Get Credit Before You Need It

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It’s only a matter of time before your business will need money. Perhaps you will need to cover operating costs during a temporary slump. Perhaps you are bursting at the seams from a rapid growth spurt. Or perhaps you have decided to invest in a new computer network or expand your manufacturing capability. New and not always predictable reasons for needing to borrow cash will inevitably occur-but smart owners and managers should not wait till the last minute to explore financing options.

WHAT IT MEANS: Finding capital to build and grow the business is one of the biggest challenges facing small-business owners. Limited access to capital in the first two years of a business’s life cycle is a major problem facing many new businesses. In addition, underestimating the need for capital and failing to understand the importance of getting access to capital are two of the most common mistakes made by new business owners. The savvy businessperson knows that securing capital is necessary to build and grow the business, and also knows that good credit makes securing capital easier. Establishing solid business credit takes time and effort, and it’s important to start early in the game.

Before you proceed, make sure you have a strong business plan because it may well be required and reviewed in future lending situations. Also, understand the four Cs of credit evaluation: Capacity, your ability to repay the loan; Collateral, your assets that can be used to secure a loan, such as a building, equipment, or bank accounts; Conditions, your intentions for the loan and the external variables such as economic factors that can impact how the money lent will be used and repaid; and Character, your personal attributes, traits, abilities, and integrity, along with your education level and work experience.

ACTION PLAN: Maintain a good relationship with your bank and with your banker. You should periodically review your fiscal condition and anticipated borrowing needs with him or her. Open a business credit-card account. It’s a quick and easy way to start building your business credit history. Finally, make sure to have ’industrial strength’ accounting systems in place-the kind that can easily help you track your sales and expenses and produce the kinds of reports that lenders want to see. Partnering with a local accounting firm could be very helpful in this regard.

EVEN BETTER: Consider other potential sources for credit if needed. These could include a loan from friends or relatives, microloans from the SBA or other private organizations, a line of credit, or better credit terms from your current suppliers. If you’re about to launch a business of your own, you might want to obtain a home equity line of credit (or expand your current one), as your currently employed status will work to your advantage.