On Your Way: Getting Financing and Establishing Credit for Your Small Business (Part One)

You’ve written your business plan and raised start-up capital on your own. Now, you want to acquire a traditional bank loan or business credit card to get your small business moving forward.

What seems like a relatively simple concept is not always so.

Marilyn Landis, president and CEO of Basic Business Concepts, Inc. (www.basicbusiness.biz) and honored as the 2009 Financial Services Champion by the U.S. Small Business Administration (SBA), offers some insight, information and advice to help you acquire financing and build business credit.

First and foremost, it’s important to understand that there are only two types of business credit — debt credit and trade credit. Debt credit is a traditional bank loan, credit card or mortgage where money is borrowed and principal and interest is paid. Trade credit is where vendors or suppliers will deliver products or materials, invoice your business, and allow 30 days for payment; basically, trade credit is about building sound relationships with the individuals and organizations you do business with.

Second, whether you’re granted a loan or extended credit for your small business depends almost entirely on your personal credit score. This is the determining factor used by banks and companies alike. Moreover, small lines of credit are virtually gone and most banks today aren’t in a position to loan money. That being said, small business owners may want to try their hand with a healthy, small community bank or regional credit union.

“These are truly character loans,” says Landis. “If you can demonstrate a good credit history, as well as good character, you have a chance. If the banks or credit unions can clearly recognize your ability to work and earn a wage, a comfort level is found. If your business fails, they have confidence they will be paid back.”

On an added note, Landis warns against advertising packages, also known as the “We want to do business with you!” hook. “Don’t shop all of the banks, for every time you do, inquiries are made to the three credit bureaus; the more inquiries made, the lower your credit score. Plus, it’s a lot of wasted time and energy. Instead, do your research and select the bank you are most certain will work with you.”

An alternative option for small businesses open six to 12 months is to look to private companies focused on helping small businesses with financing. “Private companies are coming up with solutions,” adds Landis. “Currently there are five or six new online lenders, such as On Deck Capital (www.ondeckcapital.com), one that Basic Business Concepts has worked with. These solutions, as people find out about them, are growing and expanding, and eventually will have a broader access.”

Another way to get assistance with financing and to help establish credit is to apply for a personal credit card and use it strictly for business. But, before you do, be sure to pull your credit reports from all three bureaus. Then, contact the credit card companies you are interested in applying to and ask them the minimum score they require and what credit bureau they report to. If they will not give you this information, think carefully about applying. You may want to reconsider applying on your own if you’re not sure you will be approved. The application process will lower your credit score with each inquiry.

Now, if you know your score isn’t high enough to qualify, look to a guarantor (co-signer) for assistance. If this isn’t a possibility, contact a reputable organization, such as FICO® (www.myfico.com), to steer you in the right direction on repairing your personal credit. This is a very important first step, for it will take you closer to being able to better finance your business and establish excellent business credit in the future.

Marilyn Landis Pictured Below:

Visit Nolcha.com next week for part two of “On Your Way: Getting Financing and Establishing Credit for Your Small Business.”

By Dawn K. Terrick, president and creative director of DKT Communications, Inc., a full-service custom publishing and marketing communications company.