Establishing a credit line for a start-up business can be tough. This is because providing finance to a company that doesn’t have revenue is a huge risk. All hope isn’t lost though; there are ways to get a business creditworthy in order to be in a position to receive credit.
First of all it is important that the directors of the start-up are aware of their own financial situation and continue to monitor it going forward. If the financial data of a business is limited, those providing credit will often look to the people behind the venture as an indicator of the risks involved. Checking your credit file, especially before an application for major credit, is a good way to start. There could be errors or defaults that need resolving prior to any request for finance. Also, it is imperative that any personal credit repayments are met on time. Paying by direct debit should circumvent the possibilities of missed payments.
If there is enough information about your business available, it is recommended that you register the company with a credit reference agency. This will allow you to frequently check and keep track of the business’s credit file which could help you avoid shocks further down the line.
Making payments on time is key and a business without a credit file, or limited financial information available, can often find credit scoring agencies will check with suppliers for example, to find out whether invoices have been raised on time with payments met. Being a good payer consistently, can only have a positive impact on the business’s credit risk.
Having any sort of credit granted to the start-up and then crucially meeting the payments on time is an excellent way to build the credit score of the business. It will show credit agencies that the company is responsible and organised when it comes to meeting credit agreements and it will minimalize the perceived risk.
Targeting companies who specialise in start-ups is always a good idea at the beginning of a venture as they understand the financial situation at entry level. They will be more willing to offer credit than some of the bigger lenders who impose stricter risk assessments.
It is definitely difficult for start-up companies that have been trading for less than two years to obtain credit due to the risk factors involved and the lack of financial information available to the approached creditor.
Start-ups often want to lease vehicles or other assets for their company and this is a common credit line investigated in the early stages. There are things that can be done to improve the chances of approval. A personal guarantee may be sort, an opening balance sheet will be required and there is a need to provide evidence of trading. Bear in mind a director’s guarantee and at least 3 months of management accounting data will be necessary to be considered as a start-up.
The people involved at the onset are crucial, as is their own financial situation. It is best to involve somebody who has a good track record in business. This will give potential creditors more peace of mind, especially if they have assets and a very good financial history behind them.
