From your sole member LLC’s to S corp companies, many businesses are created each day but how many will really survive the next 3 years? Many business owners in today’s dynamic world create new or parent companies quickly but forget to properly set up its foundation for long term growth. One of the main components that often is forgotten is a obtaining business credit, which also becomes the backbone of a company once its established. Being aware of the need for future credit under the business name and taking a proactive approach will help you on the long run and will ensure you don’t have to beg for investors when you need cash the most.
Before we start diving into the steps you can take to prepare and obtain your business’ credit, let’s take a second to understand how banks perceive and determine the business’ ability to repay a loan. This comes in two simple parts, Cash Flow and Credit Rating. Cash flow simply looks at how much in/outs you have each month, quarter or year and the amount of surplus you have on hand at the end of each cycle, but it also helps determine the consistency of your sales and the amount of overhead you have. Cash flow is determined through your business financial statements as well as your business tax returns. Banks will usually ask for 3 years worth, but will settle on 2 complete years. The second piece is the credit itself, banks will run your business credit and hope to find some other debt or obligation connected to a positive pay history. Credit doesn’t have to be real estate based, it can also include revolving lines of credit for supplies, merchandise or operating capital, as well as credit cards associated with the business. Great credit will show several revolving lines with no missed or late payments for at least 2 years.
Where and how can you obtain business credit?
When a business is in its entry stage, it is a very large liability to a bank and therefore having access to credit for a brand new venture will be difficult. There are instances where the SBA (Small Business Administration) comes to play but that’s a topic for another time altogether. As you start your new business and are about to establish your first business account, consider applying for a Business Credit Card. You will require what the bank calls a personal guarantee, which means that you agree to take on the liability to repay the card on a personal basis if the business doesn’t pay up. This is similar to saying you will be the co signer for your business’s credit card account and are ultimately as responsible in case of default. A personal guarantee is great, as you own the business and are investing yourself fully into it, so you should know what to expect; but it is also great as it is not reflected into your personal credit unlike a regular loan you co sign for which is reflected. Being eligible does mean having a good personal credit score as well as a good credit history and employment record. An unsecured business’ credit card is a great way to start and usually an easy option if you have the personal credit to support it.
Holding, using and paying back your credit card will enable you to create positive credit history very early in the business cycle but will also lead to more credit card offers in the months to come. Credit cards not requiring personal guarantees will become more accessible as well as easier to get.
After your first year with your credit card is up, and you have responsibly managed the business, it is time to ask for more money but away from credit cards. A small line of credit is a great way to go and usually is about 10% of your annual gross revenue. If you sell about 1.2Million in gross sales/revenue then you can qualify for about $120K but you may not get approved, so thinking about applying for 50% of that will help increase your chances as you will only have one year of credit history at that point.
These two loans cover the unsecured aspects of loans and help give you more cash flow to grow and operate your business. The next segment to consider is equipment or vehicle purchases. Acquiring a secured loan before your two years is ideal but not always easy. I have found through experience that vehicle loans under a business name and tax ID are a great place to start and should be highly considered.
Having covered the secured and unsecured aspects of obtaining business credit prior to your 2 years in business is a powerful combination, as you know the impact that credit access can make on your business. Building this basic foundation will allow you access to the money you need when you are finally ready to move into your own building or need a large loan to complete a project. Either ways, the need to obtain business credit is very important and it should be created with a sense of urgency on your part right from the start.