How to Secure Business Financing Without a Personal Guarantee

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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As a business owner looking to secure the capital your business needs to grow, many people may tell you that it's impossible to obtain a business loan without a personal guarantee. While this is generally true for a brand new business, if you plan for it from the outset, you can build your business credit fairly quickly and potentially eliminate the need for a personal guarantee for an expansion loan once your business is up and running.

Business credit is not nearly as difficult to secure as it might seem. No doubt, it is both a long and drawn out process. The important thing is to make sure you understand how to secure business credit for your company as a separate entity from your own personal assets. Your ultimate goal is to ensure that your business credit is tied into the performance of your business. Don't allow your personal credit to be used to secure the business credit your company needs to sustain its operations. You must establish business credit on its own, as a separate entity — not tied into any of your own personal assets. So, where do you start?

1. Must be either incorporated or a limited liability company

First and foremost, your business must be incorporated or registered as a limited liability in order to build business credit. Otherwise, your own personal credit will be linked to your business loan interest rate. Regardless of how many years your business has operated, if your business is not incorporated or a limited liability, then according to the banks and financial institutions that lend you money, it's nothing more than a personal loan. That means a much higher interest rate for you, and more personal risk with respect to the performance of your business. What's the difference in interest rate between a personal loan and a business loan? Well, it can easily be up to 8 to 10 percent higher on a personal loan. Therefore, the importance of making sure your business is properly set up right the first time cannot be stressed enough.

2. Build up your history with successful payments

The most common credit rating service in business today is Dun & Bradstreet, commonly referred to as D&B. There are others, but this is the one most banks use when it comes to establishing your company's credit worthiness. It's also the one your own suppliers will use to set your company's credit terms for purchases. D&B produces a report that contains your company's history of payments to all of your creditors. These could include the aforementioned banks, suppliers and vendors, and even the smaller bills your business pays every day.

The report includes a score that is tied into your company's ability to pay its invoices. Depending on how fast you pay off your invoices, your D&B report will produce either a high, good rating, or a low, bad rating. This grade or scale is referred to as your "paydex" score, and is the ultimate measurement of your company's ability to pay its bills. Banks and other businesses use this rating to determine your interest rates on loans, the amount of credit, and the terms they grant your business. Your company itself will likely use the D&B report of your own customers in order to grant or refuse them credit with your business.

3. The "paydex" score is based on a weighted average

Perhaps the most important aspect of your paydex score is to understand that it is a weighted average score. This means that the highest dollar value invoices, bills, or payments your company makes carries the most weight in your paydex score. So, when it comes to paying off your invoices, make sure to pay of the highest values first. This will make sure your paydex score is within an acceptable range. It's also imperative that you take an active role managing your paydex score. Take the time to speak with your creditors and work with them to make sure they know when they'll be paid. Having a high paydex score will get your business that lower interest rate on loans, more favorable terms with customers, and ultimately, save your business money.

4. Build credit with suppliers that do not require a paydex score or personal guarantee

A number of business suppliers, most notably office supply and industrial supply companies, do not require a paydex score or personal guarantee in order to establish credit terms with them. They may require your first orders to be prepaid, and they may start you off with a fairly low limit, but you can build higher credit limits and longer terms with them over time. If you want to establish business credit, consider using these suppliers rather than running to the local office supply or warehouse store with a company check or personal credit card. Some popular suppliers that can help you establish your business credit include:

• Uline — shipping supplies
• Grainger — office and industrial supplies
• Reliable — office supplies
• Quill — office supplies
• S. Walter — retail packaging
• Global Industrial — industrial supplies, fixtures and furniture

When it comes to securing the business credit your company needs, it's in your best interest to make sure your credit is tied into the performance of your business as a separate entity from your own personal liability. Doing this will protect you against an unfortunate bankruptcy of your business. In addition, it will provide your business with better interest rates on business loans, and better credit and terms with your own suppliers. At the end of the day, it's about saving money, getting the most for your efforts, and doing it right the first time.