If you’re in business for yourself, then you certainly understand the importance of establishing business credit. After all, when you’re granted a large job or need to expand your business, you’ll likely need to have a line of credit to tap into in order to carry the weight of the up-front expenses. And aside from borrowing from friends and family, there are two traditional ways that small businesses gain credit: by working with a lender, such as a bank or other financial service, or through a supplier’s line of credit.
But as many new businesses find out, neither one of these options are guaranteed, and a business must first prove themselves trustworthy before a creditor will extend credit. In fact, according to a survey done by the Small Business Association only about half of the companies that need credit get it. If you’re looking to increase your credit lines, follow along as we talk about the five most important things a small business owner needs to do in order to establish business credit.
Perhaps the most important thing you can do to establish your credit is to consistently pay your invoices on time—both business and personal. A lender will look to your past history to make an educated guess about how you will repay them in the future. If you have blotches on your credit history, you’ll likely have to start reestablishing it slowly. Start with a secured business credit card, and then attempt to get small lines of credit from your suppliers.
Any lender will want to know that you’re financially invested in your own business before they’ll even consider loaning you any of their money. The theory is that if you have a lot of your own money at stake, then you’ll do everything that you can to make the business work. When you are talking to a lender about a loan, make sure that you can show them your amount of personal risk involved in the endeavor.
According to The Federal Reserve System, collateral is one of the most widely used methods in loan contracts. The lender will want to know that if something goes wrong, they won’t be holding the bag. That’s why most lenders will ask for collateral to secure the loan. If you’re a new business, many times that will mean you putting up your personal assets, such as automobiles and homes, as a guarantee. In other words, if your business fails, the lender takes ownership of the assets. If your business is a little more established, the lender will oftentimes ask that you put up the business assets as collateral, such as any heavy equipment or business properties.
A lender will never make a loan unless they know in advanced exactly how the money will be used. Will it be used to expand your business, purchase necessary equipment or secure supplies needed to fulfill an order? Be prepared to lay out exactly what the money will be used for, and back that up with industry statistics and other relevant information.
You’ll need to tell a “story” to the lender that will make them feel as if they can trust you. This story is compiled of information about you—the person they’re trusting with their money. For instance, if you’ve been in the industry for years, that will go a long way in their confidence that you will make the best use of their money. In addition, any relevant education, past successes and awards or recognitions will help instill trust in your lenders.
Remember, the ultimate question in any lender’s mind is whether or not you will be able to repay the loan. You’ll have to work at ensuring that your business “character” is sufficient enough to instill confidence in them that indeed, you’re a good risk.