7 Tips for Maintaining Good Business Credit

ANALYSIS BY:
David Hakala
PUBLISHED:
May 06 2009
AUDIENCE:
Finance managers
KEYWORDS:
business tenure, credit ratings, business credit, business credit cards, lending
RESEARCH CENTERS BUSINESS CREDIT FINANCE SMALL BUSINESS

Market Primer: Financial Services

Buyer's Guide: SMB Finance & Accounting Systems

Issue

Credit is one of your business’s most important assets. It enables you to grow your company
before you can afford to do so — a minor miracle. Credit can cushion economic blows, which
every business suffers in good times as well as bad. Credit ratings are widely used as objective
surrogates for subjective judgments of character; your credit rating may help someone decide
whether to do business with you. Here are some tips for maintaining good business credit.

Strategies

1. Establish business tenure early. The very first question a lender will ask is, "How long you
have been in business?" The more established the business, the easier it will be to get credit.
Incorporate a business as soon as you get the idea for it — don’t wait until you have leased an
office. For corporate officers, choose people with good personal credit. Officers’ credit counts
heavily with lenders when a corporation has little or none. Establish a holding company under
which businesses may come and go; the holding company’s tenure will help you get credit. Some
people buy tenured holding companies for their tenure alone. Open a bank account for the
tenured business and keep $1,000 in it, moving money in and out now and then. This helps
establish tenure.

2. Choose the right lender for the job. Banks are good for checking accounts, lines of credit,
expansion and marketing loans, and quick fixes. Use the big auto lenders for company vehicles.
They are supported by automakers and often lend at cost to move vehicles. Banks usually cannot
touch auto lenders’ deals. National mortgage companies are usually more eager to do business
than banks on property and buildings. Equipment leasing makes sense even if you pay two or
three points more, because of the tax write-off benefits of leasing versus depreciation of
equipment.

3. Don’t settle for less than you want. Lenders’ policies are seldom written in stone. If you're
pleasantly persistent, you can generally get the terms you want. You may have to visit several
banks to find one that won’t hold your deposits for five to 15 days, that will give you an adequate
line of credit at a reasonable interest rate and won’t charge a fee for deposits or to speak to a live
teller. But don't give up; one's out there. Talk directly to a branch manager, not an assistant. Look
him or her right in the eye and ask, “What is your lending authority?” and whatever else you
want to know. Let your needs be known and someone will satisfy them.

4. Build face-to-face relationships. Don’t always send a subordinate to the bank with deposits.
Go yourself now and then, and stay out of the drive-through lane. Go into the bank and say hello
to the manager by name. Ask how his or her family is doing and how the weekend went. This
building of a personal relationship is important when you need a loan. Even if you have a Teflon-
coated credit rating, a good personal relationship will get you a lower interest rate than just
“going by the book” will.

5. Use business credit cards effectively. By using a small business credit card you establish a
credit record that can help with other loans, if your credit card history shows that you use it
seriously. Avoid mingling personal with business charges on a business card. Then your monthly
and year-end statements will provide easy organization of tax deductions. Manage employee
expenditures by giving them cards with preset limits. Take advantage of rewards programs to
lower your expenses for office supplies, travel, etc. Limit “card hopping” to take advantage of
promotional deals; doing it often can hurt your credit rating. Improve your cash flow by using
the grace period for paying credit card balances. Avoid cash advances against credit cards; such
loans are very expensive. Pay on time to avoid onerous late fees and seeing your interest rate
mushroom dramatically.

6. Advertise your good credit. Add your company’s Dun & Bradstreet number to business
cards, stationery, invoices and Web site. Upgrade your credit card to “gold,” “platinum” or
whatever your credit card company offers to indicate that you are especially creditworthy. It’s
not showing off — it’s showing what you have worked hard to earn.

7. Repair, don’t despair. If your business’s credit becomes damaged, it may be tempting to shut
down and start over with a clean slate. This is almost always a bad choice. Business tenure is
critical in the credit game. A long history is more important than a spotless history. Dig your
business out of its hole as quickly as possible and re-establish a pattern of on-time, reliable
payment. Creditworthiness is all about trust. Trust is the belief that you can predict a person’s
behavior with an acceptable degree of confidence. Predictions are based upon records of past
behavior; the richer that record, the more confidence a lender can have in predictions.

Next Steps
 

For more information on business credit, read our comprehensive brief, “10 Things You Can Do
to Establish Amazing Business Credit” and join this related Finance Group discussion.