Did you know that if you have a freelancing business then you may be able to secure funding without having to leverage your own personal credit?
Because a freelancer’s revenue or income may fluctuate from month-to-month or project to project, it is sometimes difficult to get access to cash from traditional lending sources like banks. For many of us, the traditional model of applying for a secured bank loan or line of credit just won't work because on paper, we may be seen as high risk.
So, what can you do when you're at the point when bootstrapping is no longer a viable option or you need to generate additional revenue but you don't want to continue pulling from your own personal resources or you don’t want your personal credit to be the determining factor in securing funds?
You may want to consider establishing business credit.
What is business credit?
Unlike personal credit which is connected to your SSN, business credit is credit that revolves around the health and history of your business as a relates to your business’ ability to borrow and pay back money. Logically, if your business has never borrowed money then how can you demonstrate a history of credit worthiness? Well, you can't.
And that's why business credit is not as easy to secure as personal credit. Think about freelancers who would benefit from a corporate credit card. Large corporations like Dell, Target, and COSTCO will want you to demonstrate or prove that your business is credit worthy before issuing a business credit card, regardless of your income, earning potential, or personal credit score.
Now, I am far from an expert, but here's what I have uncovered as I have tried to figure out if this is the best next step for my company (which was born out of freelancing).
Get your numbers ready.
You will need an EIN and DUNS number. DUNS is used to monitor your company's credit score.
Establish NET 30 vendor lines of credit.
Think of the supplies that you use like paper, ink cartridges, toilet paper, and envelopes. Rather than directly purchasing these items from a big box store or a national retailer, you may want to consider purchasing them from a company that is willing to give you 30-day net in business credit.
This allows you to establish credit history by providing your EIN; the retailer establishes a trade line in your company's name; they supply the product to you need and you pay for it. According to creditsuite.com, it’s important to try to establish at least 5 vendor lines of credit.
"You need to have a total of at least five (5) Net 30 day pay accounts reporting... Pay your Net 30 vendor accounts in full and on time. You must be patient and allow time for the vendors’ reporting cycles to get into the reporting systems. It typically takes 3 cycles of “Net” accounts reporting to build credit scores."
Good credit is the objective.
The key is that you want to pay your balance within the specified time-the sooner, the better. If you don't pay within the specified timeframe, this can have the opposite effect of what you want and you will end up establishing a negative credit history which defeats the purpose.
Your trade lines and payment history will get reported as a part of your company's credit history. If you are intentional about building up your net 30 trade lines, before you know it, you will be positioned to get additional lines of credit. With this credit, you don't have to have as much cash flow during those periods when business may be slower than you anticipated.
Over time, you can leverage your credit to secure a traditional loan, get business credit cards, and establish your business credit worthiness.
Is it worth it?
Now, for some of us, this may sound like jumping through hoops with high heels on during a thunderstorm. The verdict is still out for me, but I know people who have had great success using this to take some of the financial pressure off.
So, I strongly encourage you to do additional research and make an informed decision to determine if obtaining business credit is best for you.