Five Ways to Build Business Credit
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A year after launching her printing business, Sherry Stewart Deutschmann began leasing a new facility and needed large printing and sorting equipment. She had a business credit card with a $5,000 limit, but it would take hundreds of thousands of dollars to finance the kind of fast growth she saw for her business.
It was 2003, and she was generating about $2.5 million in annual revenues at the time, yet several banks and equipment suppliers all turned down her credit requests. "Nobody explained to me why," says Deutschmann, the 51-year-old founder and CEO of Nashville-based LetterLogic, which prints business statements and invoices. "They just flat out said no." She suspected it was because she was still a new business with little track record.
Finally, later that year, she was introduced to a venture capitalist who offered $350,000 in exchange for a 25% equity stake in the business. He also guaranteed a $500,000 line of credit. Today, LetterLogic generates about $21 million in annual revenues with 33 employees. Banks now contact her regularly to see if she needs loans or new credit lines, Deutschmann says. "The interesting thing is we don't need it anymore. We don't really have any debt."
As she learned, getting credit is much easier when you don't need it. But there are ways to build your business credit to avoid the same rejections Deutschmann faced early on. Here are five options to get started.
1. Mind your personal credit rating. The biggest factor in many banks' decision to initially lend businesses money is the owners' personal credit ratings and they typically look for a personal credit score of at least the mid-600s, says Ami Kassar, co-founder and chief executive of MultiFunding LLC, a Broad Axe, Pa.-based company that helps businesses connect with lenders. To boost your credit score, be sure to pay personal bills on time, keep a low ratio of debt to available credit on personal credit cards and credit lines, and make sure any balances remain under 30% of your limit on credit cards. Moreover, lenders will also often check the personal credit of any investor or business partner with more than a 20% stake in the business, Kassar says.
2. Apply for credit before you need it. To begin building a credit history for your business, apply for at least some sort of credit soon after starting up, Kassar says. A small business will often have to establish itself for two years before a bank feels comfortable offering a sizable credit line. But there are ways around that, such as getting a business credit card or applying for a small bank loan. If you have trouble scoring even a small loan, consider opening a store-based credit line or getting a small secured credit card with a low limit. Some major retailers that supply to small businesses, such as OfficeMax or Home Depot, offer commercial credit accounts that can help build a credit history for your business.
3. Grow your credit and use it. Many businesses with enviable credit histories applied early for business credit cards and credit lines and used them as early as possible, says Wayne Sanford, owner of New Start Financial Corp., a credit consultancy in Allen, Texas. Once you've established a payment history, request an increased credit limit -- even if you don't need it right away. Also, check to see if you have a profile with Dun & Bradstreet, a business data and credit reporting agency, suggests Gwendolyn Wright, a San Francisco business consultant and former first vice president of the Bank of San Francisco, a community bank. If not, it may be worth paying a fee to set up a profile. You can then add credit references, such as suppliers you've worked with, to elevate your credit profile as a business.
4. Forge relationships with more than one lender. Banks can change lending policies on a moment's notice and cut your credit limit overnight, so it can help to not have all your financial eggs in one basket, Sanford adds. You might instead choose to have a credit card through a major bank and your credit line through a locally-owned bank or credit union. "With the smaller banks, you can actually speak to the one person who will put your [loan] package together and go to the board" for approval, Sanford adds. On the other hand, a big bank can offer more products and more locations.
5. Consider alternatives. Remember that traditional banks are not your only shot at credit, Wright says. There are a growing number of other options, such as securing investors, like Deutschmann did. Other resources include asset-based lenders, which focus more on collateral rather than credit worthiness, factoring -- which lets you borrow against your accounts receivables -- and peer-to-peer lending and crowdfunding sites, such as Prosper.com and Kickstarter.com. Using these alternate channels can at least indirectly improve your chances of getting credit in the future. "If people know your business and that you're good for the money, it can only help you," Wright says.