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In one day, I received five spam e-mails advertising business credit-building services. Because I understand how unnecessary these intermediaries are, the solicitations probably aggravate me more than they bother most recipients.
A reader named Eva sent a note recently telling me she’d spent $595.00 with a prominent company after they promised they could open the first five accounts and establish the best credit for her new business. (See You Can Build Awesome Business Credit, Part 2.) A couple of office supply accounts and a UPS account were rapidly opened. She could have easily done that for herself. Then she was told the gas cards she needed could not be opened without using her personal credit. Since she had carefully explained, before she signed up for their service, that she needed to build flawless business credit because a health crisis destroyed her personal credit she was upset when they wanted to use her personal credit to apply for a business account.
If you are in a similar situation, or have been, please know you are one among many. (See Avoid Business Credit Gotchas.) Establishing business credit seems more complex than it is and many succumb to the hard sell tactics from various companies that push these services. Save your money for necessary expenses. Ignore all the lies and threats from sales people. Hang up the phone, and know you can do this for yourself.
Eva’s dilemma of how to get oil company credit cards was quickly solved. You have to dig a bit on their Web sites, but most oil companies offer fleet or commercial credit cards to businesses, even when your fleet is limited to one vehicle. These are business accounts; they require only an employer identification number (EIN), not a Social Security number (SSN). You will need to have a few other active business accounts before you apply.
Personal credit scoring rules have become more stringent, which has lowered credit ratings for many consumers during the past year. Business credit scoring procedures have not changed. However, the economic downturn has lowered credit limits and eliminated the one business credit card provider, Advanta, which had a long history of extending credit to startups without requiring a personal guarantee. (See Overcome Business Credit Card Challenges.)
When you have established business accounts for six months (See You Can Build Awesome Business Credit, Part 3.) and are ready to open credit card accounts, know the process may be more challenging during the ongoing economic downturn.
I am a strong proponent of establishing a close working relationship with a local bank because local lenders support local businesses. This can enhance your life as a small business owner. Companies that are generating ample cash flow, with expenses substantially lower than revenues, are viewed by their banks as low credit risks. Your ability to establish a corporate credit card account will improve greatly if you fall into this category.
If you cannot qualify for a standard corporate credit card, do not resort to using personal credit. Establish a secured corporate credit card account. Yes, doing this will tie up some cash while you prove your creditworthiness to your bank. However, your account use will be reported on your business credit report. And as soon as your bank believes you will be a responsible steward of their money, they will convert your secured account to a standard corporate account.
Remember: Unlike a personal credit card, where you must keep usage below 10 percent of the limit to drive your credit ratings up rapidly, with a corporate account you can use the full amount of your credit limit without any negative impact on your business credit scores. If you pay the balance due before an invoice is generated by the creditor, you’ll receive ‘bonus points’ on your business credit score.
The ongoing credit crisis has caused a serious constriction of loan funds for businesses. (See You Can Build Awesome Business Credit, Part 4.) With anticipated policy changes by the new Obama administration, we expect to see more available funds over time. Your relationship with your banker can be key to growing your business credit, especially while lenders experience this unique funds limitation.
Because all companies need to protect themselves from the risk that comes with extending credit, you may find your credit limits on new accounts are lower than they would have been a year ago. As you use the credit that has been offered to your business, pay your bills early, and build a history as an excellent customer, your credit limits will be raised.
While some are wringing their hands with gloom and doom as financial freefall seems to be continuing on its downward spiral, I see this as an excellent time to start or grow a business. If you can provide essential goods and/or services, your footing will be solidly established when the economy improves.