by Wendy Connick

Created on: June 03, 2008

Creating a new business or expanding an existing one is usually a lot easier if you can find someone to extend you business credit. When applied correctly, a business loan or credit line can repay you tenfold for your efforts. Unfortunately, a new or struggling company will have a very tough time getting approved for the credit they require. It's a truism that banks will only lend to people who don't need it. Banks and other lenders tend to very cautious, because it's not actually their money that they are lending out. The funds come from their depositors, so if a bank loses enough money on bad loans it can find itself in very deep trouble.

Luckily there are some things you can do to help demonstrate to the lender that you are a low risk borrower. If you don't require credit at this time, there are also a few steps you should take to prepare so that if in the future you do need financing, it will be easily available for you.

To begin with, you need to get your personal credit as perfect as possible. One positive assurance you can offer lenders, particularly if your business is brand new, is your own borrowing history. So before you request business credit try to pay off any personal debt you may have. As a general rule, the more available personal credit you have the better. One thing to keep in mind is that if you have any ancient, outstanding debts now is NOT the time to pay them. That doubtless seems strange to you, but the fact is that fresh items on your credit report have a much bigger effect on your credit score than older items. If you pay an old debt now that debt will become a recent item on your report, and often this will lower your credit score by a noticeable amount.

If your personal credit is bad, however, don't despair; there are still a few things you can do to get business credit. For one thing, you could incorporate your business. This will help because a corporation is a legal entity in its own right, whereas a sole proprietorship or partnership is not. Essentially a corporation is a step removed from you, so your own credit history has less effect on its ability to borrow money. This will only take you so far lenders will still run your social security number when you apply for business credit but if your credit history is so-so rather than horrible, it can be enough to make a difference.

Another idea is to apply for trade credit, which is typically much easier to get than general credit. Trade credit is credit provided by one of your vendors which you can only use to purchase things from that vendor. If you were to get a business credit card from your office supply vendor, for example, that would be a trade credit card. These trade lines enable you to build a credit history for your business, so assuming you use them cautiously and pay right away you should find it much easier after a while to get other types of credit.

Once you have decent personal credit, and perhaps a trade line or two, go ahead and apply for a business credit line through a general lender. Do this whether or not you need any more credit right now. Why? Remember that banks don't like to finance individuals or businesses that are in difficulties, because at those moments you're typically a bad risk and of course those are the very moments when you need money! By setting up a line of credit now while your business is in good shape, you are really hoisting an umbrella against a future rainy day. Use your credit line from time to time to continue building up a good credit history, but always pay it right away and make sure you leave plenty of available balance for emergencies.

Learn more about this author, Wendy Connick.
Click here to send this author comments or questions.