom they purchase janitorial supplies, shipping boxes, small equipment, etc.
Often times, however, you will be looking for a larger line of credit or other financing. In that instance, you can pretty much count on being asked to sign a personal guarantee. That’s especially true for younger businesses, as well as those that can’t demonstrate significant cash flow.
If you are planning on leaving your existing employment you may want to consider setting up a line of credit with your financial institution while you are still employed. Many of our clients, particularly those who have left successful, well-paying careers, have reported to us that they had no problems whatsoever establishing lines of credit or other financing opportunities with their banks, but upon becoming self-employed those doors closed rapidly.
Tapping the SBA Loans
The SBA does not provide direct loans, but, for those businesses that are eligible and qualify, the SBA provides a guaranty for a significant amount of the loan.
Some things to note (as of this writing) about using SBA loans are:
- This is not “easy money.” You will be required to meet the lender’s financial criteria. While repayment ability is a primary consideration, their decision is not based solely on that Other considerations, such as good character, management capability, collateral, and owners’ equity contributions are also reviewed.
- All owners of 20% or more of a company will be required to personally guarantee SBA.
- For most loans under $350,000, you will have to demonstrate a FICO LiquidCredit SBSS score of 140 or higher; many lenders require 160 or higher. This FICO score combines your personal credit information with the credit history of your business. It is possible to get a high enough score if you don’t have a business credit history, but it’s not easy. (Currently this is the only place to view your FICO SBSS score in advance.)
- Loan proceeds may not be used for things like financing floor plans, purchasing real estate (unless your business will be occupying the site), or paying delinquent debts or taxes (unless you can show that refinancing will help the business and is not the result of bad management decisions).
- The SBA will require you to keep meticulous records about how and where you spend the loan proceeds, so be prepared for paperwork.
To learn more about these and other important business financing strategies please see my book, co-authored with credit expert Gerri Detweiler, entitled “Finance Your Own Business.” It is available at CorporateDirect.com and all booksellers. An audio version is also available.