How to Build Great Credit for Your Fledgling Startup
Young entrepreneurs must overcome significant hurdles to achieve success -- from managing investor perceptions to handling the egos of older employees. This is particularly true when it comes to funding.
Depending on your age, you may not have much credit history, which will make it difficult to get a significant line of credit or small-business loan. Since you probably don’t have the work experience needed to spur investments from wealthy individuals or venture capital firms, your potential sources of capital stand to be rather limited.
Your approach at this point in time should therefore be twofold. First, open a credit card in order to get positive information flowing into your credit reports on a monthly basis. Secondly, seek assistance from friends and family. Close friends and family members may be able to provide seed money or co-sign an application. Banks put more stock into your personal credit standing than that of your business when underwriting small-business credit cards and loans.
Piggybacking on that last point, you will definitely need help establishing credit if you are under the age of 18, as federal law prohibits minors from having their own credit card accounts. You can, however, become an authorized user on a parent’s account in order to build out your credit reports before you qualify for a student credit card.
Regardless of your ultimate ability to garner funding through school grants, crowdsourcing or other alternatives, you will likely have to get your business rolling with minimal capital until you can demonstrate viable potential or build enough credit standing to warrant large-scale borrowing.
Once you have above-average credit, it will be time to overhaul your company credit card strategy in order to get the best possible collection of terms and reduce financing costs. The best approach is to open a business credit card with lucrative rewards on your biggest everyday expense categories as well as a 0% general-consumer credit card to use for any purchase that you won’t be able to pay off in-full by the end of the respective billing period.
This method of credit card segmentation, known as the Island Approach, enables you to get the best of both business and general-consumer credit cards: unique expense tracking features and business-oriented rewards from the former and debt stability from the latter. While consumer cards are governed by the CARD Act, which prevents issuers from increasing interest rates on existing debt unless an accountholder is at least 60 days delinquent, issuers can arbitrarily jack up business card rates whenever the mood strikes them. Separating revolving debt from ongoing purchases will also reduce your interest-accruing average daily balance, thereby giving you reduced costs to go along with debt stability.
At the end of the day, business success is about minimizing risks, maximizing rewards and setting yourself up for the best possible outcomes. That’s why establishing credit and making do with minimal capital early on are both so important. The former fosters funding options as you get older, enabling you to ultimately garner better terms, while the latter forces you to prioritize and think outside the box -- habits that will pay dividends in the long run.