Any business with the goal to expand should focus on building business credit from the get go. Even if you’re not ready to apply for business funding today, the time will likely come in the future. To qualify for business funding and manage your working capital, it’s important to build your business credit. There are several steps you can take to do so, no matter where your business is currently at in regard to its finances.
Here, we will break down the definition of business credit and share some ways to build business credit. This way, you can properly assess your working capital.
Business credit is a measurement tool that is used to qualify businesses for financing methods. In the same way that people have credit scores, businesses too have their own credit history and credit score. Business credit bureaus like Equifax, Dun & Bradstreet and Experian keep track of a business’ debt records.
This credit report is likely to be used by creditors, lenders, suppliers and insurance companies when they need to evaluate your creditworthiness to approve or deny applications and deals.
While there are ways to access business loans for bad credit, it’s less than optimal. Instead, you can follow these recommendations to build your business credit along your journey.
Some of these tips can be performed from the outset of starting your business. Others may happen over time. Either way, if you consistently take care of the following, your business credit will grow.
Once you start doing business, you need to let people know about it. We aren’t just talking about marketing and making sales. It’s important that you start to use your business name and establish its reputation. For starters, list your business phone number in a directory. Open a bank account in your legal business name.
Piggybacking on the previous point, use your business bank account and personal bank account accordingly. Separate the two and keep your business expenses and transactions solely within your business’ bank account. This one step will help overcome many hurdles, like dealing with taxes and monitoring your business expenses. It’s also a good idea to separate personal and business accounts because if anything is legally to happen to your business (like being sued), then your personal finances won’t be put at risk.
Some vendors and suppliers report to credit bureaus, others don’t. If it’s possible to do so within your industry, try to establish some relationships with vendors who do report to the bureaus. This way, you can build your reputation as paying bills on time and boost your credit history. For the vendors who do report to the bureaus, try to set up payment terms based on extending a line of credit. This way, you pay invoices on net-30 or net-60 terms and prove your creditworthiness (trust that you will pay what you owe).
Never miss a deadline to pay a vendor or bill. The detriments extend further than having to pay interest. It also will tarnish your credit score and go against the grain in your endeavor to build good business credit. What’s more is that if you are able to pay early, you can even get some extra brownie points and potentially fast track building desirable business credit.
Business credit cards will report to the credit bureau, so it’s worthwhile to open one or maybe a few. Just know that if you cancel a credit card, it doesn’t work in your favor. So, start with one and pay bills on time, or even early. Be sure not to overextend business lines of credit. Only use as much as you know you can pay back. A good rule of thumb is to try and only use less than 30% of available credit.
Consider establishing your business as an LLC (limited liability corporation) or incorporating your business (Inc.). Just like separating your bank accounts, this aids in removing liability on your person as to being held responsible for the business should you ever face legal ramifications.
An Employee Identification Number (EIN) is like a social security number for your business. It’s your federal tax ID and it’ll come in handy when opening business credit cards, business bank accounts and incorporating your entity.
Credit reports can be faulty. It’s up to you to monitor your credit history that’s stored with the aforementioned credit bureaus to remedy any issues that may come up. If you do happen to come across a mistake, be sure to notify the credit bureau and have it fixed.
With good credit, you may qualify for lower interest rates when agreeing to business financing. This helps manage cash flow. It’s always best to seek business funding with the lowest interest rates that you qualify for because the interest rate is the cost of borrowing the money. With a credit card, you can leverage the grace period before interest rates accrue whereas lines of credit won’t offer that same perk.
We’ve touched on some of the benefits of having good business credit already. But, to make sure it’s extra clear, here’s why it’s so important:
With good credit, you will automatically expand your options as to what kind of business financing you qualify for. Of course, there are business loans for bad credit or alternative methods of funding like merchant cash advances which won’t hold your credit against you. However, it’s always optimal to have broader options when it comes to financing.
Business loans will assess your credit score to extend loans. The better score you have, the higher likelihood you possess to get loans with lower interest rates. This is because you present less of a risk of defaulting (not paying back loans) to the lenders.
Vendors obviously prefer to supply goods to businesses they can trust will pay them. With good credit, you can set up preferable trade terms with your vendors and suppliers.
Building business credit is a great approach to expand your access to business funding options. The type and amount of debt you take on affects your working capital, so it’s the best case scenario not to carry debt.
With good business credit, you will be able to secure the best loan terms and deals possible as your business will be considered trustworthy since you’ve built a history of paying what you owe