Published By Janet Gershen-Siegel at September 25, 2017
Do you know how a new business can acquire a business line of credit? As a new business, by definition, you have no or little business credit history, so it could be difficult. When you ask: What is the credit score of a new business? The answer is – it’s usually not so hot. But you can get past that. Here are some ideas which will work so you can get credit for a new business.
At some point, you will want to stop doing this, but at the beginning, you have got to get your new business off the ground, and that means you will need developmental funding. This is funding to do anything from paying a rental deposit for an office to purchasing a set of prototypes for a product you want to make. If you have decent personal credit, then you can tap into it to get your new business off the ground.
Once you have established a history and a favorable payment reputation, then you can work on getting your business line of credit. Having a good personal credit score will go a long way to showing creditors that you are reliable and will pay off your debts on time.
What happens if your personal credit is not so hot? Collateral is essentially when you use one thing (or several things) of value in order to ensure your payments. However, as you might expect, if you default, you will lose your collateral. Still, it is a good technique of how to fund a business with bad credit As always, pay off your bills on time and in full, and don’t borrow more than what you can pay back comfortably. After all, now your second car (or something like that) is on the line if you’re late with payments.
Trade credit is when you work directly with a local vendor you use all the time 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 supermarket. For a dance studio, it could be the company that washes the floors or maybe a salon which does the students’ hair and makeup for recitals and shows.
No matter which kind of vendor you get trade credit with, be responsible and, of course, pay them on time (and early, if you can swing that). Not only does that reinforce and maintain that relationship, it also counts toward your credit score.
This may feel a bit like an obvious fact, but your use of currently existing credit will be what any creditor (trade or banks, etc.) will use to ascertain if you can pay your bills on time and are, therefore, what is considered a good credit risk. Suddenly squandering all of your personal credit at the tables in Vegas is not going to endear you to future lenders. New companies in particular, no matter how cautious they are, are generally evaluated as the full credit package. That is, both personal and business credit scores are under consideration. If you look like a bad credit risk on the personal credit side, you’ll appear, to future lenders and creditors, to be an equally poor credit risk on the business side of things.
And finally, because a new business and its credit will inevitably be conflated with the personal credit of its founder(s), take steps to separate the two. One of the most significant steps you can take is to apply for an IRS EIN (employer identification number). By declaring to the IRS that your new business is the real deal, and not just a pipe dream or a hobby, then that helps to indicate to creditors that its commercial credit is not the same as your personal credit, and should not be treated as such.
New ventures can succeed, although the odds are long. But if a new business has their own business line of credit, that can make it a bit easier to succeed.