How to build a business loan portfolio

The corporate structure of a company determines the credit line extended. Banks are less likely to extend credit to an unincorporated business or LLC. Most companies with strong credit portfolios are structured as LLC, S-Corp, C-Corp, or non-profit. Every business owner needs to choose the best possible type of corporation for their business based on the following information.

LLCs are popular with small business owners due to their simplicity. Anyone with fewer than 20 employees will benefit from the LLC structure. They are essentially business hybrids that combine a business partnership with a corporation. An LLC offers the protection of a corporation, but has similar paperwork as a business partnership. Taxes are reported under the individual shareholder’s capital gains rather than the entity level as in a C-Corp.

S-Corps share a similarity with LLCs. They are not taxed at the entity level and income is recorded as shareholder capital gains. S-Corps taxation comes from a special IRS designation. Small businesses with more than 20 employees may be eligible for this designation.

C-Corps protects business owners from liability entirely because they are financially separate. However, C-Corps are subject to double taxation. The corporation is subject to tax, as well as dividends from shareholders. The articles of incorporation have some statutes that can offset a portion of the taxes, but business owners should carefully consider double taxation before choosing this option.

Most businesses do not qualify as non-profit organizations, but those that do must be established accordingly. Nonprofit finances are completely separate from business owners and offer full liability protection. However, nonprofit organizations also qualify as 501(C)3 or tax-exempt, since they don’t technically make a profit. A charitable organization would qualify for a non-profit corporation.

Presenting yourself as a corporation, regardless of type, demonstrates a company’s authenticity and trustworthiness to creditors and potential investors. But creating a portfolio requires more time and effort than simply completing the documentation to onboard.

After determining what type of corporation your business needs, register with a credit bureau. Regularly used credit bureaus are Dun & Bradstreet, Business Experian, and Business Equifax. In fact, 99 percent of potential investors and creditors use these offices to determine how they will invest their resources. Registering with each credit bureau requires your EIN number provided by the IRS once a business is incorporated. Register with each agency separately and be sure to check your credit report. The offices will provide you with a DNB (DUNS) number. Even if your credit reports are blank, review them to make sure the information is accurate and check back later on a regular basis. It makes good business sense to monitor your company’s credit as well as your own. You can start applying for credit at any time, but it can take up to three years to get the credit you really want.

Creditors feel more comfortable lending money to an established business. Three years from the date a business is listed as a corporation is when creditors give a business larger credit limits. The reasoning is that a large percentage of businesses go bankrupt within the first three years of opening. This is not to say that it is impossible to obtain credit before that time, but the amount offered to a new business will be substantially less than the amount offered to an established business. Having credit, even if you don’t need to use it, will increase your ability to obtain loans or more credit when it’s time to expand your business. A good rule of thumb is to apply for credit every six months.

Never use your personal information when applying for business credit. This includes your social security number and date of birth because the business account will be linked to your personal finances if personal information is used. Even business owners who pay their bills on time will lower their personal FICO scores by raising their debt-to-income ratios. EIN and DBN numbers are what you need to apply for business credit instead of a social security number.

Build your business credit slowly. Start with smaller, easier-to-obtain credit accounts like Net-30 vendors. Gas station credit cards are relatively easy to acquire and a good place for small business owners to start. It takes two Net-30 accounts reporting to the credit bureaus to get to the point where you qualify for low-end revolving lines of credit, which will eventually determine a PAYDEX score. A low-end revolving line of credit is anything with a limit between $1,500 and $2,500.

A PAYDEX score is the business equivalent of a FICO score. A PAYDEX score ranges from 0 to 80. A score of 80 is the equivalent of a FICO score of 750. Dun & Bradstreet will not publish a PAYDEX credit score until four or five low-end revolving accounts are established and there are two months payment history for each account. Dun & Bradstreet is the highest rated credit bureau, so reporting a PAYDEX score is essential to advance to the next stage in your credit portfolio. Most experts recommend keeping all four low-tier accounts for a few months before trying to further a credit portfolio by applying for higher credit with mid-range revolving creditors.

The same process that is used to generate low-end revolving credit must be repeated when obtaining mid-range revolving credit. A mid-range account will provide a credit of $2,500 to $7,000. Again, set up these accounts before trying to go to the next level and apply for credit cards at the bank level.

Bank-level creditors like Visa, American Express, or MasterCard issue limits based on a company’s credit history. Slowly building a credit portfolio will help you receive the highest line of credit available to you. Once a business credit portfolio is established at all levels, it will be possible to qualify for most leasing programs and obtain bank-level financing for the business.

Starting a small business is always a risk, but there are ways to reduce the financial risks many business owners face by building a strong and reliable credit portfolio. Doing so takes time and considerable effort, but the professional gains that come from taking the right steps to get credit are well worth it.