Maybe you have an excellent idea for a business, but now you need some money to make it happen! Or perhaps you have already started a new business, but you are facing the need for some funding. Whatever the case, there are some things you should know about business credit that will help you to be successful as you try to fund and grow your business. There’s not much worse than going in blind and then getting stuck because your business doesn’t have enough credibility with lenders or customers.
1. Realize that your personal credit and your business credit can be different.
You are probably already familiar with personal credit. Maybe you have a credit card or a home mortgage – or maybe both! But how is your personal credit different from business credit? When you are just starting out in business, it is common for lenders to look at your personal creditworthiness in order to determine how much, if anything, they are willing to lend to your business. This often involves tying up personal assets (like your house or car) as collateral. But if you have a successful business, lenders will often look at your business track record and decide whether they can take the risk of lending to your company. These business loans may also require collateral, but it can often be in the form of business-related assets – like accounts payable, business property, and the like. While small business and new business loans can end up being a mix between personal credit and business credit, the ideal is to keep business credit and its associated risks separate from personal credit.
2. Be aware of the difference between secured and unsecured loans.
Secured Business Credit
As mentioned above, many loans require some kind of collateral. These are called secured loans. If you don’t meet the repayment obligations of the loan for some reason, the lender can take possession of the asset you used to secure the loan. Of course, if the collateral that you use is your house, failure to pay the loan back could have devastating consequences for you and your family. This is a strong reason why the ideal scenario is to keep your business credit separate from your personal credit.
Unsecured Business Credit
If you don’t use collateral to secure a loan, then the lender relies on your track record and your promise that you will pay back the loan. These loans are called unsecured loans, and they can come with higher interest rates because of the higher risk for the lender. If anything goes wrong in terms of repayment obligations, there’s no security asset available for the lender to repossess.
3. Know why you should have an EIN number for your business.
Getting an EIN number is one of the vital early steps as you set up your business. An EIN is the taxpayer identification number for a business. Obtaining this number for your business will allow you to build your business credit on a solid foundation. Plus, you may be legally required to obtain an EIN for your business (check out this site for more information).
4. Understand that you can’t get business credit without a business.
This statement may sound like a simplistic declaration. But let’s take it to a deeper level. To achieve the best results when you apply for business credit, you need to make sure that you have put the various building blocks into place. You need to create and represent your business correctly. Your business should have a name. It should be appropriately registered/incorporated. It should have an EIN number (see above). It should have an address and phone number. And it should have a website. These various elements can help to signal to potential lenders that your business is legitimate and that you are taking it seriously. In summary, if you want lenders to take your business seriously, they need to see that it is more than just a dream or an idea. They need to know that you take it seriously enough to put the vital building blocks in place.
5. Recognize the importance of a clear business plan.
This point continues along a similar train of thought as point number 4 above. A clear and achievable business plan will help to show that you take your business seriously. Besides, it will give potential lenders the confidence that you have a clear vision for your business and know where you are going with it.
When you write your business plan, make sure to detail what your business will do and how it intends to make money. Be specific and concrete. Of course, you don’t know everything about the future. Still, your business plan needs to make a strong case for the viability of your business going forward.
There are several important factors involved in business credit. Your attention to these factors can be the difference between a successful start and an unsuccessful one. Ensure you know all of these points before you get too far down the road toward starting your business.
Does the prospect of navigating the world of business credit seem a bit intimidating? Here at Lion Fortress Credit, we offer a great Business Credit Builder program to help you get started on the right foot. Our program walks you through setting up many of the building blocks of your business as you build your business credit record separate from your personal credit record. And it is okay if your company hasn’t made any money yet! We can still help you to obtain funding! We also offer some tremendous all-inclusive packages that include many of the business branding and infrastructure items that a startup needs. So what are you waiting for? Claim your free credit consultation with Lion Fortress Credit and get a great headstart toward your dream of successful entrepreneurship!