Published By Janet Gershen-Siegel at August 31st, 2017
So, you’re finally doing it. You took the plunge and you started your own small business. But there is so much you need! Whether it is renovations for your location or payroll or the ramp-up costs for getting manufacturing started, all of those things need money.
And you are not made of money.
But your business is new, so its credit score is not so hot. As a result, you are probably wondering how to finance a business with bad credit.
But let’s step back a little, because you should also be thinking about where to establish business credit.
When you are looking at your business credit score vs personal credit score, they should not be identical. How do you do this?
The first thing you need to know is how lenders are thinking. Banks and the like often request personal guarantees because they know you but not your business. And your credit score has, too, probably been around a lot longer than your small business’s has.
Plus small, new businesses often see a commingling of funds with personal accounts. If your business is not bringing in the cash immediately, an owner will often float a loan to the business, with or (more commonly) without interest.
This commingling of funds is not doing you any good when it comes to trying to get a credit line. It is understandably creating confusion with lenders. And so they ask for a personal guarantee because, to them, you and your business are one and the same.
The best way to communicate to all and sundry that you and your small business are not the same is to create a separate business entity. The Internal Revenue Service understands what you need. Your first stop is on their website, to get an EIN (your company’s identification number for tax purposes).
Apply online after you figure out your eligibility. All you need to know are the answers to two questions: does the person applying online have a valid Taxpayer Identification Number (SSN [Social Security Number], EIN, or ITIN [Individual Taxpayer Identification Number])? And: is your principal business located in the United States or in U.S. Territories? If you can answer ‘yes’ to both questions, then you are eligible.
The next step is to choose the type of business entity you want: sole proprietorship (that’s just you); partnership (you and others, and not necessarily with equal shares in the business); corporation (you own shares in the business); or a limited liability corporation (LLC).
Yes, really! Trade credit is one of the easiest types of credit you can get. It is a valuable way to grow your small business’s credit score and enhance its reputation. Basically, this means you work with your regular vendors about altering your payment terms. Find out if your coffee supplier, or the place where you buy toner or plumbing supplies will give you better payment terms. These are like small loans, where you get an extra month or more to pay for your everyday essentials.
An added bonus to trade credit is that it enhances your community. You are supporting a local business, and it may be a small business just like your own. When you have a great business credit score and are successful, maybe consider paying it forward and granting a little trade credit of your own, if that’s appropriate at all.
Now, you do not want to be providing a personal guarantee forever. Personal guarantees put your own assets on the line in the event that your small business falters. However, until your business has been established and its credit is good, lenders will be looking for personal guarantees. Rather than a loan, start with a business credit card, as those are easy to use.
Always make sure, whenever you get these types of business credit cards, that they have a personal guarantee removal feature built right into them. Do not use more than maybe one third of your total available credit on them. And, as with all forms of credit, make certain to pay on time, every single time. If your cards with personal guarantees go well, then your lender will know your payment history well, and will be far more likely to provide you with a business loan without a personal guarantee if you come asking for one in a few years.
As with all advice regarding building small business credit, one of your greatest assets is patience.