Small business owners find themselves forced into a situation where they must provide a personal guarantee to receive financing. Lenders want to have this promise because it reduces their risk, but that action causes companies to pay more for the credit they need.
If the business fails, then the lender can come after the person who made the guarantee to recoup the losses.
Since many small businesses operate as sole proprietorships, a personal guarantee is already part of the credit application. Owners in this situation already have their individual and corporate assets intertwined.
If business credit is desired without a personal guarantee, then three specific steps must occur for building business credit without a personal guarantee to be viable.
How to Get Business Credit Without Individual Guarantees
Lenders are already hesitant to extend credit to new businesses. Finding an option with zero ties to personal assets will take some time and planning to accomplish.
That journey begins by implementing these steps as soon as possible. Then you can work to improve the financial reputation of the business in question.
1. Incorporate The Business
A business must be kept separate from individual assets to generate an offer without a personal guarantee. That means it must go through the incorporation process or become an LLC. Partnerships and sole proprietorships see the issuance of a business credit card like a personal loan. By filing for this structure, the company will become more like its own individual.
2. Build The Company’s Credit Score
Do you remember what it was like to try to get credit when you were young? Businesses go through this same process. The company must establish a record of repaying its obligations. That means the owners must apply for credit cards, third-party guaranteed lending, SBA loans, or store-based lines-of-credit to create evidence of responsibility.
3. Pay Bills on Time, Every Time
Creditors want to see that a business has the reputation of paying its bills before they will move away from the idea of a personal guarantee. That means the company might pay a higher interest rate on the loans or credit it receives for the first 12-36 months of existence to establish this record. This will be especially important if the economy makes a downturn into a recession and you see existing and new business slow.
Building business credit without a personal guarantee gets easier over time. If you focus on improving your Dun and Bradstreet score now, then the higher credibility levels you’ll need in the future will develop so that your company can secure an excellent lending product with a fantastic rate.