How to Establish Business Credit in Tough Financial Times

As I talk to people starting a business, I often talk to them about starting slow, to build up business credit, rather than using personal credit for startup. They want to know why personal credit isn't enough. Personal credit is the credit from your personal buying and spending habits. But using your personal credit for business can be a problem, for several reasons:

• Your personal credit may not be good enough to get a business loan or line of credit. Business credit standards are higher, particularly in these difficult financial times, so using personal credit may not be the best way to get funds for your business.
  
  
• Using personal credit for business can put your personal credit in jeopardy. If your business fails to pay back its bills, your personal credit rating can be affected.

Consider the 4 C's of Credit (Character, Capacity, Capital, and Collateral) and how they can help you get a business loan more easily with business credit:

Character Character relates to how good a "financial citizen" the person or business is. If you build up good business credit, your personal credit "character" won't be as much of a factor in finding funding.

Capacity
Capacity relates to the ability of the entity to pay back the funds through operations. The longer you are in business, the more you can show your capacity for paying back the money you owe. The operations of your business can help you achieve a high business credit rating.

Capital
Having capital (cash and other assets) is important to getting a business loan. Building up capital by running your business economically and buying assets will help you secure more business credit.

Collateral
If you can use business, rather than personal assets, as collateral for your business loan, you will be able to keep your personal assets less at risk. You can also avoid the problem of having a personal guarantee for the business loan.

So, as soon as you start your business you should work on getting a business credit record. Here are some suggestions for building up your business credit:

• Get a business credit card and use it for your beginning business purchases.
  
• Establish trade credit with vendors, for equipment and office supplies for example.
  
• Get a bank account and operate your business as a "real" business, paying bills through this account rather than your personal account.
  
• Set up a formal business type, such as a limited liability company (LLC) or a sub-chapter S corporation, so it is clear that your business is a separate entity from your personal finances.

Tomorrow, I will talk more about getting a credit report for your business, and you will be able to see the factors that affect your business credit score.