Send Lynette a Confidential E-Mail
Entrepreneurs write questions about business growth expectations as they start a new enterprise and begin to apply for credit. In the enthusiasm and drive of the start-up, many business founders want to rush the credit-building process. Because the rules of personal credit have been mysterious, there’s a tendency to think there’s a secret silver bullet for business credit – something to allow a new company to leapfrog ahead without building a credit foundation and following the fair and easy-to-grasp business credit rules.
You can bootstrap your company with personal savings or personal credit of some type, which you loan to your company. See my series, How to Self-Fund Your Business and Preserve Personal Credit. Or you could finance your start-up with a small business loan. It does not matter what your initial funding source is; the credit development cycle does not change.
New businesses want to use credit because it’s a helpful convenience. Presuming your plan is to grow a sustainable company, it’s critically important to look at the long term, big picture view of business credit.
Think of the first two years of your business as the start-up years. While some companies push the envelope and appear to the world to be fully formed entities early in their life cycles, if you could be a fly on the wall during private executive meetings you’d know it’s an external illusion. Inside these fast off the block start-ups, management is scrambling to develop infrastructure to make the companies become what they are already perceived to be. With credit, and in many other ways, it takes two years for a business to create a solid foundation.
Most company cultures evolve over time as a reflection of founders’ values. And businesses usually accept this normal development process. However, founders tend to think about business credit from a different viewpoint. Unlike culture, there is a tendency to believe credit can be developed rapidly.
You can use personal credit to qualify for credit cards that you use to pay business expenses. Everyone who understands credit advises against doing this because your account usage will be reported on your personal credit reports rather than your business credit reports. You won’t be building business credit. And, if you use a large portion of the credit limits on personal accounts – an accepted practice with business accounts – you are likely to destroy your personal credit while growing your business. See my column, Remove Your Credit Illusions.
An incorporated business is a legal entity. Think of a new company as an 18-year old applying for their first credit card. You’d probably think any business that offered a high credit limit to a young adult with no credit history was irresponsible. Your business is a credit newbie in the eyes of potential creditors. Office supply stores will be the first to provide credit because the risk is small on their part – maybe a $600 credit limit to begin. You can buy a lot of supplies to get your company humming with that low credit limit. An on-time payment history will cause them to raise your limit rapidly. They want to build loyalty from you so you buy all of your supplies from them.
It will take six months to open basic accounts with vendors and build a credit history that qualifies you to move forward to larger loans and commercial credit cards. This process is a bit like dating. It usually takes six months to determine if a new relationship has potential. While two people are still in the ‘getting to know you’ phase, it’s clear whether you share values, interests, complementary temperaments, lifestyles, humor, etc. After six months, you know if you want to know more. So it is with credit. After six months of opening accounts as I explain in Why You Don’t Need Intermediaries to Build Business Credit and the linked columns, you and your future creditors will be ready for the next 18 months of credit relationship development.
While building business credit is far more straightforward with fairer and more forgiving rules than personal credit, they both share a common requirement for gradual development. In both cases, two years is the milestone after which you are considered ‘stable’.
Grow your credit foundation. Combine it with excellent cash flow, profits, and a positive relationship with your community banker. That blend is your secret silver bullet. After six months to a year, you will probably be able to leapfrog the traditional timelines to establish larger credit accounts based on the success of your business and the quality of your credit history.