The Stages of Building Business Credit: Where Are You?

Melanie Benson Strick is now a million dollar lifestyle success coach. But when she started her coaching and info marketing business, SuccessConnections, it never even occurred to her to build business credit. “The first two years of my business I had no idea how much money it would take to become profitable. Flying by the seat of my pants I used two strategies: borrow from my credit cards and borrow from my father. Unfortunately it wasn’t until I was up to my ears in debt that I knew about other forms of capital, and by then it was too late.”

Benson Strick says there is an upside to learning from the school of hard knocks: “The positive by-product of looking for a capital infusion was that I became proactive about revenue projections. I learned how to identify what was going out, what was projected to come in, and create strong strategies to payoff the debt, including using low-interest credit cards. There is no way you can stick your head in the sand and become financially profitable,” she advises.

According to the Small Business Administration more than three out of five small enterprises will borrow to start or grow their ventures, frequently using credit cards, home equity loans and loans from friends and family to get started.

Like Benson Strick, many entrepreneurs wait until their business is already up and running to start building business credit. But if you start earlier – the very moment you launch your enterprise – you’ll increase your chances for success significantly. And it is worth it. Business credit can reverse your business’s cash cycle and increase profitability.

After working with hundreds of business owners, we have found that small businesses are usually at one of four stages when it comes to building business credit: 

Stage One: Bogus Business Credit

At Stage One, you’ve probably bootstrapped it and used personal credit cards, loans from “friends, family, and fools,” equity from your home, or even your life savings to fund your venture. Chances are, there is very little separation between you, your business, and your credit. The vast majority of businesses at this stage are operating as sole proprietors.

This is the by far the most common and most dangerous stage of business credit. You are completely mixing business and personal credit, and that means:

  • You can have major headaches at tax time, not to mention forking over extra money to Uncle Sam by failing to take full advantage of available deductions.
  • You have no asset protection whatsoever. If your business tanks or is sued, you can lose everything personally and professionally.
  • Your personal credit score will sink due to the level of debt you’re carrying to fund your business. You may also see the interest rates on your credit cards and other accounts skyrocket. 

Clearly, you want to move through this stage as quickly as possible. Better yet, skip it altogether.

Stage Two: Beginning Business Credit

At Stage Two, you begin separating your business credit from your personal credit. You have a corporate structure in place, and you start applying for credit in the name of your business, not your own. By keeping business debts off your personal credit report, they don’t affect your credit scores.

While you may not be getting a hefty line of credit from your bank, you are establishing “trade” accounts with retailers or suppliers where you can buy what you need and pay for it later. Most of these vendors will lean on your business credit history, without even looking at your personal credit. Whenever possible, you select vendors who report your payment history to the business credit agencies. This helps you start building a positive business credit score.

Stage Two is a massive leap from Stage One. It helps protect your personal credit rating, which in turn allows you to continue to get more credit than you could at Stage One. You help maintain your personal credit scores and don’t run the risk of being turned down for business or personal loans due to the business debt you’re carrying.

A small business can chug along at Stage Two for quite a while — as long as the bills get paid on time. But Stage Two is not the destination. If you’re serious about your business, you’ll want to move to Stage Three.

Stage Three: Building Business Credit

Stage Three is where your business establishes a strong and stable credit identity. At this stage, you have successfully managed at least five or six trade accounts that report to the major business credit agencies, and you have at least one or two business credit cards that are reported to your business credit reports only – not your personal ones.

As a successful Stage Three business owner, you use an accounting system that allows you to generate financial statements as needed, and you understand where your business stands financially at any given time. You are now able to approach banks for unsecured business lines of credit, loans, and leases. To avoid bank rejections and dings on your personal credit, you strategically approach only those banks likely to approve you.

At Stage Three, you’ll find yourself with opportunities to borrow or lease without having to rely on your personal credit. Does that mean you’ll never be asked for a personal guarantee or to have your personal credit checked for a business loan? No. Lenders will try to get every bit of extra protection they can. But the stronger your business and corporate credit rating, the more negotiating power you have to strike deals at the most favorable terms.

Stage Four: Robust Business Credit

Your business is no longer just about you, the owner(s), when you reach Stage Four. It is a “real” business, with strong revenues and a solid track record. Some businesses get here very quickly, but others can be operating for years and not break through.

At Stage Four:

  • Your business credit ratings are strong, and you actively monitor them.
  • You have solid revenues and well-prepared, audited financials.
  • You use business credit exclusively (not personal credit), and you have business lines of credit and corporate credit cards with major financial institutions. You may have even negotiated away personal guarantees on some of the credit cards (when you have more than 25 employees and $2 million in revenue).
  • Your business plan is well-prepared and persuasive.

At this Stage, you may decide to look for outside investors — private investors, angels or venture capitalists (VCs) — to help take your company to the next level. If you’ve built a strong foundation, you’ll find yourself negotiating much better terms if you choose to bring in outside capital.

Even if you don’t plan to borrow, it is essential that building business credit becomes a part of your business from the start. Planning ahead is crucial. As former president John F. Kennedy said, “The time to repair the roof is when the sun is shining.”

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