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Give Yourself Some Credit

I'm setting up a small business. How do I build business credit without damaging my personal credit score? -- E.P., Lansing, Mich.

Yours is a prudent question. Too often, people starting new businesses don't practice good financial forecasting and they find themselves needing more capital than they had anticipated. Since they've typically already invested personal funds in the startup, or put up personal collateral to get initial funding, they figure they might as well put company expenses on their personal credit cards too.

As expenses mount and early customers stretch out payments, they cannot meet payroll and they start trading off their balances to new cards offering limited-time low rates and applying for more revolving credit accounts, says Mary Kay Schneider, executive vice-president for small business credit services at National City Corp., a Cleveland-based financial services firm.

"Pretty soon they find themselves in a situation where they've applied for a lot of credit and they have high balances on multiple revolving credit lines. All those things combine to drop their personal credit scores," she notes.

CLEAN UP YOUR ACT. Fundamentally, your credit score is a measure of your financial capacity to repay obligations on time, and your willingness (or discipline) to meet those obligations under the agreed-upon terms. The score is largely a measure of how well you've behaved in the past, and says little about how well you intend to behave in the future.

"Improving your score is, for the most part, a matter of building a track record of paying on loans, leases, vendor lines, or credit cards which report to the primary credit rating agencies," says Tony Smith, executive vice-president of Chicago-based ShoreBank. "Your track record of paying...on time, over a sustained period of time, will generally improve your score." Your last 12-month history is more important than the 12 months before that, and so on, he notes.

"Be careful not to apply for too many credit accounts. Each credit application may have the effect of lowering your score, so apply where you expect to enjoy success first," he advises.

That said, the real key to achieving financial success for your startup is to think more broadly about financial sources and capital solutions. Put together a solid business plan that identifies where your revenue will come from, how much cash you can personally invest in the company, and what additional funding you'll need in order to keep operations going until you turn a profit. Build in a capital cushion that you can draw on to cover emergencies, bad luck, and faulty projections.

GOVERNMENT SUBSIDIES. "You might benefit from a combination of term loans and a line of credit," Schneider suggests. "Some loans term-out after three to five years and do not require you to make a large monthly payment immediately." Investigate the loan guarantee program operated by the U.S. Small Business Administration to see if you qualify. If so, the SBA guarantee will reduce a bank's risk when lending your new company money and generally make the bank feel friendlier to you.

"If you are creating jobs, often local or state governments have what are called 'linked deposits.' The government will subsidize the bank, which in turn will offer you a below-market interest rate," Smith says. "In some cases, the rate may be less than half of what you would normally pay." If you are a woman-, ethnic minority-, or enterprise-zone-based business, there are other local and national subsidies or alternatives for which you can apply.

Building a financial track record for your business will help you establish beneficial relationships with suppliers, vendors, customers, and even potential investors. If you decide to sell the company someday, having excellent business credit will be an asset as well. If you need help with your business plan, and particularly with financial estimates and calculations, get it at agencies such as your local Small Business Development Center, or SCORE office, Good luck!

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

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