Each year, millions of new small businesses are formed, but only a small percentage actually make it past the first 12-months. Establishing small business credit for your venture is a critical aspect of building a strong financial foundation that can last the test of time. The good news is that that are a number of small business loans and other programs available so that every business has a fighting chance. Why is a business line of credit the ticket to longevity? Let’s explore this further.
THE IMPORTANCE OF ESTABLISHING SMALL BUSINESS CREDIT
It’s a common misconception that the only way to start a small business is by tapping into personal savings or borrowing the money from friends and family. While these methods may seem noble, they can easily put a person at risk of losing personal assets or, worse yet, burning a bridge with a loved one. Instead, it’s a much less risky choice to take out a small business loan to fund a business dream. A small business line of credit:
HELPS WITH OBTAINING SMALL BUSINESS LOANS
Lenders generally look at a couple of factors when determining if they should lend money to a small business: equity and cash flow. If a business already has a track record of paying their small business loan payments on time and they have used this money to build equity, they can get another small business loan in the future with little problem.
PROTECTS YOUR PERSONAL FINANCES AND CREDIT HISTORY
Taking out a small business line of credit removes the personal income risk, somewhat. According to blue vine, it is important to protect your personal finances and credit history by keeping both separate. This establishes your business as an independent entity, and makes things much less complicated at tax time.
MAKES YOUR BUSINESS APPEAR AS VIABLE IN THE INDUSTRY
A business line of credit says, “Hey, world – here I am!” Your business becomes real and takes on a life of its own when it has a financial profile and credit history. A small business loan belongs to the business and makes it more viable in the industry, making it more competitive too.
HOW TO ESTABLISH BUSINESS CREDIT FOR YOUR SMALL BUSINESS
Now that you understand how a small business loan can support the sustainability of your business, here are 10 steps to establish a small business line of credit.
- Establish your business entity (incorporation), name, and web domain
Your business needs a separate entity, therefore you will need to create a name (think carefully and check to see if anyone else has used it first), then you will want to purchase a web domain so no other business can nab it. Lastly, establish the type of business you have. A solo-enterprise is fine for now, but at least choose a limited liability corporation (LLC) to protect your personal finances. Bizfilings advises that this legally separates the business from the owner.
- Get a federal employee id number (EIN) for your business
You will want to register your new business with a federal employee identification number (EIN) for tax purposes. Use this number for all business transactions moving forward, instead of your social security number.
- Open up a bank account under the business identification
Now that your business is recognized as a legal entity, it’s time to develop a positive business practice by establishing a bank account for your business. Use your EIN and provide the bank with all other demographic information. A small savings and checking account will suffice for now.
- Apply for a business credit card and vendor accounts
Your business may be eligible for business credit cards to establish a credit history, so you will want to take advantage of this. Apply for credit with some vendors you regularly use too.
- Choose the right lending source and type of business financing for the purpose
Start exploring additional lines of business credit that may be a good match for your business goals. For example, if you are trying to build equity, you will want to invest in business equipment with easy repayment terms.
- Check your small business credit score with all three credit reporting agencies
Once you have been in business for a few months, and you have paid your new vendor and credit card accounts on time, it’s time to check your business credit score. If you are in a range of 650 or above, you have a good chance of getting a small business loan (but don’t worry if you are below that score as there are special bad credit small business loan programs too).
- Apply for a small business line of credit for your business
Select a reputable company like United Capital Source for your small business line of credit. You’ll have the benefit of learning about a wide range of business loan programs and other lines of credit with flexible repayment terms and low interest rates.
- Provide your business information, including references and revenue reports
Gather up all your financial reports, using your financial software or your accountant. Bring in a copy of your recent profit and loss statement, and any credit references you have. You can even complete this information online securely.
- Work with the lending agent to obtain the perfect financing for your business
Explore all the different small business loan programs for the type of business you have. If your customer base is mostly on Net30 day terms, you may want to obtain financing based on the average worth of your monthly receivables.
- Consider a bad credit small business loan if there are challenges
If you have hit any credit road bumps in the past, you can still qualify for bad credit business loans through United Capital Source. There are programs for every credit score and type of business, so come with an open mind and the goal of making your business better.