How to Establish Business Credit in 90 Days
Author: Paul D. McDonald, MBA
Business Credit--every small business needs it at some point in time. Unfortunately, the age-old rule so often seems to be true--the only way to qualify for a loan is to prove that you don't need it. But that isn't necessarily the case... here are some simple strategies that will help any small business move toward a good, strong credit relationship with a bank.
Be a Good Customer of Your Bank
Remember that if you apply for a business loan at a bank where you have your business checking account, the first thing that the loan officer will do is call up your checking history. If it is constantly in a state of overdraft or is very low, they are unlikely to consider a loan proposal any further. However, if your account shows a regular inflow of cash from many customers, that is much more appealing to a loan officer.
Have Great Financial Records
Get your financial records in shape. Have a nice summary booklet prepared to show to your banker. Include a brief confidentiality statement. Also, have a brief description of what you do, how business has been, and what your future plans are for your business. Include some photos of your business and work. While these measures aren't really required for a bank loan, they do show that you are serious about your business and help the loan officer to more understand your business.
Letters of reference also help a lot. Ask a few of your best customers to write letters for you to include in your record book. Ask them to state that they intend to continue to do business with you in the future, and at what level they expect to do business. Letters like this will go a long way to convincing a lender to work with you to set up a line of credit.
Establish Secured Loans
This method is widely taught to help people establish credit. You'll need about $1,000 to start--go to your bank and set up a $1,000 Certificate of Deposit (CD) and use that CD to secure a line of credit for the same amount. You can then use that money borrowed to complete the same move at a second, and then a third bank. You'll have $3,000 borrowed at with $3,000 on deposit to secure those loans.
Pay the loans as agreed and in about 90 days you should have a good working relationship and history with three banks for your business line of credit.
If you don't do anything else, do this step. If you want to improve your position, start with more than $1,000. Establish a Floor Plan with Wholesale Suppliers I'll be the first to admit that this isn't always the best idea. In fact, I know of several businesses that went completely under by having too much money and profit tied up in their ""floor plan"" of products with their vendors.
That's the key phrase, though... ""too much."" If you are in a business that sells products that can be acquired by a floor plan, those items in your inventory are used to secure the credit. While I don't recommend having 100% of your inventory on a floor plan, it is a good idea to establish some credit with one or more wholesale vendors.
Buy a Company Car on Credit
Sure, if you have cash then sometimes it is a good idea to pay in full for a car... but this isn't about being debt-free, it's about establishing credit. Get a company car from a dealer and arrange the financing through your business. Many automotive financing companies and banks will issue business loans for automobiles because the loan is secured by the vehicle.
Include a photo of the vehicle in your financial statement.
Get a Line of Credit BEFORE You ""Need It""
This is the most important step. You have to be prepared in advance. Establish business credit before you need it for your business. Have a strategic plan to establish credit for your company and work that plan. Don't be afraid to meet with your banker and discuss the plan--their job is to loan money to good credit-worthy low-risk businesses.
Work with More than One Bank
In his book Sharkproof, author and businessman Harvey MacKay explains one of his business mistakes. He had given all of his banking business to one and only one banker for many years. When the market turned hard on the bank and on his business, his one and only bank had pulled his line of credit and it severely hurt his company's operations.
He continues to explain that he ""should have taken his own advice"" and spread his business around to several banks. While you may not have a company the size of Mackay Envelope Corporation, it's still good advice for something as critical to your business as banking relationships--spread the business around.
Refer Business to Your Bank
When you go about your daily business, it is not uncommon to find people who have moved to the area or are unhappy with their current bank. Recommend your bank to them. Write them a great note and tell them how you really do like your bank. Include a business card of your banker for them to contact. You then should send a copy of that note to your banker with another note attached stating that you are truly happy with them and that you are always looking to help their business as well as your own.
Is this sneaky? Maybe. Do it anyway--your banker will love you for it and will remember you when the time comes for you to increase your business with that bank.
Not every strategy listed here will work for every company and with every banker or lender. Nothing works 100% of the time, but these eight ideas are enough to get any profitable business started toward establishing good business credit.
About the author: Paul D. McDonald, MBA, is in business in Overland Park, Kansas. He specializes in Life Insurance, Annuities, and Long-Term Care Insurance. He welcomes contact at 1-877-711-1264 (phone or fax). He maintains several financial and business websites at http://seniorfinances.blogspot.com/, http://smallbizfinance.blogspot.com/, and http://small-biz-center.blogspot.com/.