Business joke: create great credit for high start-up costs
For many entrepreneurs, running a business is no small feat. According to 2021 research Led by the Shopify retail platform, small business owners spend an average of $ 40,000 in their first year. This expense rises to $ 60,000 when the owner has between one and four employees.
However, some businesses need even more capital to get started. For example, you might want to open a restaurant and need to purchase all the equipment and accessories. Or maybe you want to buy, renovate and transform a property. Either way, if you don’t have the cash on hand or the investors are willing to provide the cash, borrowing may be the best option to explore. If so, you will need your credit to be particularly attractive to lenders.
Here’s how to prepare your credit for your big business adventure.
1. Prepare your personal credit
If this is your first foray into business borrowing, you won’t have a business credit report. This means that the information that appears on your consumer credit report will be used to determine risk.
Since lenders take on more risk with larger loans than with smaller loans, it will be especially important to prove that you are a regular and responsible borrower.
Extract the top three credit reports from TransUnion, Equifax, and Experian. The best place to get them is from AnnualCreditReport.com, which offers free access to each of your reports once a year, although due to the pandemic you can currently get free weekly credit reports. Read your credit reports carefully. Everything must be precise and positive. If you see negative information that is incorrect, file a dispute with the credit reporting agency. They have 30 days to investigate your request, so don’t delay if you are going to be applying for credit products soon.
You will also want to have a lot of positive information on your reports. A thin credit report, which means you have few or no listed accounts, is doing you a disservice. A lender will not know what kind of risk they are taking with you as a borrower.
What’s most important to lenders, according to Everett Sands, CEO of Lendistryis that you are used to paying your debts in full on past obligations. Without it, you will need a clear and reasonable explanation of past credit issues.
“Revenue history supporting repayment capacity, marketing and / or sales data to support future projections or future contracts executed” are also key elements of qualification, Sands said. “The most important thing for a lender is the borrower’s ability to repay the loan. The stronger the applicant’s credit profile and financial information… the more likely they are to receive the loan.
So if you have inactive credit cards, use them to make purchases and then pay the bills on time and in full. No accounts? Open one or two credit cards and use them the same. Building credit takes time, so take this step well in advance.
You’ll get a FICO score after at least one account is open and active for six months, although a VantageScore can be generated within a month or two after an account is on your record. Both scoring systems measure your creditworthiness based on data from your credit reports. The numbers range from 300 to 850, and you’re more likely to qualify for a large loan when your scores are in the mid-700s and up.
2. Understand your business credit
You won’t have a business credit report until you start your business and creditors and sellers provide the information to business credit bureaus. These reports are similar to your consumer files, but are more inclusive, complex, and specific to the financial health of your business.
The most common commercial credit reports are produced by Dun & Bradstreet, Experian Business and Equifax Business. Your business credit reports will contain the information necessary for a lender to make an informed decision about the health of your business and your credit history. For example, it will show your supplier payment and lender repayment history, current bank balances and business activity, assets, inventory, and company sales. If there was a lawsuit, it would show liens, judgments, and bankruptcies.
As with lenders who assess your consumer credit reports, the most important factor will be your payment history. If you’ve borrowed and paid on time and within the terms of the contract, issuers can see that you are a responsible person to do business with. The longer you have had and used credit products, the more confidence a lender will have in you as a business owner.
On top of that, Sands says, your past income or your predictable future income forecast will be assessed, as will your ability to show your experience in the industry or company you are in.
3. Develop healthy relationships and relationships
You will also need to demonstrate that you have enough money to handle payments on the credit product you want.
A business that you have had for a long time will help you qualify for a large loan, but without it, a strong income base and collateral will definitely put you in a positive position. What will get in the way? Debt. If you already owe a lot of money, these monthly payments will reduce the amount you can borrow from the new lender.
The lender will assess your debt-to-income ratio (DTI) when deciding if you qualify for a loan. Your DTI compares your total gross monthly income to your monthly payments from creditors. So if 40 percent of your gross monthly profits are already pledged to creditors, your DTI is 40 percent. This ratio helps lenders know if you can afford to accept payment. The lower your DTI, the better, so before you apply you may want to pay off your current financial obligations first.
According to Josh DeShong, founder of Dallas-based real estate investment company Trelly, there aren’t always strict rules about eligibility for very large loans. Often it is about building strong relationships with the right financial institution.
“Regional banks and credit unions tend to measure each investor differently,” says DeShong. “My credit score could go up to 500 and my bank will still lend me money.”
Another Texas-based real estate investor, David Phelps of Freedom Founders, stresses the importance of assets when approaching banks for huge loans. For example, a million dollar loan may be achievable when you have $ 15 million in assets. If you don’t have that, says Phelps, “the debt-to-income ratio should be strong enough for the lender to say, okay, the risk is good.”
4. Seek funds from the right sources
Ready to start applying? There are several types of sources of capital. Among them :
- Small business cards. Small business credit cards tend to have high credit limits, especially when compared to personal credit cards. If you get a charge card, there is no preset limit, so you can charge almost anything, but you have to pay the entire bill within 30 days. Some payment cards also have installment plans, such as the American Express® Business Gold card which offers a “pay over time” option.
- Commercial lines of credit (LOC). These flexible loans work like a credit card. You can borrow up to a limit during the “drawdown period” and then make at least interest-only payments during that period. If there is a balance left at the end of the drawdown period, you will pay off the debt as you would an installment loan. The lender will look at your credit score, annual income, and length of business (usually six months is the minimum) to determine if you qualify.
- Commercial loans. You can get business loans from many different sources, such as Small business management, conventional banks, credit unions, online lenders and microlenders. With a business loan, you borrow a fixed amount and send regular monthly payments until the loan is paid off. The largest loans with the lowest interest rates will be available to you if you have been in business for a few years and have good credit.
Once you have the credit products, use them to your advantage. Leveraging a bank’s large assets is a great strategy, but it’s just the start. Because all of this borrowing and repaying activity will end up on your credit reports, only withdraw what you can and will repay. Then bigger and better credit cards and loans will be available to you and your growing business.
The bottom line
Ultimately, remember that banks and other credit providers want to lend money to qualified borrowers. It’s part of their business model, after all. So act now to become the most attractive borrower you can be. As a startup, you may need to start with low limit cards and small loans and build your creditworthiness, but with time and a strategic approach, higher limits and loans will be within reach.