I opened my first business repairing commercial signs when I was 23. I was nervous about the risks involved, but confident I’d succeed.
For one thing, I knew the industry well. I’d worked for an electric sign company in Utah toward the end of college, and my boss had been so impressed with my potential that he encouraged me to return to Idaho without a degree and establish a company of my own. For another, being raised on a farm had instilled me with a monster work ethic.
I figured these two advantages — relevant experience and a willingness to do whatever it took — gave me a decent shot at bucking the odds and prevailing where others had failed. The truth was way more complicated.
What No One Tells You About Running A Business
Within a month of opening my doors, I was turned down for a Small Business Administration loan. My vendors refused to extend me credit on even the stingiest terms. Having no credit to draw on meant paying for every expense (equipment, supplies, payroll, etc.) out of my own pocket.
My business started booming, but I remained cash broke. I’d have hundreds of thousands of dollars languishing in accounts receivable, and nothing in the bank to show for it. Unable to sleep, I’d pace all night, my head filled with visions of uncompensated employees and reputational ruin. In theory, I was killing it; reality told a different tale, and it was killing me.
There was a reason I got denied by the SBA, a logic behind the obstinacy of my vendors. Everything stemmed from the basic fact that I had no credit history. I’d been taught to avoid all debt and pay cash for every purchase. I’d never applied for an auto loan or credit card in consequence. As far as the credit bureaus were concerned, I was nonexistent. Lenders had no way of knowing whether I was the kind of person who paid their bills on time.
This caused me no end of nightmares until I woke up to the problem and took deliberate steps to resolve it. Learn from my mistakes, and don’t procrastinate harnessing your credit and building your credit history. Here are a few steps to help get you there:
1. Tackle Your Personal Credit Immediately
When I learned how important it would be to my business, I started building my personal credit right away. I was viewed with so much suspicion that one major credit card company asked me to mail them a $200 deposit in exchange for a $200 credit account.
Think about it. A couple hundred measly bucks secured 100% by cash. Throughout the following years, as I continued to make payments and my credit history developed, the folks who couldn’t trust me with $200 eventually decided to expand my credit access to $200,000.
Improving your personal credit will show lenders of every stripe that you’re a responsible business owner who means to be taken seriously. There’s no shortcut to awesome financing, but focusing on raising your personal credit score is an excellent place to begin the journey.
2. Learn Your Business Credit Scores And How To Read Them Correctly
A few years ago, my company conducted a survey of small business owners and gained some critical insights as a result:
• Of small business owners who were denied financing, 45% found themselves in that position multiple times, while 23% had no idea why their applications were rejected.
• Small business owners with a sound grasp of their business credit scores were 41% more likely to be approved for a business loan.
• A whopping 45% of small business owners were unaware they even had a business credit score, and 82% weren’t sure how to decipher it.
The bottom line? If you’ve done your homework about business credit — including what your scores mean and how to use them in your favor — you improve your chances of accessing capital with improved repayment terms.
You’ll have a distinct advantage over competitors relying strictly on credit cards and the generosity of friends and family. Obtain a copy of your business credit report, and learn how to read it — and develop a habit of keeping a close eye on your business credit scores once you do.
3. Secure One Or More Business Credit Cards
As much as you can, separate your personal and business finances. The more they’re intermingled, the more you’ll regret it when tax time rolls around.
Your personal credit is shielded further from the unpredictable nature of business by the fact that many business cards don’t contribute information to your personal credit reports except in the case that you default altogether.
Business credit cards are among the simplest methods for establishing a business credit history. They’re like personal credit cards in that they provide you with a revolving line of credit within the boundaries of a preset credit limit. The second you pay it off, that credit’s available again as a tool for growing your business. This provides greater flexibility than a traditional business loan, and keeping up with your early payments while maintaining low balances will do wonders for your credit scores.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
