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 commonplace as a business credit card or as significant as a loan or line of credit, you’ll have to demonstrate your financial responsibility to a lender. Here, the Commercial Credit Manager for Elevations Credit Union, Brad Wright, shares tips to help small business owners successfully navigate the path of building credit.
Three musts for building credit
1. Keep organized financial records
For any type of lending, financial institutions want to see that you have the resources to pay off debt, and these institutions will 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 need to be a financial whiz to keep these records — Quickbooks or other simple accounting software are designed for the average person to maintain this information.
A common mistake business owners make is thinking their tax return or high checking account balance is sufficient documentation for a bank or credit union to underwrite a credit card or a loan. Bankers want to see what the regular flow of money going in and out of your business looks like, whether you’re making payments on time, whether you have any debts and what your assets are — like equipment or inventory. Tax returns can be outdated information, and checking account balances don’t show the complete picture.
2. Stay on top of payables
Making on-time payments to vendors and suppliers for everyday bills and taxes is important for securing a credit card or loan. Financial institutions are reluctant to lend to businesses that have a history of making late payments.
3. Keep collateral and strong personal credit
Banks and credit unions often want evidence of collateral or assets that could provide additional support should your business not be able to pay off its debt. Equipment, inventory, vehicles and real estate are common types of collateral. Consultants or business owners who don’t have a lot of assets can use accounts receivable (an indication of future cash flow) to help show an ability to repay debt.
In addition, a strong personal credit score can support your chances of getting approved. A pitfall to avoid is letting your personal credit history slide — it can hurt your chances of getting any kind of business financing.
What types of credit are available for small businesses?
Business credit card
A business credit card is not only practical for everyday spending and separating business expenses from personal ones, but it is also a gateway for obtaining larger loans. Proof of timely credit card payments makes a bank or credit union increasingly comfortable lending your business more. Plus, a credit card is an easy way to build credit because there is no special recordkeeping involved. Usually, banks require you to have been in business for two years before issuing you a business credit card.
Business owners can sometimes get around that criteria by doing one of the following:
- Maintaining a consistently high deposit balance
- Qualifying personally for a credit card and becoming a co-signer for the card
What kind of credit limit can you get? By looking at your organized financial records, your financial institution determines an amount you could pay down within a year should you happen to max out your card.
Line of credit or equipment loan
Growing businesses often find themselves needing to invest in assets to scale. Let’s say you’re a doctor and need to buy new equipment but don’t have the cash to do so. To receive an equipment loan or line of credit, a bank will want to see, at a minimum:
- That you can make the down payment without causing a major financial disruption to the normal operations of your business (i.e., the down payment expense shouldn’t cause you to miss payroll)
- That you have the ability to pay the loan back over the equipment’s useful life (“useful life” means the number of years the equipment will be in service)
Once again, it’s important to have an established credit history and financial records showing timely payments to receive these types of loans (e.g., a credit card payment history and on-time payments to vendors). If you’re a new business, you may need at least one year of credit card payment history before you can be considered for larger loans.
To learn more about building credit for your business and for answers to other business banking questions, please contact one of our helpful Business Banking Relationship Managers. We are located across the Front Range, so find a Business Banking Relationship Manager in your area today!