A 3-Step Guide to Establish Small Business Credit

During your first year of operation, it is key to establish small business credit. If you have not done so, you can begin to build your credit base at any point in your business cycle. You may think you do not need a good credit score as a business. But, in order to expand and keep pace with your competitors, you will want to leverage your assets. This is considered a good business policy because, without leveraging, you may be holding yourself back from potential profits. Once you realize the importance of a good credit score, you can set out establishing your business credit in these three easy steps.

#1 Build your Assets

An asset base will be your best friend as you build your credit. A business without assets will have a hard time proving its worth in the marketplace. This can put you in a bad position when it comes time to borrow. More importantly, however, it can put you in a bad position should you have a slow profit cycle. When business slows, you will have the option of liquidating assets for quick cash. You will also have the option of using these assets as collateral for a new loan. Consider your industry and think hard about the types of assets that will serve you in the future. In your early phases, work to build up these assets to balance your credit score in the future.

#2 Make Use of Investors

When you take a loan, it appears on the liabilities section of your businesses's financial sheets. This can present problems if you are trying to sell shares, take a loan, or entice a buyer. Instead of taking on liabilities every time you want some extra capital, consider taking on an investor. Since an investor does not need to be repaid, investment dollars are an immediate asset rather than a liability. You will have to surrender a portion of your ownership or profits to any investor. While this step can be scary, it can also offer new opportunities. If your investor is experienced in your chosen field, his or her expertise can be as valuable as the investment.

#3 Leverage Wisely

In evaluating business performance, one way to determine which business will be most successful is to see which is best leveraging its assets. If you have $200,000 worth of machinery and have not used it for a loan to expand, you are sitting on potential profits instead of going after a new portion of the market. Of course, over-leveraging can expose you to bankruptcy. Smart leveraging - typically using about 30 to 50 percent of your asset base as capital for new loans - can put you ahead of the pace of the market. A business that is well-leveraged but not over-leveraged will have a very healthy financial profile and credit score. A new lender will be attracted to this type of opportunity, especially if you have paid down debts on past secured loans.

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