Every startup at some point must determine how to properly finance their business, but for some people, taking into consideration the necessary steps to even get to the point of receiving that funding can sometimes become a mere afterthought. At Columbus Startup Week, the topic was addressed head on with a session led by Owen Pohl from JPMorgan Chase, and included participation from Our Family Home CEO, Evan Dubro; district director of the Ohio Small Business Development Center, Ariana Ulloa-Olavarrieta; and deputy district director of the U.S. Small Business Administration, Scot Hardin.
Called “Take the ‘Being Strapped' Out of Bootstrapping (HINT: It's All About Credit)”, the session focused on how people can start and scale a business by leveraging the business credit (and personal credibility) that they build. And, unless you're sitting on thousands of dollars in your savings, at one point you'll have to use that credit history to attempt to get some funds from a lender.
Who Needs Credit, Anyway?
Businesses generally run on credit. Regardless of the state of your assets, it is vital to open business accounts and actively use business credit lines.
Business accounts require just as much – if not more – responsibility for handling these funds. Bankers will reference these numbers, and the time it takes for you to make payments. This information will be crucial when they're deciding whether to issue you a loan, what interest rates are, and what the amount will be for.
Even if you have ten times the capital you need, you still need to activate a business account. Why? Because having pre-established credit will help move the process along quicker and in your favor. Credit affects many aspects of your life, especially when starting a new business.
On the panel, Dubro spoke on behalf of startups and small businesses, sharing his personal experiences with having to build his company's credit and what that enabled him to accomplish.
Steps for Building Your Startup's Credit
1. Understand the Risks
“This isn’t Monopoly money,” said Dubro. “Because, really, this is a huge risk – no one wants to go into bankruptcy, and that’s your highest risk. You may have the greatest idea and go forth, but you have to look at the risk and the reward that comes with it.”
Go into this process by understanding and coming to terms with the fact that this is risky. Taking the steps necessary to establish credit for your startup means having to take a lot of financial risk. According to Hardin, you have to look at the potential risks, costs, and time needed to establish your business and whether you think it's worth going into. Once you accept a certain level of risk, move forward with your plans.
2. Build a Financial Advisory Team That Can Support You from the Very Beginning
“When you go forth, the most important thing is: get good advice,” said Dubro. “Because you want to do it right the first time; [it’s not worth] going back and spending more money and energy. And, if you don’t know about this field, it’s: who do I trust? And you have to find a good person you can trust that will give you good advice…Find an equity partner that can offer the benefits and connections that will allow your company to grow.”
For Dubro, partnering early with Chase and others let him create a “high-trust” network of people. He was lucky enough to find and put together a group of people that knew each other and worked together to help connect his company to the people he needed to connect with, as well as give him the financial advice to build his company towards its long-term goals.
Ulloa-Olavarrieta expanded on this, and told the audience that it's important that founders “surround [themselves] with an advisory board that includes an accountant [and] that includes a banker.”
3. Use a Business Credit Card
“One advice, right away, was to get a credit card,” said Dubro. “Use your credit card, but pay it off. Use it to show the bank or any [potential] lender that you’re able to pay this off.”
Building your startup's credit really isn't any different from building your personal credit – by using your credit card and paying it off regularly and on-time, you slowly build a credit history needed to develop into larger lines of credit down the road or potential rewards.
“My credit card was that first step. The next step was a line of credit. Next step was an SBA loan…So, it built my credit from there.”
For Dubro, building this credit history by using a business credit card also allowed his company to get credit from different vendors that Our Family Home eventually worked with. The company also would regularly use the business rewards to award perks to his employees.
4. Be Aware of Your Cash Flow at All Times
“One thing I really learned from the lenders is cash flow[…]If you’re not cash flowing, it’s hard to get their money,” said Dubro. “Take some of those profits, keep it on your balance sheet, put it back into the business, and show to the individuals that the cash flow is being used towards the business…”
Building business credit is one thing, but building personal credibility with current and potential lenders is also important. If you want to show your lenders that you're being responsible with how you spend the money they're lending, then make sure to constantly re-invest profits towards keeping the company running as opposed to funneling a lot of it to pay yourself. Being deeply cognizant of your cash flow also enables you to understand where money is getting stuck, as well as sends the message to your banker that you understand what your business is doing and that you're a credible figure (which can help you out when you ask for more money down the road).
“You really need – as a business owner – to understand what your cash flow is and what it looks like,” emphasized Ulloa-Olavarrieta. “[This] creates a good rapport with your banker.”
This article is part of a Startup Week content series brought to you by CHASE for BUSINESS. Startup Week is celebration of entrepreneurs in cities around the globe.CHASE for BUSINESS is everything a business needs in one place, from expert advice to valuable products and services. Find business news, stories, insights and expert tips all in one place atChase.com/forbusiness.