Once somebody told me that building a business is impossible without building credit. At first, I was unsure this was true; after all, I know tons of business owners that actually have no credit score at all. But then, as the years passed, I realized how true this actually was.
Business owners with no credit score were unable to get the loans that could help them improve and strengthen their businesses. The ones that did have (positive) credit scores were able to secure the financing they needed to actually grow their businesses.
This growth would come in the form of buying more inventory, hiring more employees, or even literally growing the physical space of their businesses. It comes without saying that those that invested capital into their business are more successful.
Building credit is nowadays more important than ever to ensure the growth of your company. Unfortunately, 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 implies higher interest rates in loans, higher insurance policies, and less favorable terms with their lenders.
Why is it important to build credit for your business?
A stable 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.
Below you have the best practices that will help you establish or improve your company’s credit profile.
10 ways to build business credit
1. 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 pervasive 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!
Once you have a business credit card, stop using your personal card for your business expenses. While it may be easier to use your personal credit card than getting a separate one for your business, this will not build your business credit.
If you are planning to apply or reapply for a business loan soon, it is best to start building your business credit.
Avoid using personal credit cards, personal auto loans, and personal loans, in general, to support the business under any and all circumstances.
But if you don’t want to get a business credit card, don’t worry, it’s not the only option you have. Keep reading!
2. Separate your personal expenses from your business expenses
Your first step should be to 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.
Also, you must never use your business bank accounts for your personal expenses. It is not wise to use your business bank accounts to pay your rent, or insurance, to eat out and shop. You need to look at your business as a different entity and learn to identify your expenses. Separating your business from your personal expenses is not only best practice but necessary!
Front-loading your personal expenses onto your business account may indeed be a way to decrease your business taxes. It may also seem easier to manage one combined bank account. But it’s a practice that will come back to bite and hurt your approval probability when applying for a business loan.
You may be asking yourself how this is possible. How come combined expenses affect the probability of getting approved for a business loan?
Here’s the deal: When the underwriter takes a look at your business bank statements, they will show a very tight business cash flow (the quantity resulting from subtracting your withdrawals from your deposits), because you have been withdrawing cash for your personal use. This shows no room for further business debt.
Besides, if your business bank account is linked to your QuickBooks, your business tax returns and business financials will dramatically drop. This will show further signs of tight debt capacity, thus leading to denial when it comes to asking for a loan.
3. 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 prospective business partners.
4. Put your business on the map
You can not build credit effectively until you have established your business. Make sure your business’s name, address, and email are up to date. Get a business phone number and make sure it’s reflected in the directory.
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, several credit agencies 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.
History of defaults or delays can affect your chances of accessing loans and damage your credibility with other companies or consumers.
9. Deposit all cash to your business account
Even if you transact in cash, deposit it into the business bank account, please. There is no other way to prove your business growth and the true size of your business. Besides, keeping your cash under a mattress or stored away somewhere is just not safe or smart!
Make it part of your routine to go to your nearest bank branch to deposit all your cash. Do it once a week, or as often you need to. Once you start doing this, you will be able to monitor and manage your cash flow much better. Trust me, there is nothing more important than having a clear picture of where your business is standing.
What happens if you don’t deposit your business cash into the business bank account? Then the funds will not be considered at underwriting, which can lead to denial when you ask for a loan, or a lower loan amount than what you truly deserve. A larger or growing business increases your probability of approval. It may also increase your approved loan amount. Makes sense, right?
10. Give yourself an income
Yes, you are the business owner, and this is your business, so you should have the power and the freedom to withdraw business money whenever you want to, right? No. You have to play by the rules! Never withdraw cash and checks from your business bank account for personal use. Taking money in the form of cash withdrawals or checks without making it “official” will result, as we have seen above, in a tight business cash flow.
It will show that your business has no room for further business debt. Your business bank account should be used for business purposes only, like paying your employees, suppliers, or for inventory. Related Article: 4 Tips on Inventory Management for Small Business
But, if you are tight on your personal income, consider the possibility of giving yourself a salary. Pay yourself a monthly W-2 or 1099 income. You work hard like any of your employees, so you also deserve it!
And yes, you can be an employee in your own business. Your business is a separate entity on its own. Besides, paying yourself W-2 or 1099 income can improve your credit and the chances to get a loan: the loan underwriter can consider your salary as an extra income. Extra income means not only a higher probability for approval but also a higher approved loan amount. It’s a win-win situation.
Don’t be afraid to start doing this now.
Of course, you need to do a little homework, perhaps with the help of an accountant or someone who can evaluate your business to determine how much you should pay for yourself. Or you can simply analyze your business yourself to figure this out.
The importance of having good credit
To further drive the point of how important having a good credit score is, I’m sharing with you some common questions business owners have regarding credit.
Can you start a business with bad credit?
While you can start a business with bad credit, you will have a tough time growing your business. And a business that does not grow is a business that won’t succeed in the long run.
And while there are many loan options for business owners with bad credit, I definitely do not recommend you getting any of those. With a loan for bad credit, you will end up paying way more than what you got, which will hurt your finances instead of helping them.
What credit score is needed for a small business loan?
It all depends on what financial institution you would like to apply with, but, usually, they expect you to have a score of around 630 or up for a small business loan.
Can I get an SBA loan with bad credit?
The short answer is no.
The SBA doesn’t lend money directly, they do it through approved lenders (most commonly banks). And while each lender will have a different credit score minimum—which also varies depending on the SBA program you’re applying for—, they usually don’t approve businesses that have a credit score below 680.
Can I get a loan if I don’t have a credit history?
Usually, banks and financial institutions don’t lend to business owners that do not have a credit score. That why many think not having a credit score and having a negative credit score are the same (hint: they’re not the same thing).
Why do they not lend business owners without a credit score?
Well, financial institutions see people with no credit score as a gamble: either they are great at repaying and keeping their finances healthy, or they’re not. And banks are not known for taking risks that could hurt them.
Fortunately, some lenders, like Camino Financial, are always willing to bet on those business owners. We do not require you to have a credit history to apply or be approved for a loan. Furthermore, applying with us won’t hurt your score at all!
To sum up…
We hope this information helped you know how to build commercial credit. Building a good business credit (with or without a card) 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 can check your credit score and verify your credibility.
Your business credit score may vary because each credit agency calculates the scores differently. 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 to know how to improve your credit, we invite you to read: