One of the toughest parts of launching a startup or growing a small, home-based business is obtaining financial credit.
It’s tougher than you might think. A 2015 survey by business credit advisor Nav found that 1 in 5 small business owners had been turned down for business credit between 2010-2015, and 43% had been rejected more than once.
You might wonder: why is it so difficult to get approved for business credit?
The reasons vary, but surprisingly some of the biggest roadblocks to business credit lie in simple documentation errors and misunderstandings about the need to build credibility.
What do we mean by credibility?
Think of it as your company’s “credit-ability”. In the same way that you will be credit-checked upon applying for a loan for, say, a car or a new kitchen, your company will be verified for any business loans you wish to take out.
This verification process utilizes data held about your company, ranging from the date it was founded, to P&L, and even your office address, to evaluate whether you can be considered a solid and trustworthy recipient, and how likely you are to pay back the loan on time.
As noted by Levi King, CEO of Nav, typically, commercial credit decisions boil down to three main questions:
- How long have you been in business?
- Does your business earn enough revenue to repay the loan?
- What does your credit history say about your track record of paying back your business’s bills?
Before you even begin filling in application forms, you need to start diligently building your business credibility and demonstrating to potential lenders that you’re worthy of credit. It will save a lot of time and frustration later on.
Basic Steps to Build Business Credit
- Incorporate your business. In order to get a credit history for your business, it needs to be registered as an LLC or a corporation. According to Experian, this protects your personal assets by legally separating your business and personal profile, including your personal credit history. It’s an effective way of proving that your business is a separate and thriving entity.
- Get a federal employer identification number (EIN). You’ll need this number for all federal tax filings and to open a business bank account.
- Ensure your documentation is correct. Use your full legal business name on all documentation and ensure it matches across the board. It’s strange but true — businesses do use incorrect details in their documentation, which might be a simple spelling error, and as a result they can be refused credit.
- Use a corporate address and a landline phone number. Having a commercial address and a local phone number (that’s not a cell) will increase your chances of getting approved for credit. In fact, some lenders insist on it. If you don’t have a full-time office space, you can use a virtual office address and business phone number (we recommend using a registered agent to handle all SOP mail).
- Open a business bank account. Make sure you open an account in your business’s legal name and remember to steer any transactions for your business through this account. Again, ensure all company details are correct.
- Start working with creditors. According to Nav, one of the easiest ways to build business credit quickly is to maintain and nurture good relationships with your suppliers and vendors. Work with one or more industry-relevant vendors to establish a positive line of credit, and although it should go without saying, always pay your bills on time. If you don’t, it could have a negative impact on your credit rating — not to mention your supplier relationships.
Once these steps are in place, you can begin to build your business credibility. Don’t expect it to happen overnight; lenders will often look at multiple factors when deciding whether to extend credit to your business, such as a P&L statement, business plan, and six or more months of business bank statements. Naturally, this all takes time to build up and if you don’t already have these in place, your application will likely be rejected.
It’s important to build trust in the early stages, as this leads to credibility not just with lenders, but with other important parties too — such as suppliers, clients, and future partners or investors. Your credibility stretches across your brand, and all of these credit-building steps will help build strong foundations for a healthy enterprise with a positive outlook.