Building corporate credit is important. You have your personal credit that you can use, but it is not recommended. If your business goes under, you too will suffer because you used your personal record to be approved for loans and other forms of credit.
However, if you have built corporate credit, you can get business loans under your business name. This way, you need not worry about having your personal credit record affected in the unfortunate event that your business suffers financial problems. At this point, we will not lie to you and say that it is very easy to build corporate credit if you are a startup. You can run into challenges along the way, but you can easily get around those hurdles if you know already what to expect.
Here are some of the challenges that startup companies encounter when trying to build corporate credit.
Difficulty in Securing Credit
In order to secure corporate credit, a borrower has to have a good credit record (https://www.creditkarma.com/). However, in order to build a credit record, the borrower has to have past record of good credit standing, i.e. paying debts to an established creditor on time. You can see that you can be stuck in what could be called a “logic loop.” You need credit to borrow money, but you have to borrow money first in order to build credit.
That is the first challenge that startup companies encounter when they try to apply for a credit extension. How can you borrow money if you do not have a credit record, and building a credit record means that you have to secure some form of credit and settle it diligently? To get out of this challenge, you need to secure help from a reliable third-party company.
What is a Trade line Company?
A trade line company engages in helping businesses build good credit standing. Its service runs as follows:
- Startup enters into a trade line contract with the company.
- The company loans the company money, but the money is not designed to be fully paid off.
- The parties agree on an interest rate that should be paid every month, but principal is excluded.
- The startup agrees to pay the interest rate for a few months until the agreement is concluded.
- The principal amount is returned to the trade line company after conclusion of contract. Startup pays the remaining amount pending in the contract.
How Does This Benefit Startup Companies?
The startup company, with its monthly payment on the interest rate, gains positive trade lines as a result. This is because the monthly interest payment is noted on the startup company’s credit record. As the contract progresses, the startup’s credit record is also built up. This way, they can now apply for credit from other providers and gain approval easily. The entrepreneurs do not even need to use their own personal credit record and put themselves at risk, thanks to the assistance provided by the trade line company.