The Credit Conundrum: Building Business Credit


Getting credit is hard to do. It’s by far the biggest challenge for young businesses --and not getting any easier.  Over the last decade, lending for startups has fallen to 22% in 2016 from 33% in 2008.1  Small dollar credit, i.e., a credit line under $100,000, is especially difficult to obtain, according to the Small Business Credit Survey Report on Startup Firms, 2016 (SBCS).

Indian woman entrepreneur sits cross-legged on a wood floor, resting her head on her left hand, elbow on her left knee, and stares at the bills sitting in small stacks around her on the floor in an empty room.

“Access to credit is especially tough for entrepreneurs in business less than 3 years,” commented Michael Battagliese, SVP and Head of Payment Solutions at Bank of the West. “Most banks require at least that before approving a loan or line of credit. With roughly 25% of all U.S. companies falling short of this benchmark that adds up to a lot businesses struggling to get what they need. You have to get creative.”

And many do. Community Development Financial Institutions (CDFIs) are non-profits that offer micro loans to new businesses. There are also Small Business Administration (SBA) loans, and many entrepreneurs turn to business credit cards. However, even those that succeed in getting credit often receive much less than what they expected. The reason? Insufficient credit history.2 That’s the conundrum—you need credit to get credit. But there are ways to build your credit.

Here are some best practices to start building your business credit beyond simply paying bills on time:

  • Get incorporated (or form an LLC) to separate your business from your personal
  • Obtain a federal Employer Identification Number (EIN) so you have a business tax number
  • Apply for a business credit card and make sure the issuer reports it to the credit bureaus
  • Open a business bank account and use it to pay all bills, including your business credit card
  • Set up a dedicated business phone number and list it somewhere it can be found
  • Establish a line of credit with vendors or suppliers and have them report it

Personal credit vs. business credit

However, if you are starting from scratch on business credit, lenders typically rely on the owner’s personal credit score. Business credit eventually gets you access to a greater choice of credit options.

In the case of business credit cards, for example, many financial institutions may offer you small dollar credit limits – as little as $2,000-$10,000 – to start off. If you maintain a good FICO score, you might see that get bumped up over time to $15,000-20,000.

Even so, these cards are much more difficult to get than personal credit cards. Credit card issuers scrutinize personal credit to approve and set limits on your credit card. They’ll look at:

  • Your personal credit as guarantor on behalf of your business
  • Your individual credit (FICO) score
  • Your lending history showing responsible management of any personal debt

All credit is not created equally

Why not use a personal credit card? Even though they are both based initially on your personal credit, only business credit counts toward your overall business credit profile. And only if the credit card issuer reports it as business activity directly to one of the credit reporting agencies—not all do.

“It’s not widely known, but not all credit card issuers report to the credit bureaus,” asserted Battagliese. “Make sure to ask: Will this card help to build my business’s credit history?”

Using a business credit card enables a business to establish a pattern of consistent payment history as well as enjoy the features and benefits that come with a business credit card program. It typically pays off in the long run as a base to more credit and financing options in the future.

Credit where credit is due

For startups, credit can be a big challenge. For solo entrepreneurs, it’s incredibly important to have excellent credit to fund your business idea—even with a non-traditional source of capital. Good credit is essential for building capital when:

  • Your business is less than 3 years old
  • You don’t have much of a credit history, such as no mortgage, loans, etc.
  • You’d rather not use personal funds to finance or collateralize your business
  • You’re looking for more funds to expand and grow your business

Build a banking relationship

There’s no hard and fast rule for getting out of credit purgatory. However, it’s may be to your advantage to build a relationship with your bank. They often bundle business credit cards with business checking accounts, merchant services and other features or services to create an attractive package. When you buy into a bundle, you forge a de facto relationship with your bank.

“Your larger banking relationship should be taken into consideration when it comes to assessing your credit needs,” commented Battagliese. “Don’t be afraid to ask your banker: How can you help me grow my credit profile? What can you do to help my business get there?”

Excellent personal and business credit are the underpinnings of most successful businesses. Research options, talk to lenders and your bankers to find out what they recommend you do specifically for your situation to help build both the credit and the business you are aiming for.

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