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Wednesday, November 12, 2008

What's The Best Way To Establish Credit For A Newly Formed Small Business?

What's the best way to establish credit for a newly formed business entity (LLC or corporation), even before it's actually conducting business, to avoid having to personally guarantee a (SBA) loan, and to be able to open (vendor) accounts?

First you have to establish your business legally with your federal, state, county/local governments. Here a basic steps that may help.

- Secure a small line of credit with secured assets.
- Establish a supply base and make small purchases.
- Lastly contact one (or all) of the business credit agencies to establish a credit file.

This process may take 3-4 months. This is the least costly approach with an above average personal credit score.

Please know that I am not a proponent of using credit cards to fund a business, however, if the credit is for inventory where there is more than a likelihood that the inventory that you are acquiring will be sold and paid for within 60 days there is an avenue open to you.

Go to American Express - Plum and apply for an American Express Plum Card. Using the card judiciously will give you the option of paying two ways.

1. pay in full within 10 days of bill closing and receive up to a 2% discount
2. pay 10% when the bill is due and defer the balance for up to 60 days.

Yes, there is liability to the card holder (principal), however this does give you access to a great deal of funding within a safe environment for initial inventory purchases and is a great cash management tool.

When you have your business up and running, how will you determine the credit-worthiness of your potential customers? or more directly, why would you want to do business with your own company? Putting yourself in the shoes of your vendors will help answer your question.

Many local vendors will extend a small amount of credit if they know you. Alternatively, you can prepay vendors to develop a history of being able to pay for what you order. After a number of prepaid orders, they may be willing to sell to you on credit.

When setting up your banking accounts, you should be able to obtain a debit card. Use it as a credit card until you can qualify for a true credit card.

When you have assets (inventory or receivables), you can leverage them for cash when needed.

Hopefully you have a business plan and have developed some financial analysis and projections so you know your break even points, and how much inventory you have to have on hand to re-pay debt, and start building equity.

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