How to qualify for credit as a small-business owner
By Elaine Pofeldt | Published: April 3, 2017
Your Business Credit
Dear Your Business Credit,
I am a small-business owner of a LLC. We have passed our one-year mark in business. We have a credit account with Sherwin Williams that we pay off every month. We've had this account for over a year.
I have tried to open other store credit cards and have been denied every time, because of my personal credit history.
I thought as a LLC owner I should separate my personal and business credit. We started this business without taking out any loans so we were using our own money.
This is becoming an increasing problem. We can't get funding and are maxing out our own credit, which is making any more funding impossible. The bank where our business checking account is does not do business loans. – Nicole
It’s time to take a breather from borrowing and look at the big picture in your business.
From my perspective, you’re doing a lot of things right. You’ve made it through the first year in business. That suggests you have built up a customer base for whatever you are selling.
On top of that, you’ve taken the smart step of separating your business and personal credit. You are also diligently building business credit by paying your bills to Sherwin Williams on time. This will pay off in the future. The stronger your business credit profile, the better positioned you will be to get credit at affordable rates in the future.
As you’ve discovered, though, good business credit is not a panacea. When lenders consider a credit application from a small business, they virtually always look at the personal credit of the business owner. They also will typically require the owner to guarantee he or she will pay back the debt personally.
That makes sense, when you think about it. Often, the business owner is one and the same as the business, given that the vast majority of businesses in the U.S. have no employees other than the owners.
Given this reality, owners have to show they are handling their personal credit well to get business loans, in most cases. Maxing out personal cards to grow the business will hurt your case. When you have high credit utilization, it generally lowers your credit score.
So what do you do about being short of funds? I’d look at the underlying reasons and try to eliminate them.
One reason many businesses get into a cash crunch is that they are not invoicing promptly. Sending out invoices the same day you have completed a project and following up as soon as they become past-due can greatly reduce the need to borrow and reduce unpaid bills that become uncollectable.
You may also want to incentivize clients to pay you in advance. Some businesses do this by offering a discount if clients pay up front.
Making it easier for clients to pay you on time can also go a long way. If you don’t already accept credit cards and ACH payments, you may wish to use an accounting software such as QuickBooks or FreshBooks that allows this. You don’t need a merchant account to offer this option. You simply need to check off a box on the invoices.
It’s also important to keep an eye on spending. Being aggressive about investing in growth only makes sense when you have cash on hand to do so. Sometimes, growing slowly is the best strategy for building a sustainable business.
If you follow these practices – and work on improving your personal credit by taking steps like paying down debt – you will become a more attractive candidate for a loan. Good luck!
See related: 8 steps to building your business credit profile
Meet CreditCards.com's reader Q&A expertsDoes a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.
- Options to collect from customers who can't pay their balance in full – When dealing with customers in financial distress, suggesting a payment plan might be the best way to ensure you get full payment ...
- Q&A: Ex-partner was authorized user; is he liable for card debt? – Your ex-business partner could be equally liable for the company's credit card debt even if he was just an authorized user on the card. Here's how to find out ...
- Q&A: Can I charge cards with a mobile app for my side hustle? – If you're operating a side hustle and wondering about your rights when it comes to charging cards on file and paying taxes, make sure you do your homework before you find yourself in trouble ...