subject: Steps To Build Business Credit [print this page] What are the steps to Building Business Credit? Where Are You? Starting a new business is tricky. First time business owners who need to learn the ropes run most businesses just starting up. A new business and a new owner is a deadly combination fraught with troubles. Without experience, you can make disastrous mistakes. Learning all you can about the way a good business is set up and run will improve your businesses chance of success greatly. Even with study the one thing most new business owners struggle with is starting an independent business credit that protects their own finances.
The best thing a prospective business owner can do is start with a plan. Those who simply jump off the deep end and start up their business without careful groundwork have a much harder time keeping their equilibrium when things are rocky. Most new business struggle in the first five years, so there will likely be rocky times.
Know Where You Stand as a Business
Lenders and vendors, both, will consider your business in various stages. Each stage has its own troubles with getting funding or accounts set up. A well-prepared business owner who understands where they are at and how to circumvent those troubles will be more successful in convincing lenders and vendors of their credit worthiness.
a) At stage I your business is nothing more than a conception. This stage is the least likely to get any backing unless the business owner has a long, and even more importantlysuccessful, track record of previous businesses that all have their own business credit ratings. Bottom line, if this is your first business, lenders and vendors are not likely to provide start-up capital or new accounts.
This is a hard time to get capital, but it is a great time to do the groundwork for later preparation. Set up accounts with all three of the major small business credit reporting bureaus: Experian Smart Business Reports, Dunn & Bradstreet, and Equifax Small Business Financial Exchange.
To accomplish this step you will need to apply for an EIN number from the IRS. You can do it online from their website and it is free to do. You'll get the number as soon as you fill out their form and your business will from then on be a separate identity. You should then put a business plan together that outlines, at least, your first five years. This plan will show potential lenders how serious you are, that you have a realistic idea of what will happen, and how long it will take to show a reasonable profit from your efforts.
The reason a five-year term is needed is that according to the IRS your business must show a profit five out of seven years in order to be a valid tax identity. If it does not manage to show a profit after five years it is a hobby, and you should look elsewhere for income. No lender will seriously consider financing a business that has no hopes of financial stability in that period of time.
b) When you are ready to move on to stage II you will have all of your business paperwork in order. You will have your EIN number to separate your business from your personal expenses. You will be recognized by the small business credit reporting companies, and you will have a valid business plan prepared. With all of those items in order, you stand a slim, but reasonable chance of getting some form of financial backing. Even start up funds, although probably still not all of the money you would require.
c) Stage III business are operating and showing performance capability if not profits. During this time you should be able to prove to your lenders and vendors that the business plan you have laid out is going according to plan. This makes you a much more appealing credit prospect.
d) Stage IV business have a long-term record of operation with successful profits. Businesses at this stage of the game who have followed the rules, and practiced smart business procedures will have no trouble getting financial backing.
How Fast Should Your Business Credit Grow?
Let's face it, not many people start preparing for a business years before starting it. It really does not work that way. It is tough to build credit for something that isn't in existence, has no operating needs, lease payments, bills, payroll to meet, or other financial obligations. Even when you follow all of the appropriate steps above, it will be an uphill struggle. So, when you start a business you have a double-edged sword dilemma. You need money to operate, and that usually means the need for financing; but you do not have the credit to get financing.
If you have startup capital you are in a good position to build a credit score that will help you with future lenders. Startup capital will make it easier to get vendors to open accounts for you as well. If you do not have the initial operating expenses needed for your business and are going to have to rely on vendor accounts it is vital that you are sure you can move items or services fast enough to pay the open accounts. No credit is bad, bad credit is worse. Be prepared to present an accurate business plan, and get help creating a winning presentation to sell to financial institutions and vendors.
Get Help
The smartest move a prospective business owner can make is to seek reliable help in taking the proper steps. Business finance counselors are worth their weight in gold for the experience and knowledge they bring to the table. They will be able to start up the accounts for credit reporting and put your business on the fast track for developing sound credit scores. Your credit counselor can help you prepare a presentation to sell your company to lenders and vendors that will help you get started building credit.
A good credit counselor will show you the way to increase your business' credit worthiness so that you can get greater funding as your needs increase. Most of all, a financial credit advisor will keep you from disastrous missteps that might cost you your business, and maybe even put your family's financial welfare in peril.
Starting up a business is often financially dangerous. If it is done right, the experience can be exciting and the beginning of a bright new future where you are your own boss. Take your time and make sure you make the right moves to insure it is a long and successful future.
