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Lisa Petti of Kayokoko Swimwear, based in Windsor, Ont. (Kayokoko Swimwear/Kayokoko Swimwear)
Lisa Petti of Kayokoko Swimwear, based in Windsor, Ont. (Kayokoko Swimwear/Kayokoko Swimwear)

Financing

Skimpy credit rating? Here's what to do Add to ...

The basement of Lisa Petti’s home in Windsor, Ont., is brimming with bikinis – a testament to the success of Kayokokoswimwear.com, the online shop she started three years ago with $6,000 and a personal credit card.

“You should see my guests sitting there watching a hockey game with bikinis practically falling on their heads,” jokes the ambitious 25-year-old, noting that Kayokoko Swimwear began as a sideline to her career at a pharmaceutical company but has since become nearly another full-time job.

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Ms. Petti started the business without the help of a financial institution. Windsor and its automotive industry had been hit hard by the recession, and it was difficult, even as the economy was coming out of the downturn, to be approved for credit. So she relied on her own resources and hard work, including persuading suppliers to give her 30 days to pay for inventory. By offering free shipping to anywhere around the world, she went from filling one to three orders a month in the first year to shipping out 250 to 300.

As her business grows, Ms. Petti recognizes that she may need a credit backup plan.

“When I incorporated last year, I sat down with the business expert at my bank and discussed a line of credit to increase my inventory,” she recalls. “At that point, I was hoping to do everything on my own, but some time [this year] I’ll be sitting down with him” to see about finally getting that credit.

New businesses like Ms. Petti’s commonly go through credit growing pains, and small business experts say economic uncertainty in recent years has exacerbated that.

“Since the 2008 recession, it’s definitely become more difficult to get financing than it was before,” says Brent Finlay, a Waterdown, Ont.-based business financing specialist and author of the Definitive Guide to Business Financing. Although the prospects for entrepreneurs seeking credit have improved, “lenders are still a bit more cautious and there are a lot less lenders – a lot of lenders have failed and disappeared from the landscape,” Mr. Finlay says.

Still, it’s important to apply for a business line of credit or credit card, even if it isn’t needed immediately, say both Mr. Finlay and Joe Collura, the Bank of Montreal’s small business area manager based in Vaughan, Ont.

“Credit, when you utilize it properly, is a very effective tool,” Mr. Collura says. “If you don’t have those receivables coming in in a predictable way, or you need to address seasonal pits and valleys, then you can turn to your cash reserve, which could be in a line of credit.”

To help secure and build credit, the experts offer these tips:

Make your business identifiable: Registering and incorporating your business and obtaining a Canada Revenue Agency identification number will help establish your business as a separate entity. “Get whatever identifiers are available to you so you can incorporate those into your credit applications – and some creditors will require those things anyway,” Mr. Finlay says.

Maintain good personal credit: When just starting a business in particular, creditors will want to examine your personal credit history. “Everyone’s financial picture tells a story, and we want to get to the bottom of what the story is and if they have strong financial character. … [For instance] we look at the individual’s two-year personal financials to understand what their income has been like, previous employment and whether it relates to their new business,” Mr. Collura says.

Lenders usually determine a person’s credit-worthiness by measuring debt compared with income, with a debt-service ratio of higher than 40 per cent indicating an inability to keep up with debt payments.

Mind your credit score: Securing credit often hinges on your credit rating with reporting companies such as Equifax and TransUnion, which get their information from lenders. So ensure whoever you get credit from is sending your data to reporting companies. Credit scores in Canada are based on a statistical formula, and range from 300 to 900, with higher scores indicating less risk to lenders.

“In general, it’s going to be easier [to be approved for credit]if your score is over 650 than below it,” Mr. Finlay says. “Lenders also want to see you have credit established at different places – they tend to want to see two or three different credit sources with different lenders because it shows you’re managing more responsibility well, which speaks to your ability to handle credit,” he says. “At the end of the day, the longer you are getting credit and it’s being reported, you’re building credit.”

To help boost your credit score, pay all your bills on time, don’t max out all sources of credit at once, and keep account balances below 75 per cent of your available credit.

Develop a thorough business plan and keep it updated: Lenders will want to see a well-written plan before advancing credit. “We want to see whether a business has a history of sustainable growth, where profits may have fallen, has inventory been ramped up,” Mr. Collura says. They want to know who is running the show, “the owner’s ability to service debt and how well they have done in managing credit already existing.”

Look outside the lending box: In addition to banks, businesses may seek funding from credit unions and even governments, which can offer grants and loans. “Major banks are very difficult to get financing from because they are such low-risk lenders,” Mr. Finlay says. “A credit union has to work a little harder because it may not have the same brand recognition. If it gives you a small amount of credit and you’re more responsible with it, they’re liable to give you more.”

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