If you’re a small business owner, it’s important to start building business credit early in the life of your company. Good credit can open doors to the financing you’ll need for growth or tell potential investors that your company is worth their consideration. This article will explain how to establish and build business credit.
What you need to know
- The earlier you establish business credit, the more likely you’ll be approved for business loans.
- Business credit scores measure your business’s creditworthiness.
- Trade lines and credit accounts can help you establish business credit.
Understanding business credit
Business credit is not the same as the credit score and history of the business owner. Separate those two as soon as possible if you want your business to have its own identity. The key to growing your business credit profile is to ensure you’re doing business as a business and not as an individual who owns a company.
Using a personal card instead of a business credit card for company expenses is a common example of commingling your expenses. You might get away with writing your expenses off as a tax deduction, but they won’t appear on your business credit report. Worse yet, you’ll increase your personal credit utilization. That could affect your individual FICO® score.
Don’t think your business is “too small” for this. Small companies can build business credit using the same steps as larger corporations. Start now, and you might be able to get the business loans you need to grow and scale when the time comes. Without business credit, you’d need to rely on your personal credit score and history when applying for credit or loans.
How business credit scores work
You’re likely familiar with the FICO® scoring system used to calculate personal credit scores. But businesses have credit scores, too. Dun & Bradstreet ranks them on a scale of 0 to 100, while FICO Small Business Scoring Service (FICO SBSS) uses a scale of 0 to 300. You can check your business credit score at any of the following sites:
Dun & Bradstreet, Equifax, and Experian review your company’s payment history, including previous debts and current suppliers. They also look at your company’s revenue. These are all factors that lenders need to see when reviewing your company for a loan or line of credit. Your business credit score gives them a snapshot view of your creditworthiness.
Learn how you can build credit for your business.
Start with the basics: Establish your business identity
The first step to building business credit is establishing your business as a legal entity. Begin by registering with the state where you do business and applying for an employer identification number (EIN) from the IRS. Once you have that, you can open a business checking account with a dedicated business address and phone number.
This stage in the evolution of your company is a good time to discuss the business structure. Sole proprietors assume all the liability for their firm, while LLCs and corporations protect the assets of the owner(s)—which is one reason investors also prefer corporate entities. Speak with an attorney or business coach about which of these is the best model for you.
Your next move is to register with the three major business credit reporting bureaus listed above. This is a critical step in small business credit development, so don’t bypass it. These agencies won’t compile a report on your company if you’re not registered.
Build credit history: Tradelines and credit accounts
Tradelines are the terms and conditions of paying creditors, vendors, service providers, and suppliers. An example is a supplier that gives you “Net 30” terms on what you order from them. That means you have thirty days to pay them after you receive your order. Business credit monitoring agencies track whether you pay on time.
This also applies to business credit accounts. Pay your business credit card on time, and pay it in full each month. Carrying a balance incurs additional interest costs and limits your spending bandwidth. If you have a business line of credit, make your monthly interest payments on time, and try to pay down the principal as quickly as possible.
The amount of debt you take on and your payment history are two more variables that go into calculating your business credit score. They are used to determine your credit utilization rate, the amount of available debt your company uses. Lenders prefer to see that number under 30%. Paying your full business credit card balance monthly will help you get there.
Proper cash flow management is another important factor in business credit management. Running too close to the line and risking bounced checks and overdraft fees will not help your credit. Make sure you maintain a healthy balance in your bank account (enough to cover your short-term liabilities) so you won’t struggle to pay bills on time when they come in.
Monitor and maintain a strong business credit profile
You can monitor your business credit by registering with the three business credit reporting bureaus and logging in frequently. You should also receive regular email updates if you opt-in to them. Make sure to quickly address inaccuracies to prevent fraud or correct erroneous reporting.
Leveraging good business credit
Securing business loans with lower interest rates is more likely when you have strong business credit. You’ll also get better terms on loans and lines of credit, giving you the flexibility you need to grow and scale your business through avenues like funding a new product launch or building a new facility. Credit is also useful when you need new equipment.
Leveraging good business credit doesn’t mean spending more than you can afford to pay back. Smart business credit strategies incorporate a cash flow analysis and revenue projections. Both should be done before you borrow or use your business credit card. Understand what you can afford to do, then execute a plan to make your business more successful.
Small business credit development should be a part of your company’s growth strategy. Register your business with the state, open a business checking account, and register with Dun & Bradstreet, Equifax Business, and Experian Business. They’ll start tracking your financial activity and compile a business credit report. Then, it’s up to you to monitor and improve it.
Building a solid business credit profile takes time, so get started on this as soon as possible— even if you’re uncertain that the company will make it. If you can establish it, business credit for startups and small businesses could be the difference between success and failure.
Apply for a business loan without impacting your credit score.
