Building credit is nowadays more important than ever to ensure the growth of your company, but it also seems to be harder than ever: according to a report published by the US Small Business Administration, 20% of loan applications for small businesses are declined due to poor credit scores. For businesses seeking financial help, a bad credit score even when they get a loan, implies higher interest rates, higher insurance policies, and less favorable terms with their lenders.
Why is it important to build credit for your business?
A solid credit history will not only allow your company to get the funds it needs to buy goods, acquire inventory or expand its operations, but it will also allow you to access new business opportunities. In this sense, your credit history will be evaluated when you want to negotiate a contract or partner with potential partners.
On the other hand, lenders need to know if you can pay them on time. For this reason, they check your credit history and your credit score on the major credit bureaus websites. These indicators help banks determine if you are trustworthy enough to lend you money and the way they calculate the interest rates.
How can you build credit for your business?
Below you have the 8 best practices that will help you establish or improve your company’s credit profile.
1. Separate your personal expenses from your business expenses
Make sure your business gets the legal status of a Corporation or a Limited Liability Company (known as an LLC). You will not be able to build commercial credit only with your personal credit score.
2. Get an Employer Identification Number
The Federal Tax Identification Number (also known as EIN) is something like a social security number for your business. You will need one to open a bank account in your company’s name or sign business contracts. To obtain this number you must register on the IRS website. You must also register on the website of the agency Dun & Bradstreet Credibility Corporation to obtain a DUNS number: with this number your business will be added to a database of millions of companies, thus allowing your company’s credit history to be consulted by your potential customers, banks, and potential business partners.
3. Put your business on the map
You can not build credit effectively until you have established your business. Make sure your business’ name, address, and email are up to date. Get a business phone number and make sure it’s reflected in the directory.
4. Apply for a business credit card
Getting a credit card from a company that reports to the main credit bureaus is an excellent way to build business credit. The ideal situation is to have at least one, but several can be useful. In this sense, it’s a good idea to apply for a secured credit card, perfect for those who don’t have a very extensive credit history but need an initial loan. However, be cautious and avoid exceeding the credit limits. The fact that the funds are there doesn’t mean you need to use them all!
5. Establish lines of credit with your suppliers
In the business world, a solid line of credit with your main suppliers is worth gold. Many providers offer this type of benefit, which means you can pay for your supplies several days or even weeks after receiving your inventory. By establishing a line of credit with suppliers that report your payments to the credit bureaus, you can create a positive credit history. However, your providers are not required to report your payments to the bureaus; therefore, you should ask them to do it, or you can be proactive and open accounts only with those providers that send the information.
6. Update your data at the credit bureaus
As we mentioned in a previous article, there are several credit agencies that collect information and create business credit scores, such as Experian and Equifax. All of them have a different method to calculate the scores, and each bank and financial institution reports different data to these agencies. As you don’t know which agency your suppliers, creditors or potential clients are going to review, the most sensible thing is to update your data in all of them. Dun & Bradstreet, for example, allows owners to update basic business information, such as years in operation or number of employees, and publish their financial statements on the platform. The more complete your profile is, the better.
7. Check your credit report frequently
25 % of small business owners report significant errors in their credit reports. Reading your credit history carefully can help you detect any problems or inaccuracies. If you find an error, you must file a complaint with the appropriate agency. In any case, remember that if you stop paying your taxes, have been sued or have declared bankruptcy, all this information will go directly to your report, negatively affecting your credit score.
8. Always pay on time
Or better yet, pay ahead of time! When you pay your bills on time, you are showing that your business is reliable and you can effectively manage your debts. If you fall behind your payments, your creditors can send negative reports to the credit bureaus. A history of defaults or delays can affect your chances of accessing loans and damage your credibility with other companies or consumers.
To sum up…
Building a good business credit will allow you to get low-interest loans, credit cards, and better terms with your suppliers. It can even help you get new customers since anyone is able to check your credit score and verify your credibility.
Your business credit score may vary because each credit agency calculates the scores in a different way. But generally speaking, the best practices to build commercial credit are: updating your business information at the credit bureaus, establishing financing lines, borrowing from entities that report to these agencies, and paying on time or before the due date.
If you want more tips on how to build your business and your personal credit, or the difference between those two terms, you can read these articles specially picked for you.
How did you build your company’s credit history? Tell us your strategy in the comments section!