Most small business owners don’t understand the different levels of credit and that each level leads to the next. Much like an infant first learning to crawl, then a toddler taking their first precarious steps into their future, your small business will likely have bruises and skinned knees before it can run after the credit it needs to thrive and then soar off into the great unknown.
Where are you in the race for small business credit?
While everyone would love to start a business today and immediately be able to achieve unsecured bank lines of credit tomorrow, banks and small business lenders are quick to dish out a hard dose of reality in the form of thousands of credit denial letters daily. The fact is, these lenders and creditors have specific criteria each small business owner will have to meet in order to qualify. For some, these are basic prerequisites such as having a three year old business with an 80 Paydex® score. Others may also require risk ratings to be in the low to moderate range. Most will demand a combination of various credit types before they offer approvals.
In reality, each level of credit achieved should help you obtain additional credit at the next level. As each level is established, used, and paid, it reports to your D&B® profile and enables you to advance to the next level of credit. By the time you have in business for a while, you will have obtained each of the required elements and can qualify for bank lines and major funding. Unless you are an independently wealthy entrepreneur, you are going to need a solid D&B®profile and every level of credit to maintain day to day operations and plan for growth in the future.
CRAWLING is the most basic of credit, trade and vendor credit, yet is a requirement before moving up to the next level. These are low-dollar Net 30 accounts, usually obtained online for simple purchases to sustain day-to-day operations. Most small businesses will have already established baseline credit with small retailers that can be added to the D&B® report. For those who have not been able to do this, there are a number of well-known online retailers that most credit enhancement companies use to establish base-line credit. Like everything else in life, there are right ways and wrongs ways to crawl, but it has to be mastered before you can walk.
WALKING is the next level in the process and includes retail credit. Also established on net 30 terms, these credit limits are of a higher dollar value and generally are revolving credit lines for larger purchases, such as major marketing campaigns, office equipment, or immediate access to inventory. Companies who provide retail credit are usually older, larger, brand name providers who pull your D&B® file before approving credit for their potential clients, so it is imperative that the D&B® file be strong and full before applying for credit with these businesses. Examples may include wholesalers, gas cards, and smaller, low-balance loans or credit cards. Because they usually report back to D&B® on your payment habits, you will need to walk-the-walk with these mid-range companies before you can make a run at major credit.
RUNNING requires the talent of being able to put one foot in front of the other very quickly and precisely and an innate ability to dodge obstacles. Credit at this level requires that you have already moved past retail and trade-line credit and are ready to achieve basic funding. By now, you have been trusted with net term accounts and have proven your ability to handle credit responsibly and repay not only the debt, but the trust those companies placed in your business. Major credit cards and small business lenders will consider your application more worthy based upon the previous credit showing in your D&B® file. Keep these accounts current so you can soar to your highest potential.
SOARING happens when you have the freedom to use the credit you have achieved to help you gain more. Bank lines of credit and SBA lending are now becoming available and additional funding sources will now seek you out when marketing credit opportunities to qualifying businesses. Your D&B®business credit profile is now filling up with examples of solid past performance and can stand on its own merit against the toughest of scrutiny. Your business has proven it can carry the weight of new debt as it continues to grow and thrive, and lenders can feel confident that you are successful in managing your business credit profile.
LESSON: You can get to your goals using credit-building and enhancement strategies that are best suited specifically for your business needs. Only you know how far along in the process you have come, and you should have the biggest say in how far and fast you want to process. Just understand, there's a big difference between your first steps and your first flight. Taking things one step at a time will get you there faster and safer.