Boost Your Business Credit Rating

One of the problems with starting a business is that the owner may have decent credit ratings, but the business has none.  Before your business can borrow money, you will need to establish credit in the company’s name, not your own.

One of the best ways to start your business credit history is a cash-secured loan.  You pledge cash as collateral for a loan from the bank, then pay off the loan.  At the end of your loan payments, you get your cash back.

Getting a Cash-Secured Loan

The procedure is simple.  You put your cash in a certificate of deposit (CD) with your bank.  Banks typically lend up to 90 percent of the value a CD.  The interest rate on the loan will run 2 percent to 3 percent higher than the rate you are earning.

The bank is guaranteed to make money on the loan because it gets paid more for the borrowed money than they are paying out on the CD.  In addition, the bank is guaranteed full repayment, because it can take the cash if you default on the loan. That is why this loan is easy to get.

Using this type of loan, you can start your business off in a good direction by paying off the debt and having it reported under your company name.  Note that you should not plan to pay the loan with the cash that is in your CD, because that cash will be unavailable throughout the term of the loan.  You will need business income that can cover the debt service.  Also, be sure the loan is in your company’s name.

Starting a Business Relationship

Using cash as loan collateral can help you establish a banking relationship that can pay off down the road.  Banks like customers who have a good track record with them.  Eventually, you will qualify for a business loan when you need it, and your relationship with the bank can go a long way toward getting a conventional loan approved.

Bailing Out of the Loan

In the event you cannot keep up with the loan payments, you can sign the CD over to the bank to satisfy the loan.  This will pay off the loan and boost your business credit rating, because all that will show on your credit report is a paid-off debt.  Credit rating agencies don’t care how you pay it off.  Just make sure to make arrangements with the bank to take the CD before you miss any payments, because missed payments will hurt your credit score.

Avoid using a cash-secured loan for your business if you know before you apply that you won’t be able to make the payments.  You will incur unnecessary interest charges on the loan.  In this case, you would be better off using your cash instead of borrowing money.

Proving Your Company’s Credit-worthiness

Besides boosting your credit rating and starting a relationship with your bank, cash-secured loans have another benefit.  You can show yourself that you can earn enough from the business to service a loan.

This is no small matter.  It’s one thing to believe you can make enough profit to afford loan payments; it’s quite another to say you have done it. This can boost your confidence, letting you know your business is on the right path for growth.

A cash-secured loan is a handy technique for entering the world of business financing.  Even established businesses can use it to improve an existing credit score.

 

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