Many small businesses start out using personal credit to secure funding, as in the case of sole proprietorships and partnerships.
In the beginning, cash may be tight and the business owner may find himself in a catch-22. Many traditional lenders are reluctant to loan until you've proven yourself with a strong credit history, but it's difficult to develop a good record when no one will lend to you in the first place. So, how does a business build credit?
Ideally, this will show, over time, a cash flow that will support a business debt.
Secondly, register your company with a business credit bureau, such as Dun and Bradstreet; this is free and can be done online. The next step is to find suppliers (creditors) that are willing to grant credit without a personal credit check or guarantee. You may have to initially use a personal credit history to qualify, but you can ask that all billing be done under the business name. When you find a creditor willing to grant credit, say for 30 to 60 days, ask them to report their payment experiences to the credit bureau to help build your profile. Not all companies will report their trade experiences to the bureaus, but you can usually find one or two that will.
It would be a good idea to also apply for credit with several specialty stores that might be more flexible, such as gas stations, office supply, and cell phone companies. Always apply in your company's name. Initial credit lines could be as low as a few hundred dollars, but it's a start. Make small charges each month and pay in full.
In the meantime, it is important to keep your business plan and financial statements updated as they are required by many credit grantors and institutions. As in your personal life, manage your debt so you don't fall into trouble making your payments.
It is important to remember that you can't build business credit overnight. It is something you need to think about from day one. Even if you don't need the credit right away, you never know what growth opportunities may pass you by if you don't have access to credit.
Ruth Bellissimo is a business counselor in SCORE's Tip of the Mitt chapter, and owns Sunnybank Assisted Living in Petoskey and Charlevoix. The local SCORE chapter's "Scoring in Business" columns appear the second and fourth Wednesdays of each month on the Business page. The SCORE chapter can be emailed at firstname.lastname@example.org. Mail can be sent in care of the Petoskey Regional Chamber of Commerce, 401 E. Mitchell St., Petoskey, Mich. 49770.