Last week I applied for another line of credit from CapitalOne, this is a line of credit against my business, not personal. Since I am trying this in an attempt to build the business credit I have been researching the topic for a couple of days. Below are some of my initial observations.
- Business credit can be established faster than personal credit. Credit history does not seem to go as far (7 years) as personal credit. Creditors basically look at several reporting agencies (D&B the most common) to determine if the business is credit worthy or not.
- Before starting the process make sure you have two things: a bank account and a D&B number
- Once you have a bank account there are several ways you can start to build credit. The most direct one is to ask for a line of credit (10,000 or 15,000). If your business has absolutely no credit the creditor will usually ask for your personal info as well. In this instance your personal credit is probably the basis why they agree to open a line of credit for the business.
- The most cumbersome recommended way (at least by me) is to build the credit slowly. Slowly in business credit is maybe 6-12 months. First make a couple of purchases with your business debit card in places that report to D&B (Home Depot, Sam’s, Lowes, basically big chain stores to be safe). Those vendors will report your purchases and payment history to D&B. You are basically building your business credit history.
- After 2-3 months of purchases you can use that credit history to request either a credit card or line of credit from one of those same stores. Larger purchases are probably required at this point depending on what is your goal for the credit. This step is basically the same as step 4 but with larger purchases and lines of credit established at nationwide stores your business is demonstrating to the reporting agencies that it is responsible with credit. This step should take between 3-6 months.
- Finally, and if you have had no issues with payments, your business credit is probably solid enough to request lines of credit or loans from lenders directly.
Credit can be a double edge sword. It seems counter-intuitive that in order to build credit your business has to essential either spend money or go into debt but that is the system. As always credit can supplement your cash flow but it can’t replace or hide negative cash flows in your business so it must be used wisely, just as personal credit.