A strong business credit profile can help a business acquire loans easier, pay lower interest rates, and get better loan terms. Having a high business credit score is beneficial, but it isn’t always an easy process. It takes businesses about 12-18 months to improve their credit scores.
Even though the process is long, it is well worth the work you put into it. According to a study done by the National Small Business Association (SBA), 20% of small business loans get denied due to poor credit.
What is Business Credit?
Business credit shows a company’s ability to pay back a loan, credit card, or other financial obligations on time. It gives a good indication to lenders and suppliers of how trustworthy a business is. In return, these suppliers will be more willing to offer their service or goods in exchange for financial compensation. Business credit is obtained through a company’s EIN/TAX ID and is separate from personal credit.
Reasons for Building Business Credit for a Small Business
- It makes qualifying for a loan much easier- Lenders will be more willing to give out a loan since your business already has a proven track record of paying them back on time.
- A high business credit score allows you to negotiate better interest rates and loan terms- A lower interest rate can make it easier for a small business to pay back their loans faster, improving a company’s credit score.
- Business credit separates your personal and business financials- If by chance, your company struggles to pay back a loan, your personal credit score won’t be affected.
- Your suppliers will set better terms- Instead of having to pay for all the products you purchase in one go, your supplier might be willing to offer a 30,90- or 120-day payback period.
10 Steps to Build Business Credit
Step 1: Register your Business as an LLC
An LLC (Limited liability company) is a business structure that separates your personal assets from your business assets. This means that your personal credit and business credit will not impact one another.
However, if you choose to operate as a sole proprietorship, all loans, and other financial activity will be tied to you personally. If your personal credit score is high, this can be beneficial, but your personal assets can be at risk if your company acquires debt.
Step 2: Obtain an EIN/Tax identification number
An EIN is a nine-digit number that identifies a business entity. This number is used when filing taxes, opening a business bank account, or applying for a business loan.
An EIN also adds credibility to your business, which can be beneficial when working with large suppliers. These suppliers will be more willing to work with an established company than with someone running a business on the side.
Step 3: Open a Business Bank Account
A business bank account allows you to separate your business expenses from your personal expenses, which will make it much easier to keep track of money coming in vs. going out.
As a business owner, you will have to pay personal income tax, and your business also has taxes to pay. This can become confusing and lead to problems with the IRS if you don’t separate your finances. Another issue you can encounter is when there is a problem with your business checking account. If the bank puts it on hold, you won’t have access to business or personal funds.
Step 4: Set up a Business Phone Line
A business phone number will allow you to list your business in the 411 directories. This is useful as many insurance companies, creditors, and lenders will call to verify if your business is legit.
Having a dedicated business line will make it easier to separate personal calls from business calls. It also adds to the professionalism of your business when greeting customers with a custom voicemail. A phone line will also make it easier to redirect calls to multiple different employees within the company.
Step 5: Set up a Website
Before lenders can grant business credit, they often research your company through the internet. Having a website and domain for your business can significantly improve the chances of being approved for business credit.
In addition to a website, you can also have a professional email that you can use to communicate with lenders, suppliers, and customers. The more established your business is, the better chance you have of building a credit score.
Step 6: Frequently monitor Business Credit Reports
A credit report can give you insight into areas that need improving that will help you build your business credit. You can stay up to date with any changes made to your business, and if there are any fraudulent activities, you will be alerted. If any fraud happens on your account without you knowing, it can poorly impact your business credit score.
Another benefit of having a credit report is you can obtain information on other businesses, which can be helpful if you are looking for a trusted supplier or vendor.
Step 7: Secure a Business Credit Card
Not only does a business credit card help grow your credit score with timely repayments, but it also has many other benefits. One of the benefits includes purchase protection, which gives you the option to dispute payments if goods are lost, stolen, or not delivered.
If you are a new business owner on a tight budget, then a credit card could help relieve the financial pressure with a line of credit. Enjoy cash back or travel rewards whenever purchasing with your credit card.
Step 8: Work with Vendors and Suppliers
Suppose you have a good relationship with your vendors and suppliers, and they are willing to let you make payments over a 30- or 90-day period. In that case, they can report back to the business credit reporting agencies. These agencies collect information about your business and determine a credit score based on your repayments and credit history.
Three of the top credit bureaus include Dun & Bradstreet, Equifax, and Experian.
Step 9: Make early Repayments
Credit agencies applaud businesses that have credit. Unfortunately, they do punish companies harshly when payments are late. The fastest way to build your credit score is by making payments on time. This will establish a positive history, and lenders will be more willing to give you a business loan.
Step 10: Obtain Business Licenses and Permits
Lenders will check if you have the correct business licenses and permits in place to operate legally. These licenses can vary depending on the state you live in and the type of business you run. Most companies will need a general license, but the easiest way to find out which license is required is by contacting the government offices.
It might seem daunting to build business credit, but if you take small actionable steps over time, you will most certainly reach an impressive business credit score. At the beginning of the article, the main question was, how to build business credit? As you digest the information, you can clearly see the benefits of having business credit and how it can give you access to lower interest rates, longer loan terms, and financial security.