If you are a small business owner, you know that maintaining a steady cash flow is one of the most important things you can do for your business.
When entrepreneurs start running out of money, they often have no choice but to seek loans to fill the gap.
Good business credit can make all the difference.
Not only does a good business credit profile make it easier to get a loan or line of credit, but it also gives you access to better interest rates, which can help you manage your finances more effectively and give you more flexibility in running your business.
But for newbies looking for tips and tricks on how to build business credit professionally, they need to know the ins and outs of how it works.
This ultimate guide will help you in this way. So, without further ado, let’s get started!
What is a Business Credit?
Business credit measures a company’s ability to borrow and repay loans. It is made up of several factors, but most importantly, it is a measure of your company’s creditworthiness.
These factors include your payment history, how often you use your credit, and your overall credit score. These factors create a comprehensive picture of your business’s financial health.
A good business credit score can make or break your small business. It can significantly improve your ability to get a loan or line of credit.
This is important because lenders and financial institutions use this score to determine your creditworthiness, affecting their willingness to lend.
If you have a good business credit score, you can not only get the capital you need to run your business, but you can also get it on better terms. This will help your business grow and be more sustainable.
How Does Business Credit Work?
Business credit works by systematically assessing a company’s financial stability and trustworthiness. Dun & Bradstreet (D&B), Equifax (Equifax), and Experian (Experian) are the three main business credit reporting agencies that significantly simplify the process.
Each of these agencies uses a multi-layered approach to evaluate businesses, including things like past loan repayments, credit usage patterns, and even the personal credit histories of business owners.
These complex data points create detailed credit scores and comprehensive business credit reports.
This careful process aims to give lenders a solid framework for evaluating the risk of extending credit to a specific company.
Lenders rely on a business’s credit profile and score to make informed decisions about loan approval and terms, protecting their investments.
By proactively managing your credit profiles, you can secure the financing you need to grow while ensuring you are attractive to lenders looking for low-risk borrowers.
Does Your Personal Credit Matter for Your Business?
Depending on your type of business and how much capital you need, you may need to borrow money to get your business up and running.
You may use a business expense credit card, create a credit line for steady cash flow, or take out larger loans for things like equipment.
When you apply for these loans, typically, you will use your EIN, and lenders will look at your business credit score.
However, if you have a relatively new business, lenders may also look at your credit score. This is because they want to know if you have been able to manage your personal debts responsibly.
In this way, your credit score can impact your business’s ability to get a loan.
But what if you do not have a good credit score?
No worries!
There are ways to get financing for your business that you may not have access to otherwise. For example, you may be able to find someone else with good credit who will co-sign your loan with you.
How to Build Business Credit?
Building business credit can be a lengthy and challenging process. However, do not worry. We have a solution for you.
Follow these steps if you do not know how to build business credit:
Build your Foundation
If you want to establish your business credit and take your company to the next level, the very first step you need to take is formalizing your business structure.
It can be done by creating a legal entity, such as an LLC or corporation. Formalizing your business structure serves several important purposes.
First, it allows you to separate your personal finances from your business finances. This is essential for protecting your personal assets.
Second, it gives you the benefit of limited liability, which protects your personal assets in case of legal issues.
Third, lenders have more belief in businesses that are structured as legal entities than those that are simply extensions of individuals.
Register Your Business
Now is the time to register your legal business name with the appropriate government agencies.
The process for registering your business will vary depending on where you are located. In the United States, you may have to register your business at the state, local, or federal levels.
You must also obtain a Federal Employer Identification Number (EIN) through the Internal Revenue Service (IRS). The IRS EIN can be obtained for free on their website.
Register for a DUNS Number
If you want to build a strong business credit profile, you should take a few steps further.
Registering for a Dun and Bradstreet (DUNS) number is one of the most important steps in building your business credit profile. This unique nine-digit number is key to identifying and classifying your business.
Creditors and lenders in the United States often ask for your DUS number and EIN (employer identification number) before extending any business credit to you.
They use these identifiers to assess your business’s creditworthiness and determine the credit terms you are willing to accept.
Note:
The importance of the DUNS number is not limited to the US. Many other countries use the DUNS number as a unique identifier.
Get Accounts that Report to Business Credit Agencies
When building your business credit, carefully choosing vendors and suppliers who report to the major credit bureaus or agencies, such as Dun & Bradstreet, Experian, and Equifax, is important.
Not all your business partners may automatically report your payment history to these bureaus, so it is wise to research before establishing relationships.
This practice has two benefits: it allows your business to have mutually beneficial transactions and improves your credit score.
By aligning with vendors that report to the major credit bureaus, you can proactively improve your credit score, which can help you access better financing terms and have the financial flexibility needed for growth and stability.
Get a Business Credit Card
Building credit is crucial for any business, and a business credit card is the perfect tool to achieve this.
Just like personal credit cards, they offer the convenience of easily paying for expenses.
You can earn cash-back rewards by getting a business credit card, even if it has a low limit or needs a personal guarantee. These rewards can help cover the card fees and might even exceed them.
Therefore, apply for a business credit card and reap the rewards that come with it.
Make all Payments on Time
Making timely payments serves two primary purposes. First, it helps establish a strong payment history, one of the most important factors in improving your business’s credit score.
A good payment history signals to credit agencies and lenders that you are a reliable lender.
Making payments on time also allows you to access more available credit, improving your overall credit usage and creditworthiness.
Monitor your Credit
It is important to regularly check your business’s credit reports to catch any mistakes or wrong information.
It would be best to review your reports at least once a year. However, doing it more frequently, like once every three months, is even better.
You can request a single business credit report from one of the three main credit reporting agencies, or you can choose a package that includes reports from all three simultaneously.
Does your Personal Credit Impact your Company?
Did you know that commercial lenders consider both your personal and business credit scores before approving your loan application?
That’s right!
Your personal credit score can significantly impact the terms of your commercial loan.
If you are worried about your poor personal credit score affecting your chances of approval, do not wait any longer.
It’s time to improve your credit score and increase your chances of securing the commercial loan you need to grow your business.
Business Credit vs. Personal Credit
Business credit cards are different from personal credit cards in several important ways. We have highlighted some of the key differences:
Credit Name & Trustworthiness
Business credit cards display the business’s name, which helps establish credibility and makes it easier to manage finances using budgeting software.
Credit Boundaries & Payment Parameters
Credit limits for business cards can be lower at first, but they can go up with regular use.
Payment terms for business cards can vary, and some require you to pay the balance in full every month. This can impact cash flow for long-term investments.
Rewards & Bonuses
Most business cards focus on business expenses and offer rewards for things like food and drinks, entertainment, airline tickets, office supplies, etc.
Personal cards, on the other hand, may have better rewards for things like groceries or drugstore purchases.
Risk Mitigation
Personal cards come with extra protections that business cards do not. Business card rates can go up or down at any time, so it is important to read the terms carefully.
Reporting Policies
A business credit card is one of the most effective ways to build your business credit. Business credit card issuers typically report business credit card activity to commercial (i.e., Dun & Bradstreet), consumer (Experian), and credit reporting agencies (e.g., Equifax).
What is the average time for a business to improve its credit score?
Establishing a strong business credit profile can take anywhere from one to three years. However, many start-ups can achieve a high-quality business credit score in as little as 12 months.
This can be achieved through good credit management, good credit utilization control, and a variety of credit types.
Paying attention to these factors can help businesses build a strong credit profile faster, allowing them to access better financing and financial stability.
Conclusion
To sum up, building a business credit profile is essential for achieving financial stability and business growth.
Following the steps in this guide will help you build a strong credit profile, gain access to better financing options, and protect your personal assets.
Remember, building a strong credit profile requires discipline and consistency. But the benefits for your business are worth it.
Start today and build the strong credit foundation that your business needs to succeed.
