October 5, 2008
Building Your Business Credit: An Overview of Steps to Get You Started
By
Dezra L. Guthrie
If you have a business, you want to start building your business credit now, rather than waiting for when you actually need it. Building your biz credit takes time and can involve having good personal credit as a guarantee when it comes to building lines of credit or even credit cards. And with lenders tightening up their guidelines as we experience recessionary conditions, all the more reason to make sure you have the time to get both biz and personal credit looking their best.
Now, I’m always seeing where someone on the internet who is selling a program on building business credit is saying you can get thousands of dollars in credit without a personal guarantee (pg). What they don’t tell you is what they are talking about is net 30 accounts, vendor accounts, and some store credit cards. All of those together certainly could equal “thousands of dollars.” And I’m sure that in some cases, somewhere, somehow a credit union or some small local bank that someone has been with might establish a credit line without a pg -- HOWEVER, I would rather discuss the subject according to the most likely scenario. Better to be prepared than surprised. In this article, we will discuss the steps for getting you on your way to establishing your business credit for when you need it. Here are the steps we will discuss:
Establish your company.
Net 30 Accounts
Vendor Accounts
Store Credit Cards
Lines of credit
1. Establish your company
Register your business with the Secretary of State for legitimacy, credibility and to start the two-year process. If you have a company, you need to register it with your Secretary of State. This separates your business from all the fly-by-nights that come and go within a year. It gives your company solidity as an entity that subjects itself to operating within and according to the legal registering authorities. The date it is registered is very important. It starts the two year process in motion. Why’s being in business for two years so important? It is the bench mark that most lenders look for you to be in business for. You can get turned down or approved on the basis of this, or you can be required to give or not give a personal guarantee based on being in business for two years or not. It also adds to a higher credit score, which is what you are shooting for.
Get a business license.
It’s also important to have a business license, if required, depending on the type of company you are operating. Always make sure to check with your local authorities regarding this. Why? When you begin to apply with banks, they will do the white glove treatment on your credit application. They will want you to be operating legally in all aspects and will more than likely check this. You would not want to get turned down for not having a business license.
Open a bank account right away.
And speaking of banks, you want to open a bank account as soon as you register your company. You want to start the clock ticking on establishing a banking relationship. That two year rule tends to also apply when it comes to how long a bank wants you to be with them in order to lend to you.
Have phone service in your company’s name.
Make sure to have your phone in your company’s name - land line, cell, or wireless/internet phone service (if you use internet phone service like Vonage).
Make your place of business be home or an office lease, but not a mailbox.
These days more and more businesses are run from home offices. Most lenders realize this. Mailboxes are fine to use as mail receiving points, but not to replace your actual home office or office lease location. Most lender credit granting software can decipher whether an address is a mailbox store, so using the term “Suite” rather than the mail box # will only make your application appear as if you are trying to pull a fast one. It’s better to honestly state that it is a mailbox for mail receipt, but to use your home address if that is your place of business.
Register with D&B and the credit bureaus right away.
Okay, Dun & Bradstreet (D&B) is the foremost name in business credit reporting, but they are not the only one. Equifax’s Small Business Solutions has been gaining ground on them in recent years. It makes sense to establish an account with all the bureaus. You want to apply for a DUNS # with D&B. Here are your options: (1) apply for a DUNS# and when their sales rep calls you, reject their offer to sign up for the business credit builder program. If you do, you will wait approx. 30 days to get your number. (2) apply for a DUNS# and negotiate subscribing to their business credit builder program. It can be expensive though -- several hundred dollars. But, they will give you your DUNS# within 24 hours and this can speed up the credit reporting process with D&B, as their reps will call (upon your request) and verify your accounts and usually immediately post them to your credit. (3) if you are a government vendor (or planning on becoming one), you can apply for a DUNS# and get one immediately. However, you do not get the benefit of having D&B verify your accounts and get them reported on your credit immediately as their business credit builder program does. By getting your DUNS#, you are setting the stage for what you will be doing next: getting a
Paydex score of “80.” Paydex is D&B’s equivalent of a FICO and because D&B is the foremost bureau for credit, you especially want to reach the “80” goal. You will do this through the steps ahead.
2. Net 30 Accounts
Establish three net 30 accounts. These are stores who will allow you to buy their merchandise, products or services and pay them within 30 days of receiving their invoice. Look for those that report to D&B and the bureaus, but especially to D&B. By the way, World Class Online extends net 30 terms to companies. You can contact us about this at go2worldclass@aol.com.
3. Vendor Revolving Accounts
Establish two vendor revolving accounts. These are stores that establish an account and allow you to make payments monthly on it. Again, you want to make sure that the vendors you patronize actually report to the bureaus, because many do not. Note: World Class Online (www.go2worldclass.com) does offer revolving terms to established companies.
4. Store Credit Cards
Obtain two credit cards from department and home improvement stores. You may be able to obtain these without a pg, but some will require it if you have been in business less than two years or do not have a Paydex of 80. If your personal credit is not good, this is when you will want to start working on improving it.
5. Business Credit Cards
Obtain at least one business VISA or M/C. You are going to be hard-pressed to get a business VISA or M/C without a pg if your company is less than two years old or has less than an 80 Paydex. Even with an 80 Paydex, you will likely be required to have a pg, but you could get a higher limit with both. Note: New credit guidelines may change limits in the future.
6. Lines of Credit
Bank lines of credit are what most companies strive for. No matter what people tell you, again, you will in most cases, absolutely have to pg bank lines of credit. These are high dollar accounts that are granted -- usually $20-200k. Just know that generally, if you qualify by virtue of your combined business and personal credit, your initial bank line will likely be less than what you ask for. And with lender guidelines changing all the time, it is a good rule of thumb to expect less, period.
These steps will get you on your way, but they are not the only things that are looked at by lenders to determine credit granting -- particularly when it comes to applying for high dollar credit lines. Bank ratings are often looked at. Banks rate how much of a balance is kept in an account for how long. This can become a part of your D&B or other bureau report. Number of employees are often considered as payroll is generally the highest expense for most companies. Annual reported profit and loss is vital to major decision-making on high dollar credit lines. Company or corporate shareholders and partner percentages means you must hold 49% interest or more in order to be the one providing the sole guaranteeing.
Although this is far from everything you need to know, it will certainly give you a bird’s eye view of the process of building your business credit. For more information or to take a course and obtain resources, go to www.go2worldclass.com.
Dezra L. Guthrie is the CEO and founder of World Class Educational Services, LLC. She is a seasoned college and online instructor, business entrepreneur, and writer. World Class Online is a division of World Class Educational Services, LLC, and is located at
www.go2worldclass.com. World Class Online offers courses in building your business credit, as well as over 500 other courses. It also offers net 30 for businesses and revolving terms for corporations. For more information, email go2worldclass@aol.com.
