If you’re an aspiring entrepreneur who’s thinking about starting a small business and you know you’ll need small business funding, now is a good time to start thinking about building and maintaining good personal and business credit histories. Many aspiring entrepreneurs have no idea how important is to build and maintain good personal and business credit histories to obtain small business funding and end up seriously limiting their chances of getting any money once they’re ready to launch their startup. Firstly, if you want to build and maintain a good personal credit history there are a few things you can do:
- Diversify your credit accounts – Lenders who review your credit history to determine if you will qualify for small business funding will look at the type of credit accounts you have open. Having a well diversified personal credit profile that is well maintained will show lenders you have the ability to handle and manage debt properly. Your personal credit profile should have a combination of installment loans and credit cards reporting. This can include car loans, mortgage loans, and personal credit cards, etc.
- Pay your monthly bills on time – Your ability to pay your credit accounts on time is a huge determining factor in whether or not lenders will approve you for small business funding. Although I know that life throws us many curves which could cause a payment to be made late, you should always strive do your absolute best to pay your bills when due. In my experience, the best way to handle this is to only take on debt that you know you have the ability to pay back. It may sound easier said than done, but if you start disciplining yourself now, it will get easier over time.
- Keep your credit card balances low – As a rule of thumb, you should always keep your credit card balances below 30% utilized. For example, if you have 3 personal credit cards that equal a combined total of $10,000, you should never spend more than a combined total of $3,000. If you use more than 30% of your total available credit limits, you may hurt your chances of being able to qualify for small business funding such as small business credit cards. Small business credit cards or unsecured business lines of credit are a very popular funding source for startup business owners according to the National Small Business Association, Small Business Credit Card Survey. You don’t want to ruin your chances of obtaining this type of small business funding due to your personal credit cards being maxed out.
- Monitor your credit history – Monitoring your personal credit history will help you stay abreast of any unexpected changes so you can challenge them immediately. If you know what your personal credit history looks like before you’re ready to approach a lender for small business funding, you can do what it takes to better prepare yourself should there be something negative reporting that shouldn’t be.
- Stay employed – If you’re unemployed, chances are you’ll have a difficult time paying your bills on time. In turn, it will negatively affect your personal credit history and could temporarily hurt your chances of getting the small business funding you need, exactly when you need it. Keep in mind that most lenders who offer small business funding expect you to be gainfully employed for at least 6 months before you apply. They’ll feel more comfortable lending money to some who already has money.
After you’ve taken the steps necessary to began building and maintaining a good personal credit history, your next move should be focusing on business credit. As a small business owner, building a good business credit history is crucial in this day and age. Did you know that in the first half of 2013 more than 80 million business credit reports were pulled and reviewed?! According to Creditera, Dun and Bradstreet received 45 million requests for business credit reports and Equifax received 35 million requests. That’s a lot of requests for business credit reports. This is why is crucial to build and maintain a stellar business credit history. Your business credit history can also make or break your chances of obtaining small business funding.
You can start building your business credit history by obtaining small (net 30) vendor tradelines. Net 30 Vendor tradelines are typically offered by suppliers such as Grainger.com, Quill, and Uline. Net 30 accounts must be paid in full within 30 days. Most of these vendors do not require you to provide a personal guarantee to get approved for the Net 30 tradelines. The Net 30 tradelines can be used to purchase the initial supplies needed for your startup. This includes packaging materials and/or office supplies such as pens, paper, staples, etc. I suggest purchasing these items from vendors in small amounts (and paying your monthly bill on time every month for about 6 months) to begin building your business credit history.
Once you start paying, your payment activity will report to Dun & Bradstreet and help you build your Paydex score. Once you build your Paydex score to an 80+, you’ll be able to qualify for revolving vendor tradelines up to $25,000 more from vendors such as Best Buy, Dell, Wal-Mart, etc. This will enable you to purchase bigger items for your business such as desks, computers, and printers, etc.
If you take this step by step approach as an aspiring entrepreneur, I can almost promise you that you’ll have an easier time obtaining small business funding for your startup!