How to Get a Line of Credit to Start a New Business

Have an idea about starting a new business? Looking for ways to make your small or home-based business grow?

The most common form of small business in the U.S. today is one individual operating as a sole proprietor, owning and running a home-based, unincorporated business, personally financing the enterprise and paying federal taxes on a personal return.

But this way of doing business places severe limitations on growth and makes the owner personally liable for all debts and financial obligations if the business slumps.

If you want to launch or expand a small business, there are several options, including legally establishing a corporation or a Limited Liability Company (LLC). By incorporating, you open the door to more options, including obtaining a commercial loan or credit line to finance your ongoing operations or expansions.

By setting up your own company, you will be on the path to obtaining a line of credit from your community bank that can help you grow and prosper.

Here’s what you need to do:

  • Before making any decision, arrange a meeting with your community banker to discuss the advantages of operating as a legally incorporated enterprise, the benefits of obtaining a line of credit and the basic requirements for incorporation.
  • Prior to meeting with the bank, prepare a brief summary of your business plan, plus information on your personal assets, bank accounts and credit lines (personal credit cards, accounts with merchants, bank loans).
  • To grow your existing small business, you’ll need an adequate cash balance. These funds will be needed to cover operating expenses, acquire an office or expand your operations. To secure this critical financial base, a line of credit from your community bank may be necessary. And when you meet with your local banker, inquire about options available from the U.S. Small Business Administration (SBA) or other government agencies.
  • In order to qualify for a commercial loan, your company needs to be a legal entity separate from your individual finances. Talk to your community bank representative about the options for structuring your business: a corporation (some states allow S Corporations, a variant of a standard corporation), an LLC or a partnership, each of which has an impact on paperwork, taxes and personal liability.
  • For complete details on the option you choose, talk to an accountant and/or commercial lawyer. The best way to set up your company will be through either of these two professionals. While these professional services are an expense, the cost is well worth it. Your company will begin on a firm legal footing.
  • After your company is established, you’ll need to obtain a Federal Tax ID Number from the IRS and secure local or state businesses licenses. Aside from federal taxes, find out if you will need to file returns and pay state, local or county taxes of any kind.
  • Set up a standard checking account at your community bank in the name of your new company. As backup, you could also open a savings account or obtain a CD in the name of the company. These accounts will be your initial capital base and will also be reflected in future credit reports.
  • Obtain an ID number from a business credit bureau like Dun & Bradstreet, which will provide information on your company and credit profile to the public. When someone wants to find out basic information on your firm, they will check with D&B. You’ll need an IRS tax ID number to be listed by D&B.
  • Obtain a separate telephone number for your business and decide whether you will start out by leasing office space or working from a home-office until you can set up a separate place of business. You should also have an email account (and perhaps a fax number) for your firm. If you set up an office outside your residence, you’ll need to open an account with your regional power company and, for TV service, a telecom provider (which may be the same as your phone and fax provider). These new accounts and the rental agreement will be the first steps in establishing your company’s credit history.
  • When you need office supplies, equipment, etc., find vendors that will offer you good quality and service at competitive prices. You may have to pay cash at the outset, but meet with a representative of each vendor and try to set up a small credit line, perhaps for 30 or 60 days.
  • Pay all of your company’s bills and other obligations on time. Keep full records of all your firm’s financial activities. You’ll need a computer and easy-to-use business software.
  • If you want to hire employees (full or part time), find out from your lawyer or accountant about the labor laws and regulations that apply to your business. Make you sure keep full records on all employee activity, hours, pay, days off and benefits (if any).

Once you’ve been in business for a few months and have established a record of financial responsibility, talk to your community banker again about obtaining a commercial credit line. This could be used to help finance operating expenses, acquiring new equipment or general expansion.

Sources: Internal Revenue Service (IRS), the Small Business Administration (SBA), Entrepreneur, Demand Media, interviews with small business owners.

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