It’s common to use credit to finance your business venture, but not everyone is always approved. According to the Federal Reserve Bank of New York, more than 50 percent of small business owners who apply for loans fail to obtain them, and it’s usually because of poor business and personal credit scores (or recipients that have been mismatched with lenders).
What Is Business Credit?
Strong business credit doesn’t just help you secure a loan; it’s also essential for attracting new business. Unlike personal credit reports, anyone can access your business credit report, including current and potential customers, partners, vendors, etc. Your credit profile represents your credibility as a business, which is very important.
It’s critical to distinguish between personal and business credit scores and how they affect your small business. A business owner uses more credit than a consumer typically would. Keeping your personal credit history separate from that of your small business may gain you access to more credit than you could receive as a consumer.
Instead of worrying about their credit, many small business owners look to friends or family to borrow money — this is not recommended! Taking the appropriate steps to build your business credit independently will really set your business up for future financial success.
How to Build Business Credit
If you received a “no” from a lender, or you’re looking to build your business credit first to qualify for lower interest rates, check out these 10 steps below.
1. Establish Your Business as a Separate Legal Entity
Whether you’re planning to be a sole proprietor, LLC or S-Corp, schedule a meeting with a tax advisor or financial planner to determine which legal entity best fits your small business. There are plenty of websites out there such as LegalZoom or Rocket Lawyer that can help you complete the required paperwork and pay the fees necessary to file with your state.
2. Get a Federal Tax Identification Number
The IRS uses an employer identification number (EIN) to monitor businesses. Just as your social security number serves as your ID number for personal taxes, your EIN serves this same purpose for your business. While it’s not a requirement, it does help establish your personal finances as separate from your business finances.
3. Set up a Business Checking Account
This will continue to keep your business finances separate and allow you to understand where your money is going. It will also help you track how much it costs to run your business and what your cash flow looks like. Take some time to research the best banks for small businesses.
4. Keep Your Information Current With All Credit Bureaus
There are three credit bureaus that collect data to create business credit scores: Dun & Bradstreet, Experian, and Equifax. However, business credit scores are much less streamlined than personal credit scores. You never know which credit bureau your vendors, creditors or prospects will check, so it’s best to maintain all of them. The more complete your profile, the better.
5. Make Payments to Creditors on Time or Early
Open a business credit card and always pay it on time or early. This will show a positive payment history directly tied to your small business. One of the biggest risks to new business owners is relying on personal credit cards to fund operations. By doing this, you can damage your personal credit and take on unnecessary liabilities.
6. Establish Trade Lines with Your Vendors and Suppliers
You can also consider opening lines of credit with your vendors and supplies. Setting up credit this way allows your business extra time to pay for supplies and services (net 15, 30 or 60 days). For example, if you work in carpentry, you could open up a small credit line with Home Depot without reporting or checking on your personal credit information.
7. Make Sure Business Loans Count on your Credit Scores
If you make your payments on time and the lender you’re working with reports to a business credit bureau, small business loans can actually increase your business credit score. Confirm with the lender you choose whether they report before taking out the loan.
8. Keep Your Public Records Clean
Prospective customers, vendors, suppliers, etc. can see any details concerning your business’ history of paying creditors. These reports will also show any public records filed under your business name, including bankruptcies, judgments, and liens. If any of these are filed against you, they can be on your record for up to 10 years.
9. Use Business Credit Cards to Manage Your Cash Flow
Credit cards may offer fast and flexible financing at lower interest rates than other types of quick funding like merchant cash advances. Just make sure the overall cost (including interest paid) will result in profit for your business. Sometimes, if you keep a revolving balance on your credit card, the interest rate may be higher than what you’d pay on a credit line.
10. Monitor Your Business Credit Regularly
Check your business credit reports a few times a year. Errors and fraudulent activity can impact your business credit, making it more difficult and expensive to borrow money. If you find an error, you can file a dispute with your credit bureau to get it taken care of before it causes a more significant issue down the road.
Your business credit score is a significant factor for lenders, vendors or suppliers deciding to work with your small business. A lender wants to see that your business has a good track record and is paying accounts on time and in full. Having a strong business credit score can mean receiving better terms for loans, and it will help open up doors to more affordable, long-term credit. Taking these steps now will get you one step closer to your dream of owning a thriving business.
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