First, you’ll need to make sure your business is official to credit bureaus and lending companies. Grab an employer identification number (EIN) from the IRS, choose an entity designation, and make sure your business address and phone number are separate from your personal ones. You’ll also want to open a separate bank account for your business.
Next, you’ll want to get another number: a D-U-N-S number from Dun & Bradstreet. That number will allow you to begin a credit file with the well-known business credit bureau.
Then, you need to start building credit any way you can. Trade lines with your suppliers are one of the simplest ways to accomplish this as a budding new business; if you don’t currently have a viable supplier, well-known companies like Home Depot or Office Depot provide trade credit terms for businesses.
Short-term financing, either through a business credit card or small, short-term loans, can also be a good first step to build credit for a LOC approval. Either of these options will build confidence in your credit while also helping your business manage its short-term capital.
Finally, don’t forget to make payments. Otherwise, your business credit score won’t be moving in the direction you want. And be sure to follow up with any trade line suppliers to make sure they’re reporting your repayment to credit agencies.
Many lines of credit will require a personal guarantee from small-business owners. A personal guarantee means the credit is unsecured, so you won’t be including specific collateral like your home. But that doesn’t mean you escape any personal consequences if you don’t repay the loan.
Instead, you—as the loan’s cosigner—will be next in line for creditors if your business fails to pay its debts. Obviously, that makes things risky for you if the business starts to struggle.
This gamble balances out the risk a lender takes when so many small businesses fail in their first few years. You might be able to spread out your personal risk with the other owners or investors in your business (if you have them), with your spouse, or through securing the loan with alternate collateral.
You can also get lenders to waive a personal guarantee if they have enough evidence that you’re a safe bet to repay your line of credit. That evidence comes from your years in business, your past history with the lender, and a solid personal or business credit score.
To build up your credit score, you can take the steps we mentioned above. If you want to build up your score quickly, try and find trade lines with many different suppliers and use financing wherever it makes sense.
The longer you work with a lender, and the smaller that lender is, the more bargaining chips you have as a borrower. A big bank will note how long you’ve worked with them, but a smaller credit union or alternate lender will have more motivation to benefit from your continued business.
In the end, if you want to avoid a personal guarantee on your LOC, you might just need to wait it out. The longer your business has been around and the longer it generates revenue, the safer you’ll appear to potential lenders.