As you develop your small firm, ensuring good business credit is one of the most important things on your list. A strong financial credit record can assist you in getting bank loans or other forms of financing at favourable rates.
It’s possible that you were turned down for a small-business loan because of terrible personal or business credit. According to a survey conducted by the Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia, 36% of small-business borrowers who received a “no” from lenders had bad credit scores, while 30% were denied due to lack of credit history or new or insufficient financing.
Borrowers with bad credit may also have higher interest rates, greater insurance premiums, and less flexible payment terms from creditors. Despite poor personal credit, you can obtain a small-business loan. But if you take steps to build your company’s credit first, you’ll be able to qualify for reduced interest rates, resulting in savings of up to 10%.
Here are seven stages to establishing good credit for your firm.
1. Register your firm and get an EIN.
In order to establish a business credit profile, you’ll need to register your firm with the appropriate government bodies depending on whether you operate as a sole proprietor or a corporation. After that, you can apply for a federal tax identification number, commonly known as an employer identification number or EIN, which will allow you to begin developing company credit.
2. Keep your credit information up to date with all three credit bureaus.
Many data are collected by several credit bureaus and used to create business credit scores, including Dun & Bradstreet, Experian, and Equifax. Each business credit bureau has a unique algorithm for calculating ratings, and each lender reports different types of information.
Because you can’t be sure which credit bureau your vendors, creditors, or potential customers will use, it’s a good idea to maintain all three.
3. Create trade relationships with your suppliers.
Buying goods, ingredients, or other assets from independent suppliers might help you establish credit for your company.
Many vendors provide trade credit, which means you can pay many days or weeks after receiving the goods. If you have a trading account with this firm, ask it to report your payments to a business credit agency. Your company’s credit score will improve as long as you adhere to the terms of your trade agreement.
To receive a Dun & Bradstreet Paydex score, you’ll need at least three tradelines. Even if you don’t work with many vendors, you can establish tradelines with any little vendor, such as your water or office supplies supplier. If those businesses aren’t reported to a credit agency, you may list them as trade references on your account and Dun & Bradstreet will follow up to obtain trade data.
4. Make payments on time or early to creditors.
Each credit agency employs its own approach to calculating business credit scores, but all of them take your record of paying creditors into account. Make sure your payments are on time or, even better, early to get a high rating. Only outstanding Paydex grades are given by Dun & Bradstreet to individuals who pay ahead of time.
The longer a person’s credit history, the better. As with personal credit records, long credit history is beneficial. Credit utilization impacts both personal and business credit ratings; in fact, it plays a similar role. So utilize your cards and lines of credit to your advantage; don’t bankrupt yourself by spending too much money. Limit your expenditures to 20% to 30% of your available limit.
5. Borrow from credit-reporting lenders.
Small-business loans can improve your credit by establishing a good track record of making all required payments on time. However, not all lenders do this. So ask the lender if they report to a business credit agency before you take out a small-business loan.
Banks report to credit bureaus in most cases, but if you have bad or limited credit, you will most likely be denied a bank loan. OnDeck, LendingClub, Funding Circle, and BlueVine are just a few of the online small-business lenders that report. Other lenders that don’t report include SmartBiz, Fundbox, and merchant cash advance firms.
6. Obtain a business credit card.
A business credit card can be one of the most effective ways to develop business credit, as long as you pay off the balance in full every month or take advantage of a 0% introductory APR period. Many company credit cards provide incentives and perks for your purchases, such as cashback and travel points.
If your personal credit is poor or thin, you may wish to start your search for a card by raising your personal credit score. Many card issuers will rely on your existing credit history to determine creditworthiness. If that isn’t an option, applying for a secured loan is almost certainly the best option.
Although secured cards usually don’t give rewards and may have a limited spending limit, they can still be useful in building your business credit score. Some lenders will also allow you to upgrade to an unsecured card if you can show a consistent record of responsible repayment.
If you wish to avoid a personal credit check, several cards will evaluate your application based on your company’s financials alone. When your business grows to a certain size or revenue level, it may be time to consider a corporate credit card that does not rely on your personal credit score for consideration.
7. Keep your public records up to date.
Any public records filed in your company’s name, such as bankruptcies, judgments, and liens, will be included on your business credit report. A judgment is a court decision; if you lose a debt collection lawsuit, it will have a detrimental influence on your credit score. A lien is an authorized claim against your property until you pay the balance owing on a small-business loan or outstanding taxes.
Negative information from your business credit report may follow you for a long time. Bankruptcies, for example, remain on your Experian credit score for ten years; judgments and collections, on the other hand, last almost seven years.