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Developing business credit gives you financial flexibility. Without it, you’ll need to rely on your personal credit to support your business. For most people, using personal credit for ongoing business expenses causes personal credit scores to drop significantly. You and your company should sustain financial health when you create excellent business credit.
In the first column of this series, Build Awesome Business Credit in 2010 – Part 1, I provide you with company formation essentials you need before you start the credit development process. And in Build Awesome Business Credit in 2010 – Part 2, I explain the initial steps to open local accounts, which will serve as trade references for you later.
With current economic struggles, more people are bootstrapping new businesses from the ground up. If you’re in this position, don’t be discouraged. Many successful companies started this way. The founders of Apple built a few computers and had to sell them to generate cash they used to buy the components to build more computers. Remember: Facebook started in a dorm room. With a commitment to success, you can grow past the hand-to-mouth cycle. By constructing a solid foundation and building on it, you will increase the likelihood of long-term business growth.
Are you starting with seed money as working capital to fund basic start-up costs? Consider using a secured credit card to develop business credit. A secured card is a Visa or MasterCard issued by your bank or credit union in your business’s name, after your company deposits money in a savings account that will be used to secure your card. As you charge items with your credit card, the amount is deducted from your account balance and you’re expected to make a payment to re-establish your original savings balance. If you can only open a secured account for $500, do that to start. Using a secured card will mean you’ll pay your balance in full each month. You don’t need to charge-up a high balance. Your goal is to develop a positive usage history. See my column, Overcome Business Credit Card Challenges.
Unlike a debit card, your card will look like any credit card; no one will know you’re using a secured account. And, with an account issued in your company’s name using only your EIN (Employer Identification Number) to apply, your payment history will be reported to business credit rating agencies rather than on your personal credit reports. After six months of impeccable payment history, ask your credit union or bank to convert your secured credit card to a standard commercial credit card account with a comparable credit limit for your business. Following another six months of pristine payment history, asked to have the credit limit increased. Take action to raise your available credit on the account every six months. A secured credit card can be an excellent method to jump start your account development as a new company.
Credit applications ask how long you have been in business. Did you work part time, as a consultant, or as a sole proprietor before you incorporated? If you did, you were in business during the entire period. Be sure your company’s stated age accurately reflects your business years.