Establishing credit and building a strong credit history are essential for any small business owner interested in growing their business. Whether you need something as mundane as a business credit card or as important as a loan or line of credit, you need to demonstrate your financial responsibility to a lender. Here, Brad Wright, Commercial Credit Manager for Elevations Credit Union, shares tips to help small business owners navigate the credit-building journey.
Three got to for building credit
1. Keep organized financial records
For any type of lending, financial institutions want to make sure you have the resources to pay off debt, and these institutions need documents from you to prove it. They will ask for up-to-date records showing your cash flow, profitability, assets and liabilities. You don’t have to be a finance professional to keep these records – Quickbooks or other simple accounting software are designed for the average person to manage this information.
A common mistake business owners make is assuming that their tax return or high bank balance is sufficient documentation for a bank or credit union to draw up a credit card or loan. Bankers want to know what the regular flow of money in and out of your company is like, whether you are making payments on time, whether you are in debt, and what your assets are – such as equipment or inventory. Tax returns can be out of date information, and checking your account balance won’t reveal the full picture.
2. Stay up to date
In order to secure a credit card or loan, it is important to make timely payments to vendors and suppliers for everyday bills and taxes. Financial institutions are reluctant to lend to companies that have made late payments in the past.
3. Keep collateral and strong personal loans
Banks and credit unions often want evidence of collateral or assets that could provide additional support should your business fail to repay its debts. Equipment, inventory, vehicles, and real estate are common types of collateral. A consultant or business owner who does not have many assets can use accounts receivable (an indication of future cash flow) to demonstrate the ability to repay debts.
Additionally, having a strong personal credit score can aid your chances of getting approval. One danger to avoid is that your personal creditworthiness deteriorates – this can affect your chances of getting corporate financing.
What types of recognition are available for small businesses?
Business credit card
Not only is a business credit card handy for everyday expenses and separating business expenses from personal expenses, it is also a gateway for obtaining larger credit. With evidence of timely credit card payments, it is becoming more and more convenient for a bank or credit union to provide credit to your company. In addition, a credit card is an easy way to build credit as it doesn’t require any special records. Typically, banks require you to be in business for two years before issuing a business credit card.
Business owners can sometimes work around these criteria by doing one of the following:
- Maintaining a consistently high deposit balance
- Personally qualify for a credit card and become a co-signer of the card
What kind of credit limit can you get? Based on your organized financial records, your financial institution will determine an amount that you can pay out within a year if you should use your card to the maximum.
Line of credit or equipment loan
Growing businesses often need to invest in scale assets. Let’s say you are a doctor and need to buy new equipment, but you don’t have the money to buy it. To get an equipment loan or line of credit, a bank must see at least the following:
- That you can make the down payment without significantly affecting the normal course of business (i.e. the cost of the down payment shouldn’t mean you miss your payroll).
- That you will have the option to repay the loan over the life of the device (“useful life” means the number of years that the device will be in use).
Again, it’s important to have an established credit history and financial records that show the timely payments for obtaining this type of loan (e.g., a credit card history and on-time payments to suppliers). If you’re a new business, you may need at least a year of credit card payment history before you can be considered for larger loans.
Contact one of our helpful Business Banking Relationship Managers to learn more about building credit for your business and answers to other business banking questions. We are in the entire front range. Find a Business Banking Relationship Manager Near You Today!