Building corporate credit takes time to build and energy. Even by aggressively implementing credit-building strategies, it takes six months to two years of credit building and good payments to develop a solid credit foundation. Good business credit means properly growing and nurturing your business and personal credit. Expect that early on in your business, you will frequently be asked for a personal guarantee for credit lines. The personal credit of the majority owners and officers of a business are often taken into account when a lender makes a business credit decision. Weak personal credit will not stop you from building business credit, but it will slow the development. If you have meager personal credit, think about taking on a partner as an owner (member or shareholder) in your business that has good credit. This will allow you to start the corporate credit business process while restoring your personal credit.
When you start to build credit for your business, remember that all of the strategies that you used to build personal credit can also be used to build your business credit. Particularly effective is the three banks, three loans, three months strategy. Make sure that the loans are put into the names of your company and use your Federal Employee Identification Number (“FEIN”). The bigger the bank the better the chances of building the business credit files of your corporation.
Like your personal credit, business credit is also evaluated using the Five C’s of credit. But how do you develop a credit history for a company that just came into existence? This article will hopefully give you a step-by-step approach to establishing and growing credit for your business.
Don’t take it personal just know that you will have to use outrageous ways to build corporate credit. It will take a little longer, with a bit more complications, to build your business credit if you have poor personal credit but it will be well worth your time if you can keep the two separate anyway. When building credit you will often be asked for a personal guarantee. If you have good personal credit, as you can imagine, it makes this process much easier. Although be aware that personally guaranteeing a business loan or credit line will affect your personal FICO score and credit ratios and will jepordize your personal assets in the event you default on the loan. The first step in building business credit is to create a business. There are many different types of credit that are available to businesses that are not offered to individuals or sole proprietors or general partnerships. Choose a business structure that is appropriate for your business. Once you have created a business and received an FEIN, time is on your side. You can do nothing and the business grows more credit worthy every day. This is because a large number of businesses fail in the first couple of years. Therefore, just being around in a year or two will “season” your corporation, resulting in a perception of strength and value.
This is why I try to create a couple of corporations and have them in the wings for when I need them. These are called “bookshelf corporations” because their entire corporate existence is a binder of documents that sits on your bookshelf. When I need to create a new company, I just pull one of these off of the shelf and change the name if necessary. Bang! I have a company that has been around for a year, and by its very nature is a better credit risk for lenders. Before you purchase a bookshelf company from someone else, you will want to see a few things in place. First the company should have all the annual reports and statements filed. The corporate formalities should have been followed. The corporation should have a FEIN, generally about the same age as the business. There should be no negative credit history attached to the business, and no business liens. You should get an indemnification agreement with the seller, in the event of a lawsuit that developed prior to the transfer of ownership. Ideally, the company should also have a bank account with a similar aged history, preferably with a healthy average daily balance.
Although you could do nothing and increase business credibility, to develop a business credit history you will need a few more pieces of the puzzle. You will also need a bank account. When building business credit, the length of time you have had a bank account and the average daily balance is very important. Most creditors want to see a bank account reference that is at least six months old. You’ll need to prepare your business credit package. This is an assembly of all the financial documents and support materials you will need for when you apply for business credit. You can send this entire business credit package in to a lender with your application for credit whenever possible. You will want to create bound packages of the following information:
– Cover letter in company letterhead including company name, mailing address, physical address if different, business phone number as listed in 411, fax number, the contact information of a person with the authority to make decisions, email address and company website.
– Banking information including DUNS number, tax ID, bank address, account numbers, length of time accounts open, average daily balance, and last 3 months bank statements.
– Business credit references. At least three references, preferably reference letters, with contact information. These are trade references from open credit accounts with other companies that you do business with, usually suppliers.
– Business and owner character references. These are two additional references to show the character of your business. Customer testimonials are ideal for this purpose.
– Company financial statements. Current net worth statements and profit & loss or cashflow statements for the current quarter and the last two years of your business.
– Future financials. Cashflow projections and estimates on the schedule of business for your company, as well as growth projections.
– Tax returns for the last couple of years.
– Some companies will want to see a formal business plan or audited financial statement. Now it’s time to start applying for business credit.
Review the 3- banks 3-loans 3-months strategy that I wrote about in a previous article on building credit. This method works great for business credit. Make sure that the bank you are using for this strategy reports to Dun & Bradstreet, so that you can obtain a Paydex score at the right level (more about this in the next chapter). Without a Paydex, it will be nearly impossible for you to obtain a credit card without a personal guarantee.
The next place to look is to business-oriented credit cards, like those offered by Shell, Nebs, Office Max, Fedex Store and Staples. A lot of the time business services places like these will offer small business lines of credit without the need for a personal guarantee. When applying to stores such as these, pay close attention to who the finance company is on the application. Many credit card imprints will use the same finance company. Be sure not to inundate them with requests for many cards at one time. One a week is a good practice.
Once you get a card from one finance company, use the credit for a few months and pay early. After six months of so, apply for another imprint card which uses the same finance company to improve your chances of acceptance. One good source of a business credit card is the Sams Club Discover Card. When you open a Sams Club membership, you can apply for an instant approval Discover for business. You will need to have decent business credit to be approved for this card with out a personal guarantee. However, it’s a great way to get a quick credit line.
Conoco, Staples or Home Depot are also good choices for places to go. If you are making a purchase of gas stations or supplies stores, you can usually get a small line of business credit with that purchase. Gas companies are good sources of early business credit because most of the time their applications that don’t ask for a social security number which helps you avoid personal guarantees.
If your business is like most, the first C of credit that you will focus on is building capital. The number one reason that businesses fail is under capitalization. Thus the way you build your business capital is very significant. All undersized businesses require some capital to get started. Depending on the business, you may only need the capital for a small period of time to widen your inventory or pay salaries. Other businesses may require facilities and equipment purchases along with some operating capital to cover business expenses until sales and revenues can support the business.