Ultimately, the purpose of true “business credit” is to have your business borrow money with you – personally – having to guarantee repayment.
In other words, if your business can’t pay, then you don’t have to pay either.
First, the bad news about getting business credit without a personal guarantee:
If your business is brand new, just incorporated, it’s unlikely you’ll get business credit without a personal guarantee.
Banks and other lenders don’t really care how successful you’ve been in the past with other businesses. Remember, incorporating a C-corporation or forming an LLC creates a completely new and distinct entity from yourself.
Your good personal credit won’t get your company business credit because – if you get true business credit – then your credit isn’t on the line! Since you aren’t personally liable for business debts, why would a bank take into account your good personal payment history?
So, with a new business, it’s almost certain that a bank or other lender will want a personal guarantee.
In my practice, I’ve seen multi-millionaire real estate developers have to personally guarantee loans to new LLCs that are holding their latest real estate project. This is despite the developers having worked with the bank for years and having a track record of success.
The bank’s reasoning actually makes sense.
Imagine that you’re the loan officer approving that loan to a new LLC owned by long-standing customer. Unknown to you, your successful, long-standing customer has landed on some hard times. Gambling problems, drug or alcohol addiction, impending divorce, whatever.
So this “successful” person gets desperate and decides to commit bank fraud. He forms a new LLC to develop a new commercial property. He comes to you for a loan for his LLC, but doesn’t want to sign a personal guarantee, based on his long history with the bank.
You – stupidly, and against policy – grant a loan to this brand new LLC without a personal guarantee from the developer.
He loots the company, the development is never built, and the bank is stuck holding a worthless loan against a shell company. You are now working at Mickey D’s, as no bank would hire you to clean their parking lot after that disaster.
One source of business credit without a personal guarantee
You most likely source of business credit for a newly formed LLC, without a personal guarantee, is your suppliers.
Suppliers are often eager to establish new customers and are willing, if they get a good feeling from you, to extend you 30, 60, 90 or even longer to pay your bills.
Take advantage of supplier discounts and extensions of credit. A supplier is much easier to deal with than a bank, and their cooperation can help you through early growth periods where your earnings might outstrip your cash.
If you are in an industry where you get paid immediately, and you can pay your suppliers in 30, 60, 90+ days, then you are really in a good position because you can essentially grow your business on your suppliers’ credit.
Your suppliers can help establish your business credit
Not only are your suppliers a good source of business credit early on, they will also help you establish credit for your business.
If you have signed up for a Dun and Bradstreet account and number, many of your suppliers will report your timely payment history to them.
For those unfamiliar with Dun and Bradstreet (also called D&B), they are one of the largest keepers of business credit history. The same way Trans Union and Experian track your personal credit history, D&B tracks the credit history of businesses.
When your business applies at a bank for business credit, the bank will run your D&B credit history, and particularly pay attention to your Paydex score.
Your Paydex score, among your other D&B scores, is heavily influenced by your suppliers’ reporting of your payment hisory.
Do you pay on time?
Do you pay in full?
Have you forced suppliers to file lawsuits against you in order to collect?
All of these questions, and more, are answered in your D&B credit score. And most of that data comes from suppliers who deal with your business.