From startups to established companies, there is one thing every business has in common – the need for cash. New businesses typically struggle to secure funding because they lack the credit that established businesses have. Established businesses, on the other hand, can find themselves in a tight spot due to delayed payments for services rendered or sudden expenditures. In other cases, businesses simply need extra cash to expand and grow. However, a business’ ability to secure funding relies upon the state of that business’ credit and the business owner’s personal credit. If your personal or business credit is less than stellar, securing capital is going to be an issue.
The influence of your business credit score
As a business owner, it is crucial to understand how these scores work, and how they will affect you. If you plan to use your personal credit line, you will be responsible for the entirety of the debt load you may create. In using business credit, on the other hand, you can mitigate personal financial risk. You should also know that failing to build your business credit will limit access to funding options. Personal credit is calculated by all three major credit bureaus in basically the same way: the scale is from 300-850, with 750 being a good score. Business credit is less clear, since many companies offering analysis use different methods of calculation.
How to build your business credit
In order to get started, you must first apply for a business credit card or line of credit; this will require a business tax ID number, rather than a social security number. If you lack this particular step, you can fill out IRS Form SS-4 to obtain an Employer Identification Number (EIN). This number is what you will use when opening bank or credit accounts, hiring employees or paying freelancers in order to issue 1099s.
In following these initial steps, you will establish that your business is a separate credit entity. Ultimately, this protects your personal finances from being mixed in with your business finances. Make sure that your timely payments and debt load management are being reported to the various business credit bureaus by your lender – be sure they are aware of your efforts.
In addition, you can also build your credit by applying for small amounts of credit after establishing your business. One of the simplest ways to do this is to turn to store-based credit lines like OfficeMax and Home Depot. In doing so, you will slowly build your business credit history. You will thank yourself later on when you find that you’re in need of a larger sum of money.
Building good business credit takes time. Repairing a bad credit history takes even longer. Both situations involve time that most business owners simply do not have. Fortunately, there are many alternative funding options available.
- Asset based loans – This alternative option relies on assets rather than credit. In the event that the company defaults on the loan, assets can usually be leveraged for 70 percent of their appraised value. The inventory becomes the lender’s property. Asset based loans work well for businesses that are short on cash, but have a large number of assets.
- Accounts receivable financing – For the business that is service-based and has invoices outstanding, this is a great option. The lender will give your business between 70 and 90 percent of the amount due, and your clients will pay their invoices directly to the lender. Depending on the terms, the lender will forward the difference to you once they have received payment.
- Crowdfunding – One of the newest alternative options is crowdfunding. This options allows you to receive the funds you need by reaching out to people for their support. Some of the most popular crowdfunding platforms are Kickstarter and Indigogo. The key is to make a high quality promotional video that is both exciting and personable.
- Merchant cash advance – This option is known as one of the quickest ways to receive cash. Even business that are otherwise considered to be “high risk” can quickly receive the working capital they need. In working with high risk credit card processor – like First American Merchant – your business can secure funds in as little as 72 hours. Upon approval, an advance is given in a lump-sum, in exchange for a percentage of your future debit and credit card sales.
Managing a startup, making financial decisions and finding funding options can be overwhelming. While starting a new business is a challenge, building your credit will help open doors to funding opportunities. As you decide which funding options are right for you, don’t forget to consider some of the newest alternative funding options.