How To Build Your Small Business Credit
Tarek El Sheikh
By: tarek-el-sheikh
Read in 9 minutes

How To Build Your Small Business Credit in 4 Steps

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Do you qualify for a
small business loan?

Have you ever been denied a small business loan for having bad credit? It’s not the end of the world. You can still get a business loan for your business. Your weak small business credit may have been one of the reasons for the denial. But you can fix this in about a couple of months. Remember that there are no shortcuts to build the proper fundamentals of a business and, unfortunately, many small business owners try to take the easy road.

In this article, we will focus on the importance of a good credit for the wellbeing of your small business, and we will share with you the dos and don’ts when it comes to building your credit. If you want to get off to a good start in your business, and quickly become eligible for a business loan, simply follow these four steps.

Step 1: Separate Business Expenses From Personal Expenses

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 and personal expenses is not only best practice but necessary!

It’s true that front-loading your personal expenses onto your business account may 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. In addition, 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 a denial when it comes to asking for a loan.

Step 2: 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 however 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 a 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?

Related Article: 7 Tips to Manage Your Small Business Cash Flow

Step 3: 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 in order to determine how much you should pay yourself. Or you can simply analyze your business yourself to figure this out.

Step 4: Avoid Using Personal Credit Cards for Your Business

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.

Also, you need to start building your business credit as early as possible. You have options: you can take out a small 6-12 months business loan, or get a small business credit card from AMEX or any bank. And don’t forget it’s all about the relationship with the lender when it comes to business loans. Start building a relationship with your banker now.

If you start following these 4 steps today, you are on the road to building your business credit. It may seem like a lot of work, but actually, it is just about reframing your mind, practicing a little discipline and staying aware of your progress. You will see that in just a few months, the changes in your behavior will have a huge impact on your business credit! While it will take some time to build your business credit in order to submit a successful business loan application, this does not mean you have to stay out of touch with your banker or stop learning what else you can do to build your business credit. Stay proactive and soon enough you will have the business credit you need to apply for a business loan.

Are you already in control of your business credit and ready for a business loan? Then go ahead, and fill out the form below to apply for a loan today!

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