Published By Janet Gershen-Siegel at November 14th, 2017
Do you understand how to fund your startup without giving up equity? As a new organization, by definition, you have no or little commercial credit history, so it can be challenging. When you ask: What is the credit score of a new company? The answer is – it’s usually not so hot. But don’t worry! Here are some ideas which will work.
At some time, you will wish to stop doing so, but in the beginning, you have got to get your startup off the ground, and that means you will require developmental capital. This is cash to do anything from paying for a rental deposit for a business office to buying a set of prototypes for a product line you want to make. If you have respectable consumer credit, then you can take advantage of it to get your startup, well, started.
Once you have established a record and a decent financial track record, then you can work on getting your business line of credit. Having a good personal credit score will go a long way to showing lenders that you are trustworthy and will pay your debts in a timely manner.
What happens if your personal credit is less than perfect? Collateral is essentially when you use something (or various things) of value in order to guarantee your payments. That being said, as you might expect, if you default, you will forfeit your collateral. Yet, it is a decent method of how to bankroll a startup with bad credit. As always, pay off your bills on schedule and fully, and don’t borrow more than what you can pay back easily. After all, now your second vehicle (or something like that) is on the line if you’re late with payments.
Trade credit is when you work directly with a community vendor you use day in and day out and ask them to float you some credit for payments at a (not too far into the future) later date. For a catering company, this could be a green grocer. For a dance studio, it could be the business which cleans the floors or maybe a salon which does the students’ hair and makeup for recitals and shows.
Despite which type of vendor you get trade credit with, be savvy and, naturally, pay them on schedule (and early, if you can swing that). Not only does that bolster and sustain that relationship, it also counts towards your credit score.
This may feel a bit like a no-brainer, but your use of presently existing credit will be precisely what any creditor (trade or financial institutions, etc.) will make use of to decide if you can pay your statements promptly and are, as a result, what is considered a good credit risk. Unexpectedly wasting all of your personal credit at the tables in Las Vegas is not going to endear you to prospective creditors. Startup companies in particular, regardless of how cautious they are, are normally reviewed as the full credit package. That is, both personal and business credit scores are under consideration. If you seem to be a poor credit risk on the personal credit side, you’ll appear, to future lenders and creditors, to be a similarly poor credit risk on the business side of things.
And finally, due to the fact that a startup business and its credit will unavoidably be conflated with the personal credit of its creator(s), take steps to uncouple the two. One of the most significant steps you can take is to request an IRS EIN (employer identification number). By proclaiming to the IRS that your startup company is the real deal, and not just a pipe dream or a hobby, then that helps to signal to creditors that its commercial credit is not the same as your personal credit, and should not be handled like that.
Startups can prosper, even though the odds are long. But if a startup has their own business line of credit, that can make it a bit easier to flourish.