How to Establish Business Credit in 90 Days

Business Credit—every small business needs it at some point in time. Unfortunately, the age-old rule so often seems to be true—the only way to qualify for a loan is to prove that you don’t need it.

But that isn’t necessarily the case… here are some simple strategies that will help any small business move toward a good, strong credit relationship with a bank.

I am speaking from experience here. One of my major mistakes early on in business was not creating and working a plan to have established business credit. Had I taken these measures I could have avoided some hard times through the early years of my business.

Be a Good Customer of Your Bank

Remember that if you apply for a business loan at a bank where you have your business checking account, the first thing that the loan officer will do is call up your checking history. If it is constantly in a state of overdraft or is very low, they are unlikely to consider a loan proposal any further. However, if your account shows a regular inflow of cash from many customers, that is much more appealing to a loan officer.

There is another reason to have an account at the bank where you are taking a loan—you can have several months payments at that bank ready to be transferred over at any time. Make arrangements with your loan officer to set up such a program if you can—this can help you to avoid late fees from forgetting to make a payment.

Have Great Financial Records

Get your financial records in shape. Have a nice summary booklet prepared to show to your banker. Include a brief confidentiality statement. Also, have a brief description of what you do, how business has been, and what your future plans are for your business. Include some photos of your business and work. While these measures aren’t really required for a bank loan, they do show that you are serious about your business and help the loan officer to more understand your business.

Letters of reference also help a lot. Ask a few of your best customers to write letters for you to include in your record book. Ask them to state that they intend to continue to do business with you in the future, and at what level they expect to do business. Letters like this will go a long way to convincing a lender to work with you to set up a line of credit.

Most loan officers like to see at least six months history for new businesses, but one banker commented that two years is much better. But wherever your situation is right now, be sure to show summaries for every year you have been in business—even the “bad years.” This disclosure goes a long way to helping a loan officer make a decision about lending to your company.

Establish Secured Loans

This method is widely taught to help people establish credit. You’ll need about $1,000 to start—go to your bank and set up a $1,000 Certificate of Deposit (CD) and use that CD to secure a line of credit for the same amount. You can then use that money borrowed to complete the same move at a second, and then a third bank. You’ll have $3,000 borrowed at with $3,000 on deposit to secure those loans.

Pay the loans as agreed and in about 90 days you should have a good working relationship and history with three banks for your business line of credit.

If you want to improve your position, start with more than $1,000. In fact, one banker I spoke to suggests starting at $3,000. “Most banks do not like small loans (under $3,000 to $4,000) because they are not very profitable.” Because of the fixed overhead of the loan, smaller loans tend to have higher rates even when secured by a CD. The banker concluded by saying: “One $3,000 loan would probably be better, especially if it was paid off early.”

If you don’t do anything else, do this step.

Establish a Floor Plan with Wholesale Suppliers

I’ll be the first to admit that this isn’t always the best idea. In fact, I know of several businesses that went completely under by having too much money and profit tied up in their “floor plan” of products with their vendors.

That’s the key phrase, though… “too much.” If you are in a business that sells products that can be acquired by a floor plan, those items in your inventory are used to secure the credit. While I don’t recommend having 100% of your inventory on a floor plan, it is a good idea to establish some credit with one or more wholesale vendors.

Buy a Company Car on Credit

Sure, if you have cash then sometimes it is a good idea to pay in full for a car… but this isn’t about being debt-free, it’s about establishing credit. Get a company car from a dealer and arrange the financing through your business. Many automotive financing companies and banks will issue business loans for automobiles because the loan is secured by the vehicle.

Leasing a car is sometimes better than buying a car for a business. You can generally write off all the lease costs which is usually greater than depreciation and deducting the loan interest. Business owners considering this move may want to ask their accountant which option works best for them. However, there is no need to worry about which option is better for establishing credit. Leases are usually reported the same way bank loans are for credit purposes.
Include a photo of the vehicle in your financial statement.

Get a Line of Credit Established BEFORE You “Need It”

This is the most important step. You have to be prepared in advance. Establish business credit before you need it for your business. Have a strategic plan to establish credit for your company and work that plan. Don’t be afraid to meet with your banker and discuss the plan—their job is to loan money to good credit-worthy low-risk businesses.

I have never found a business of any size or profitability that didn’t need credit at some point during its growth stage. Plan ahead, establish your business credit as soon as you can and you will not regret it.

Work with More than One Bank

In his book Sharkproof, author and businessman Harvey MacKay explains one of his business mistakes. He had given all of his banking business to one and only one banker for many years. When the market turned hard on the bank and on his business, his one and only bank had pulled his line of credit and it severely hurt his company’s operations.

He continues to explain that he “should have taken his own advice” and spread his business around to several banks. While you may not have a company the size of Mackay Envelope Corporation, it’s still good advice for something as critical to your business as banking relationships—spread the business around.

But remember not to go too far with this idea. It is a good idea to have a couple of banking relationships, but too many makes the other banks nervous. Don’t put all your eggs in one basket, but don’t have too many baskets either!

Refer Business to Your Bank

When you go about your daily business, it is not uncommon to find people who have moved to the area or are unhappy with their current bank. Recommend your bank to them. Write them a great note and tell them how you really do like your bank. Include a business card of your banker for them to contact. You then should send a copy of that note to your banker with another note attached stating that you are truly happy with them and that you are always looking to help their business as well as your own.

Is this sneaky? Maybe. Do it anyway—your banker will love you for it and will remember you when the time comes for you to increase your business with that bank. One banker I know made the comment that referring business to your bank is a very good idea and will pay many dividends to the person making the referrals.

Summary

Not every strategy listed here will work for every company and with every banker or lender. Nothing works 100% of the time, but these eight ideas are enough to get any profitable business started toward establishing good business credit.