Wednesday, July 17, 2024

7 Secrets for Getting a Business Line of Credit Effectively


Are you getting ready to launch your own business? If so, you already know that there are hundreds of details to attend to, including writing a detailed financial plan, arranging for opening-day events, assembling a team that can get the job done, and more.

But, what about getting a line of credit in the new company’s name? If you have never owned a business before, getting a plastic card with the company name on it can be a challenge, even if you have good personal credit. Are there secrets to securing business credit?

In fact, there are several vital things that you, as an owner-entrepreneur, can do to improve the chances of securing a line of credit in the name of your organization. The good news is that there are no massive hoops to jump through, large deposits, or complex applications to fill out.

If you follow the process of doing seven steps, there’s a very high probability that your company can obtain credit in its own name.

Here’s a summary of the steps, followed by a detailed explanation for accomplishing each one:

Steps for Obtaining a Line of Credit for Your Business

Using Vendor Accounts

Ask one or more of your vendors if they’ll grant you a small line of credit. Of course, this method works best after you’ve made several on-time, in-full payments on the account and have built up a relationship with a particular vendor or vendors.

The amount of the credit line need not be huge, but aim for something in the neighborhood between $250 and $750. Then, whenever you use the line to make purchases from a vendor, repay the amount well before the due date, in full.

The chances are good that the vendor will eventually allow you a more considerable amount on the line, and you’ll be in the process of better establishing your organization’s credit profile and rating.

Setting Up Double Accounts

At your preferred bank, open two accounts in the name of your business. Make sure one is a simple checking account, and the other is either a “business savings” or certificate-of-deposit (CD) account.

Remember to fill out the forms in the name of the business, using the EIN (see below), so that these two new accounts are totally separate from you as an individual.

Applying for Small Loans

Applying for Small Loans

At the bank where you have two accounts in the business’s name, apply for a loan that is no bigger than the amount in the company savings or CD account. Most banks will automatically grant you a credit line for the deposited amount, which makes the loan a secured one.

However, secured or not, you’ll be building the strength of your company’s credit by obtaining a loan, no matter how small.

Making Payments

Just as you would do when establishing personal credit, pay all bills on time for your business. Always pay in full, and remember to occasionally ask vendors for an increase in the amount of credit they allow on your account.

The DUNS Method

Get a DUNS number from Dun & Bradstreet, the company that oversees business credit ratings. The number sets your company apart from you and helps establish a credit rating for the business.

Using the Power of INC

Using the Power of “INC”

The goal of incorporating is to set up a legal entity that is responsible for the company’s debts. You can’t do this when you’re operating as a single proprietorship or as a partner with other investors. Those kinds of entities are connected to the owners, personally and legally.

What you need to do is file paperwork with your state for setting up a corporation or at least a limited liability company (LLC). Those two types of businesses are legally separate from the individual owners.

If incorporation fees are too high in your state, go the LLC route, which is just as effective for creating the legal barrier between you and the entity you own.

Get an EIN, ASAP

As far as the Internal Revenue Service (IRS) is concerned, your Employer Identification Number (EIN) is the unique numerical identifier for your entity. So, what a social security number is for an individual, the EIN is for a company.

Why have one? Because the EIN is the quickest way to define your organization as a legal entity that is totally separate from you as an individual. The EIN shows future lenders, vendors, and investors that they are dealing with a business and not with you as a private citizen.

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