Establishing your business financials to prepare for credit
If you're new to or just starting out in business, consider these approaches to help strengthen your business financials and get ready to apply for credit in the future.
There comes a time in the course of most small businesses's lifecycle when the question is asked, "Do I need credit?" In hindsight, some small business owners will tell you it's rarely a question of "if" but "when." Unless you don't see significant expenses, employees, or office space in your future, it's only a matter of time before you may need credit to grow. To get on track for credit, there are plenty of ways to establish solid business financials and eventually your business's credit profile.
1. Establish your business entity.
To have its own credit, your business should have its own identity Anything from a simple DBA ("doing business as") to a more formal partnership or corporation will establish one. The next key step is to open separate bank accounts in your business's name (see #2 below). Once these are up and running, bringing in revenue and spending your cash responsibly will help demonstrate a sound financial history.
2. Start a banking relationship.
When you go to set up your business accounts, consider sitting down with a banker. Introduce yourself, and ask for a financial review. Be sure to meet with your banker periodically, especially when your situation or your goals change. When the time comes to apply for credit, you'll be able to demonstrate why you need the money and how you'll use it.
3. Consider secured credit to start.
One useful tool is a secured business card or line of credit. This is a credit product typically secured with cash you keep in a savings account. It may seem counterintuitive to tie up your cash instead of spending it on business needs — but using secured credit regularly and paying it off diligently is a great way to establish a credit history for your business. Remember that your personal credit history is also taken into account when securing credit and funding for your business. How you handle your personal credit plays a part in establishing credit for your business as well. Other nonbank options such as community development loans might also be helpful to prepare you for more credit down the road.
4. Use and pay your credit wisely.
Once you qualify for credit, use it strategically and responsibly. Strengthen your credit profile by always making payments on time. And don't forget about your vendor accounts, either. Besides strong credit, what lenders most want to see is a demonstrated ability to repay what you borrow. Consistent cash flow provides proof.
Building your business financials is the first step of your business credit journey. If your first credit application gets declined, don't give up, you can keep building your credit, and apply again in the future. Know where your business can go with different credit products, understand that it may take many steps to get there — and don't wait to get started.
Learn more about the basics for building strong personal and business credit profiles.