Issue

Credit is one of your business’s most important assets. It enables you to grow your company before you can afford to do so — a minor miracle. Credit can cushion economic blows, which every business suffers in good times as well as bad. Credit ratings are widely used as objective surrogates for subjective judgments of character; your credit rating may help someone decide whether to do business with you. Here are some tips for maintaining good business credit.

Strategies

1. Establish business tenure early. The very first question a lender will ask is, "How long you have been in business?" The more established the business, the easier it will be to get credit. Incorporate a business as soon as you get the idea for it — don’t wait until you have leased an office. For corporate officers, choose people with good personal credit. Officers’ credit counts heavily with lenders when a corporation has little or none. Establish a holding company under which businesses may come and go; the holding company’s tenure will help you get credit. Some people buy tenured holding companies for their tenure alone. Open a bank account for the tenured business and keep $1,000 in it, moving money in and out now and then. This helps establish tenure.

2. Choose the right lender for the job. Banks are good for checking accounts, lines of credit, expansion and marketing loans, and quick fixes. Use the big auto lenders for company vehicles. They are supported by automakers and often lend at cost to move vehicles. Banks usually cannot touch auto lenders’ deals. National mortgage companies are usually more eager to do business than banks on property and buildings. Equipment leasing makes sense even if you pay two or three points more, because of the tax write-off benefits of leasing versus depreciation of equipment.

3. Don’t settle for less than you want. Lenders’ policies are seldom written in stone. If you're pleasantly persistent, you can generally get the terms you want. You may have to visit several banks to find one that won’t hold your deposits for five to 15 days, that will give you an adequate line of credit at a reasonable interest rate and won’t charge a fee for deposits or to speak to a live teller. But don't give up; one's out there. Talk directly to a branch manager, not an assistant. Look him or her right in the eye and ask, “What is your lending authority?” and whatever else you want to know. Let your needs be known and someone will satisfy them.

4. Build face-to-face relationships. Don’t always send a subordinate to the bank with deposits. Go yourself now and then, and stay out of the drive-through lane. Go into the bank and say hello to the manager by name. Ask how his or her family is doing and how the weekend went. This building of a personal relationship is important when you need a loan. Even if you have a Teflon-coated credit rating, a good personal relationship will get you a lower interest rate than just “going by the book” will.

5. Use business credit cards effectively. By using a small business credit card you establish a credit record that can help with other loans, if your credit card history shows that you use it seriously. Avoid mingling personal with business charges on a business card. Then your monthly and year-end statements will provide easy organization of tax deductions. Manage employee expenditures by giving them cards with preset limits. Take advantage of rewards programs to lower your expenses for office supplies, travel, etc. Limit “card hopping” to take advantage of promotional deals; doing it often can hurt your credit rating. Improve your cash flow by using the grace period for paying credit card balances. Avoid cash advances against credit cards; such loans are very expensive. Pay on time to avoid onerous late fees and seeing your interest rate mushroom dramatically.

6. Advertise your good credit. Add your company’s Dun & Bradstreet number to business cards, stationery, invoices and Web site. Upgrade your credit card to “gold,” “platinum” or whatever your credit card company offers to indicate that you are especially creditworthy. It’s not showing off — it’s showing what you have worked hard to earn.

7. Repair, don’t despair. If your business’s credit becomes damaged, it may be tempting to shut down and start over with a clean slate. This is almost always a bad choice. Business tenure is critical in the credit game. A long history is more important than a spotless history. Dig your business out of its hole as quickly as possible and re-establish a pattern of on-time, reliable payment. Creditworthiness is all about trust. Trust is the belief that you can predict a person’s behavior with an acceptable degree of confidence. Predictions are based upon records of past behavior; the richer that record, the more confidence a lender can have in predictions.

Next Steps

For more information on business credit, read our comprehensive brief, “10 Things You Can Do to Establish Amazing Business Credit” and join this related Finance Group discussion.