Establishing Credit

The owner of a small business posted the following question earlier this week:

My partner and I have established an LLC as an umbrella company for two online retail companies. One of the companies will be drop shipping products from various suppliers. These suppliers require a credit card since we are a startup company. What is the best way to go about acquiring a line of credit without using personal credit cards? Also, my credit score has taken a beating over the past year.

First, the individual posting the question mentioned as an aside a very important point about running a business – you need to keep your business finances isolated from your personal finances. What this means is that not only do you need to keep accurate records for your business, but you also need to keep separate accounts for your business, separate lines of credit, separate loans.

I'd like a no interest loan, since I have no interest in paying it back.

In answer to the question asked, however, it is important to know how credit is given. Credit is issued either because the creditor trusts the person borrowing the money (where the borrower has a good credit rating) or because the creditor can collect from the assets of the borrower (where the borrower has something of value, such as a house, that can be held as a collateral on the loan).

A good credit rating takes some time to establish, especially if there is a negative rating to begin with. Additionally, with a small business that does not have many assets or a strong revenue stream, financial institutions will look at the owners of the company when deciding whether or not to extend credit. Often, financial institutions will require one or more of the  shareholders to personally underwrite any credit extended – which overrides any buffers of liability created by having a corporation in the first place (although there are other reasons to incorporate).

For that reason, as the owner of a small business, it’s important that you be prepared to underwrite the loans your business requires, at least in the early stages. Once your business is established with a history of making profits, the corporation may be able to borrow money on its own. In the meantime, however, you will either require an asset of value to back the loan, or a good enough credit rating on your own to acquire the loan on behalf of the corporation.