Of all the ingredients in a successful business, access to credit is the most frequently overlooked. Credit is, quite simply, the engine that builds big businesses out of start-ups, and makes the American dream possible.
“How far your business goes often depends on how well you manage your credit.”
Do you have to establish credit to succeed in the United States? For new Americans uncomfortable with the US debt culture, this is a critical question.
In the United States, credit is one of the pillars of the financial system, and having a credit rating is the primary way to prove to your investor, insurer or commercial landlord how trustworthy you are with money. Conversely, the lack of a credit history can severely limit your business’ growth and competitiveness, according to several New York financial advisers and credit specialists.
“This is a credit-driven country,” said José Made, a lending team leader at Accion USA, a micro-lender specializing in Spanish-speaking immigrant entrepreneurs. “How far your business goes often depends on how well you manage your credit.”
According to Made, you may need capital to finance a startup or expand, hire employees, move to bigger premises or buy new equipment. “Sometimes you need to take a loan in order to take the business on another level,” he said.
“You should see a business loan as an investment rather then debt.”
An infusion of credit at the right time could eventually increase your profit margins, said Yanki Tshering, the executive director of Business Center for New Americans, a microfinance company offering business loans to refugees, immigrants, women and other New Yorkers. “Credit is critical for growth and any entrepreneur who is unable to grow their enterprise will not be successful,” said Tshering.
However, as we will see later in this article, you don’t always need to go into debt to build credit.
Before You Borrow
Credit is not the only way to raise business capital.
“Before you immediately jump to establish credit, consider your goals and how credit fits into them,” recommended Chris Dlugozima, a certified consumer credit counselor at the nonprofit GreenPath Debt Solutions. Dlugozima said those looking to finance the growth of their business should first ask themselves the following question: “Is it possible to expand without borrowing?” If the answer is no, the next step is usually to find an investor.
Of course investors will ask you to pay them money back if the business is successful, and often require you to let them participate in decision-making too. The good thing about this option, Dluozima said, is that if the business fails, you don’t owe investors any money.
“How far your business goes often depends on how well you manage your credit.“ —José Made, Accion USA.
Another possibility is investing or re-investing your own money in the business.
A loan would speed up the expansion, but reinvesting your savings reduces risks, Dlugozima said. “Absent borrowing, expansion can still be done – just at a slower rate.”
Having credit gives a business owner flexibility and purchasing power, said Dlugozima. For example, when you need to purchase materials before filling an order, if you don’t have a credit history, your option would be limited to micro-lenders, community based nonprofit organizations with limited funds to lend.
“With an established credit history, you can tap into larger financial institutions where more funds may be available,” said Dlugozima.
The purpose of credit history is to show that you can be trusted to pay back the money you borrow, explained Dlugozima. “If your goal is just to build credit, it doesn’t require any debt,” he said. “You can use a credit card and pay it off in full each month. That can build your credit so that when you need it to finance a business expansion, it’s an option.”
Also, the stronger your credit, the better the chances you’ll get a good interest rate for your loan, and your Insurance company may use credit to determine your insurance rate. Finally, don’t be surprised if your landlord checks your credit scores before renting you a commercial space.
“It’s really important to establish and have good credit in this country for just about anything you’d want to do,” said Kristen Euretig, a certified financial planner and financial advisor at Brooklyn Cooperative Federal Credit Union. “It just opens doors for you.”