I have a corporation since 1998. I have never borrowed any money for the corporation. My view on borring money for business is very simple, if I do not have money for something, I do not do it.
But, it so happens that from time to time, I need to establish an account with a new vendor, they check my credit history and tell me that I have no credit history.
I am loath to borrow money, but maybe I can borrow some small amount for a few months just to establish some credit history? what is the easiest way to acquire a credit history?
I buy several tens of K$ of electronic parts from the usual distributors (Digi-Key, Mouser, Newark and Allied, mostly.) I give them as trade references whenever applying for credit. Only Avnet has ever turned me down, I guess I am too small for them. So, for Avnet, I have to buy with a credit card. For all others that I deal with a lot, I am on Net 30 terms. I do not have a corporation, just a sole proprietorship.
HA, I haven't borrowed a nickel for 20 years. if you find out, let me know. This is way less of an issue than it used to be, most places just want your CC card number now. But, if you go to a new vendor with a large order, expect resistance. I'm sure you have more trouble with this because of our respective locations.
I bought a pickup and had cash, they almost wouldn't sell it, had to take a loan out for 30 days. I changed banks a few years ago (dropped Wells Fargo) and they almost didn't want me - no loan income.
Ask for credit, get it, use it (ie. buy substantial quantities of stuff and pay for it on time) and use that to get other accounts. It's easy to get credit from vendors such as couriers to start with (and you may need to back it up with a CC or something like that to start with). If you want a bad credit history, just don't pay some stupid rip-off bill.
The bank is only one source of credit information- potential creditors are going to want to know whether you treat suppliers well too.
If you extend credit to customers, you've no doubt been asked to provide credit references yourself so you know what they are looking for (your credit limit extended, payment promptness etc.).
Typical credit application:
formatting link
Then you can apply for a DUNS number and get D&B rated.
Note that credit ratings are not necessarily always used for things you may entirely approve of. For example, before litigation the plaintiff's law firm may run a credit check to see whether it will be worth their while.
I was in the same boat when I wanted to buy my new truck. I hadn't used a single credit card in ten or twelve years so I literally had
-no- current credit history.
I had to get a few credit cards from stores and credit card companies, then build up some history of timely payments. I'd buy $100 items and pay them off in 3 months, but no sooner. The credit rating companies like to see steady payment streams.
My credit rating is 777 today, even on a _very_ modest income.
It's going to be tough for a small business owner for a few reasons.
1) nobody wan't to take the first "move" if you have no credit history, other than for something really token, like a phone company, a rubber stamp and letterhead place and things like that. Even if they trust you with $50, it's unlikely they will report this and nobody else will ever know. See #3.
2) As the owner or officer, you will have to personally stand behind any loans as well. This is easy enough for a credit card as there has to be some name on it. In essence, it's your credit card of line of credit, that happens to have a company name associated with it. If your company defaults, you still have to pay.
3) Even if you do get a credit card, net 30 terms from some places, a line of credit from the bank and you have real leases on things like equipment it's possible (and more likely a fact) that none of these will be what's called "reporting" - meaning if you're good and pay back that the lender will write great things about you in your credit report, which for businesses tends to be your D&B file. Your credit history with a corporate card won't appear in your personal credit history either, it's as if it never existed, good or bad, unless you default on it.
4) D&B sucks ass, and is a lousy place to deal with. They'll try to charge you money to doctor your credit report, they beg for details of your business and then I suspect, turn around and sell this data to junk mailing lists. It does seem places like phone companies will somehow end up in your paydex score, even if it's for totally silly amounts of money, like $11/month for toll free numbers or something like that.
5) credit checks are pretty stupid anyways. I recall a pontential vendor wanting to run a credit check on my company. Of course, they just exited bankrupcy themselves, so it's not like I was the potential crook with an accounting scandal and screwed over creditors, they were.
Your bank might be the best bet for any sort of line of credit or a loan from your bank. If you can demonstrate you steady income, they may want to listen.
You can easily get a credit card, but again, it's not going to establish a credit history, and nobody else ouside that lender will know this ever happened. They will lie to your face about it being a reporting card too, trust me on this.
I may just borrow some token amount frmo the bank and pay it back. I really do not need, nor use, credit, but some vendors require a credit history, for example, if I want to rent a particular semi trailer for a day.
I had the same problem the last time I bought a car. I had the money in my checking account, but they wanted me to get a loan -- through them, of course.
I finally had to look the guy in the eye and say, pleasantly, "if you really don't want to sell to me today, I'll take my business somewhere else".
You need to establish a credit line with a business bank in your area and tie it to your business bank account. It will cost you a bit each year and you will have to supply a bunch of documentation. But once done, you are good for probably two years.
Our credit line started at $50,000. A few years we upped it to $75k. the bank wants more! It got us through the great recession.
Let you business checking balance run down to negative so your checks draw on the credit line. Pay a few hundred on the credit line, but don't pay it off right away. Do this for a few months. Deposit your checks to a business account in a credit union savings account.
Do this for a few months and you can then pay off the credit line. You will still have the backup, but you have now established a good credit record.
Cycle the credit line every six months or so to keep the bank happy.
Now you are running with the big dealers and can buy way more than you have cash for.
Have you tried going to a bank, preferably one you already deal with, and establishing a "Line of Credit", or a "Demand Payment Loan"? You can then get a "Letter of Credit" from the bank which most businesses will take as proof.
Do NOT do the stuff about letting a credit line start drawing owing to overdrafts, etc., etc., etc., ... that will _NOT_ lead to positive credit ratings, only overdraft fees and the like.
The one thing I would suggest that can help is to get a corporate credit card from one of the majors and use it for routine expenses just as you would a debit card except you're paying the bill when due at end of month instead of it being drafted at the POS. No extra fees, no interest, no actual out of pocket cost, but it does develop the credit history by the record of payment.
I've used credit cards routinely both personal and business since uni days simply to not need to carry any significant cash nor worry about having the checkbook or, more recently, a check refused when not at home. I've not paid a single interest payment other than once or twice when out of town before telephone payment days and the check didn't get there quite on time. A single payment of that type w/ an extended period of on-time payment will have no negative impact on a score.
It's possible to get into trouble w/ CC's, sure, but if one is disciplined in using them and doesn't use them just for whim purchases just because can, they're no different than any other form of payment. The problem isn't the CC; it's the person using it, Dave Ramsey notwithstanding. And, since I rambled onto that already, there's nothing wrong w/ using credit in business for cash flow or expansion or whatever again as long as one has a solid business plan and the discipline to follow through. This idea of never doing anything until cash is at hand may work for low-capital-intensive operations but it will not work very successfully in many other situations. If we didn't have a substantial LOC we'd never get a crop planted or upgrade machinery or many other things that are mandatory to operate the farm profitably.
That's the thing to do for the most part...interest rates are generally far too high to use them for anything else other than, perhaps, a one or two month float at most, occasionally, simply for the convenience of not using some other more formal means.
But, if they're personal (and you've no other "issues" counterbalancing) then your personal rating should be quite fine. Problem would be that if they're not related to the business that you still have no business credit history I presume?
But, if you have that personally and this is a single-person LLC or the like, that should be sufficient w/ your banker to get you the credit memorandum/guarantee. You might start by asking for just one for a particular vendor/purchase/lease/whatever of a set amount--the lender may be more comfortable w/ a fixed single transaction first time until you build up a track record. If nothing else that way you could even collateralize it w/ onhand deposits or the like if necessary to get the ball rolling.
You can probably accomplish the same goal w/o actually borrowing the money w/ the credit memo.
And, when you talk to the banker, tell him what you're doing, have a summary of your business account cash flow, net worth, etc., etc., in hand and ask if they will respond favorably to request from vendors w/ credit memo/guarantee letter.
Presuming a positive response, then, when asked, you simply refer the vendor to the bank or have the bank provide you the letter and submit it.
When returned to farm from the previous consulting life, had a few consulting jobs left in place subcontracted from previous employer thru which had been running them. Those required purchases of various hardware, instrumentation, machine shop support work, etc., etc., ..., of roughly $25k for some vendors. Worked it as outlined above w/ no real problems. All the bank needed was proof of the contract and that held professional liability insurance, etc.
But, generally it helps if there's a smaller local bank that knows you well to start with; it's a lot tougher to walk into BOA or the like cold off the street.
PolyTech Forum website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.