Lenders have become more selective in lending money, but building credit is still important to contractors starting or growing their businesses. So, what is the best way to build credit when you are young and need to establish credit? The following LawnSite.com members offer the following suggestions:
hurrikanelandscaping: Recently my biggest hurdle in business has been my lack of credit. No, not a low credit score, but a lack of history.
During the past four years in business, I have developed a sound reputation for quality and a solid customer base. Also, I have little personal credit, since I am young (18 years old).
I am not looking for people to tell me not to use credit. I know and understand business, and I would not finance something where I do not have the cash in pocket for at least a year’s worth of payments. Most recently, I financed a mower, co-signed by my mother, which has been paid off.
I am trying to apply for an auto loan for a Ford F550, with about a $20,000 budget. My issue is that I am certain my business does not have enough of a credit history to apply for such a loan. Nor do I want to go with a subprime lender and be given a ridiculous interest rate.
Any advice would be appreciated on getting approved and how to build credit quickly.
My business is registered as an LLC, I have a secure credit card with a $500 limit in my business’ name, which is paid off in full every month, and I have both checking and savings accounts in my business name.
GreenI.A.: As an LLC, you can apply for a DUNS number and start building credit under the business name. A DUNS number is basically the same for a business as your FICO score is for you personally. Until you grow your assets and the credit substantially, the DUNS number means very little, as everything will be based off of your personal credit. What I did when starting my business was I found a good credit union that is business friendly (many only do personal). As long as I qualified for the loan personally, they would write the loan in the business name and I would sign a personal guarantee, which is real common for newer companies, as well as existing companies.
The whole cash versus credit is a big sore spot on here. I don’t go into details about my business finances on LawnSite.com, but in a short time I grew from doing this part time to what I am confident is one of the larger companies that is on this site regularly. I did it by utilizing credit.
hurrikanelandscaping: Cash versus credit is certainly a sore spot here. For most companies, they reached success by receiving a loan through a lender. It’s just the nature of business. However, that does not mean I believe in financing a new truck just because you got approved on the loan.
TPendagast: You’re really young. You’re not old enough to qualify for reasonable insurance rates. You’re considered an insanely high risk.
Unfortunately, the business world operates on some very antiquated ideas of age. I recall when I was under 30 how hard it was to convince people I knew what I was doing in business because I was just a “kid.” It sticks with you until you are 30-ish (depending on how old you look). It sucks in sales, too, because some people won’t hire you because “you’re just a kid.”
The best thing to do is build organically right now, acquire things through cash, trade, get direct loans from people you know like family, build your personal credit through some controlled credit cards.
Around the time you are 25, you make the gear shift. (Try and grow a mustache in the meantime, too. It helps. I’m being serious.) By that time, you have enough assets that you can use them as collateral for your first business loan, and then you are off and running.
grassmasterswilson: I would say apply for a few credit cards in the business name and charge something every month and pay it off in full.
hackitdown: The banks look at your credit, and/or your business’ credit. It is important to remember that they also look at the truck you want to buy to be sure it is worth the loan amount. They want to be sure they can repossess and sell your truck if the loan goes bad.
ztman: When my son was 18, he had a credit score of 830. How? I added him to one of our credit card accounts. The credit history of that account gets attributed to the joint account holder. Note: You have to get added to the account, not just added as an authorized user. I don’t know if you can add an LLC to an existing credit card account, but you may want to ask.
shane-pa: You are young. It will take time. Have a one-on-one with the branch manager of the bank or credit union. They will tell you their thoughts and reasons on how they lend money to commercial businesses and how to build credit. Bigger banks have commercial divisions that will help out. My bank wouldn’t entertain an application for a loan without a business plan. Only the lending source can answer your questions.
hurrikanelandscaping: I know I am young, but like I said I do have a sound reputation in my area. Not to say some people do not believe I am too young, because some certainly do. However that is not the majority of people.
Regarding insurance, I actually pay a very competitive rate for my Gl policy. I do agree I am considered a high risk for lenders. Lack of history equals high risk.
You mention growing organically through direct loans from family and personal credit. I do not mean to sound arrogant, but I cannot disagree more with this statement. Receiving a handout from a family member, even if it is to be repaid, is in no way organic growth. That’s irrelevant though because that is not an option. I also disagree regarding growing through personal credit. Although irrelevant for me right now because I do not have too many personal assets, in the future I do not want to have any major personal connection regarding credit or purchases with the business. This is to protect my own personal assets in case something does occur with the business.
When you talked about being 25, you talked about using assets as collateral for the loan. I did a liquid asset evaluation for my company and came up with $25,000. Obviously a lender would perform its own evaluation, but do you think this would be a viable route for me to go?
I’m here to learn and would appreciate any additional advice.
CrystalCreek: I’ll try to help. I’m 34 and have owned a business since 2004. I struggled to get loans my first five years. Then I had a breakthrough. I started buying equipment through my dealer, and I financed it through Sheffield. My first piece was an aerator for $3,100. The machine itself was the collateral. I did this and paid it off in three months. Then I bought a mower and paid it off in five months. Then I bought another mower and paid it off in four months. I did this five times in 18 months. I was also using two credit cards and paid them off every month. I would go to Home Depot in the winter and walk around and buy a soda just to build history. When I started the next season, I walked into a dealership and drove home with my first dump truck. Now I own too many dump trucks.
Dealers can usually get you set up pretty easily. I know this is not what you want to hear, but maybe it can help.
hurrikanelandscaping: I’ve gone the Sheffield route before. The only reason I did it was to build credit. Personally, I don’t believe in buying new mowers. They depreciate too much once you leave the dealer. Guys are going to beat them up and break them anyways. Plus, I worked in a dealer fixing mowers for four years. I quit working at the dealer this past spring, but I still put in a day here and there. So I’m trying to avoid doing the Sheffield thing again, even though I’m basically getting the machines at cost. I just feel like I am burning money making mower payments.
CrystalCreek: You need to build credit history. There is no other way to build history unless you take out small loans. We all went through it.
gulfjoe: I am in your shoes, except I am 32. I am going into my third year of business, solo, part time. I am an LLC, and I have a personal credit score of 799. I went to get a business loan at my business bank and they told me I did not qualify until I show them two years of tax statements showing a profit, if I remember correctly. I ended up having to do a CD loan so I could buy a piece of equipment off of Craigslist. Basically, I gave the bank $6,200 and they gave me a loan for $6,200, and I am paying on it slowly to build business credit. I was floored when they wouldn’t give me a loan for my business with my excellent credit history. Get some small loans and attach the business to them and pay them off.
Continue this discussion on LawnSite: New Business, Building Credit.