Business credit, when leveraged properly, can be an absolute game changer for entrepreneurs because it gives you the opportunity to scale your business in ways you never could by simply bootstrapping. This enables you to invest in the necessary inventory, equipment, and acquisitions that help you to make bigger moves and gobble up market share.
This can be especially powerful during periods of economic uncertainty like we’re facing today.
But it’s not all puppies and rainbows.
There’s a lot of misinformation out there about business credit being peddled by self proclaimed gurus that is not only wrong, but also dangerous. I’ve seen countless examples on social media where these influencers and coaches are giving advice that is actually criminal. As much as I hate to say it, this is an area where I’d actually like to see more regulation because it hurts innocent entrepreneurs. But there are other factors that entrepreneurs need to be aware of that will determine the impact they’ll get from the capital they get access to.
So in this article, I’m going to explain what you need to know about business credit before you start applying for it so that you can maximize its impact for your business.
99.9% of the business credit hacks are actually fraud
The amount of completely false, and in many cases, criminal advice that I see self proclaimed gurus preaching is frankly terrifying.
For example, I frequently see videos on every social media platform advising entrepreneurs who have bad credit to use CPNs, or Credit Protection Numbers, to get around the bad credit. On the surface, it may seem like a viable hack but in reality, it’s criminal fraud. This is just one example, but I could easily cite dozens of others on different topics.
The thing to remember here is that if something seems too good to be true, it probably is.
You need a solid personal credit profile
Lenders aren’t in the business of just giving money away. They lend money out with the intent of borrowers paying it back with interest. It’s pretty straightforward.
And the only way they can be assured they’re likely to get their capital plus interest back is to evaluate your personal credit profile.
It’s important to note that true business credit won’t show up on your personal credit report, when the accounts are kept in good standing, but lenders will absolutely use your credit profile to assess risk.
Business credit is an ongoing process
You don’t just apply for business credit and call it a day. This industry is a lot more complicated than that.
Here’s how it typically works: you’ll apply for a few business credit cards at a 0% introductory rate, negotiate higher limits once approved, merge old interest bearing accounts into the new applications for higher limits, and then consistently hit proper utilization ratios, in a way that demonstrates you actually need the credit and know how to handle it responsibly.
Unlike personal credit cards, maxing out your business credit isn’t necessarily a problem, but carrying a balance over the long term can be.
What business lenders are looking for is your ability to repay your debts. So if you make a large investment with your borrowed capital and then quickly repay it, they will likely increase your limits automatically, and even if they don’t, simply asking will often result in an easy yes.
By consistently using your business credit in a way that aligns with what vendors want to see, your access to capital will continue to increase, giving you access to more opportunities.
You will need to sign a personal guarantee
Despite what the self proclaimed gurus tell you, every lender will require you to sign a personal guarantee.
I don’t see this as a bad thing, personally.
The way I see it, if you’re serious about your business, you should have no problem signing a personal guarantee. If that makes you hesitate, then you should reevaluate your commitment.
At the end of the day, it’s a moot point if you pay your debt back. It only becomes an issue if you’re late or you default, at which point, it can impact your personal credit report.
It’s worth noting that when you start utilizing vendors that report to Dun & Bradstreet, and have two years of tax returns showing a healthy profit, you’ll get to a point where a personal guarantee is no longer needed. This is called non-recourse funding, but that will be a little down the road for most entrepreneurs.
A solid strategy is essential to using business credit
People like to say, “they only lend money to people who don’t need it,” and while that may seem like an accurate statement from the outside looking in, it’s simply not true.
The truth is that lending is based entirely on your ability to repay the debt.
Part of that, like I mentioned earlier, is your personal credit profile. But another big part is how you plan to use your capital. This doesn’t play a role in getting approved, but it does play a huge role in showing the lender that you actually need the credit as well as your ability to repay your debt. That determines whether you scale or just become a flash in the pan.
While there’s not a black and white answer as to exactly how to use your capital, I do have a general rule of thumb.
It’s to only invest in things that have the maximum chance of providing a positive ROI. That might include scaling up an existing, proven marketing campaign, buying materials or equipment to deliver on an order, or investing into real estate projects needed for a larger workforce.
