Published By Janet Gershen-Siegel at October 30, 2017
Do you recognize how to get small business funding for startups? As a new company, by definition, you have no or little business credit history, so it can be difficult. When you ask: What is the credit score of a new business? The answer is– it’s usually not so hot. But don’t worry! Here are some ideas which will work.
Eventually, you will need to stop doing so, but initially, you have got to get your startup off the ground, which means you will need to have developmental capital. This is resources to do anything from paying a rental deposit for a workplace to purchasing a set of prototypes for a product line you want to make. If you have decent personal credit, then you can tap into it to get your startup, well, started.
Once you have established a history and a decent payment track record, then you can deal with getting your business line of credit. Having a decent consumer credit score will go a long way to demonstrating to financial institutions that you are trustworthy and will pay your debts in a timely manner.
What happens if your consumer credit is not so hot? Collateral is basically when you use something (or a number of things) of value to guarantee your payments. Nonetheless, as you may expect, if you default, you will relinquish your collateral. However, it is a good method of the way to bankroll a company with bad credit As always, pay off your invoices on schedule and completely, and don’t borrow beyond what you can repay comfortably. 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 local 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 that cleans the carpets or maybe a salon which does the students’ hair and make-up for recitals and shows.
No matter which sort of vendor you get trade credit with, be responsible and, naturally, pay them punctually (and early, if you can swing that). Not only does that bolster and sustain that relationship, it also counts to your credit rating.
This may feel a bit like an obvious fact, but your use of currently existing credit will be precisely what any creditor (trade or banks, etc.) will use to establish if you can pay your statements on schedule and are, as a result, what is considered a good credit risk. All of a sudden blowing all of your personal credit at the tables in Las Vegas is not going to endear you to potential creditors. Startup businesses especially, irrespective of how meticulous they are, are normally reviewed as the full credit package. That is, both personal and business credit scores are under consideration. If you seem like a poor credit risk on the consumer credit side, you’ll appear, to future lenders and creditors, to be a similarly poor credit risk on the business side of things.
Develop your business under IRS rules
And lastly, since a startup firm and its credit will unavoidably be conflated with the personal credit of its founder(s), take steps to uncouple the two. One of the biggest steps you can take is to make an application for an IRS EIN (employer identification number). By announcing to the IRS that your startup business 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 treated as such.
Startups can be successful, despite the fact that the probabilities are long. But if a startup has their own business line of credit, that can make it a bit easier to thrive.