One of the most important things to set up after starting your small business is business credit. However, nearly 45 percent of all small-business owners will be denied credit at some time. In addition to having problems getting approval, other challenges include paying higher interest and insurance rates, and problems in managing cash flow. As such, I want to look at how to build your business credit. These steps not only cover the importance of establishing business credit but how it will help you grow your business.
One thing to remember about business credit is that it is not only about your finances. Having access to credit for your business is about credibility as it shows to your customers and your suppliers that you can effectively manage your business by overcoming potential threats to your business.
Know Your Score
Just as you do with your personal credit, it is important to know your business’ credit score. This starts by contacting the three credit bureaus which track business credit scores — Experian, Equifax, and Dun & Bradstreet.
While there are some similarities to personal credit scores, business credit scores tend to be more focused. However, there can also be some challenges as business credit scores can misreport information — especially if there are multiple businesses with the same name.
As such, building your business credit starts with knowing your score. Make sure that the information is accurate and make sure to reach out to the credit bureau if any information on your report is incorrect.
Trade lines that is. In fact, setting up trade lines can be one of the easiest ways to build up your business credit score. One example of trade lines includes supplier credit terms, but you can also include utility bills as well.
The trick is to make sure these vendors report your payment history to the credit bureau. Doing so helps to give your business a track record and will show to potential lenders that you have several open accounts.
Some things to know are that you will need a minimum of three trade lines to get a Paydex score from Dun & Bradstreet. You don’t need to worry if vendors don’t automatically report to Dun & Bradstreet, as the business will contact vendors for you.
Pay on Time
Building credit is about trust, so you want to make sure that you pay on time, every time. While some advisers will claim that you should pay early, cash is king with most small businesses. As such, you should pay early, but just make sure that you can pay on time.
Doing so will give you a positive payment history. This is important as building your business credit not only relies on the length of your credit history but also whether it is favorable as well.
Another benefit to paying on time is that it will reduce what is known as your “credit utilization score.” There are two reasons for this. First, it keeps your balances lows and second, it shows that you can handle larger credit lines if needed. That being said, you do want to limit your accounts to roughly 30 percent of your total revenue. Anything higher and some lenders might worry if you are already maxing out your ability to service additional debt.
Chose Lenders Who Report to Credit Bureaus
Look, if you are looking to build your business credit why would you take out a loan from a lender who does not report to the credit bureaus? For this reason, you want to focus on lenders who will report your payment history.
While this is a bit of a double-edged sword — as your loans are being reported — it gives you an opportunity to document the payment history of your business and to establish the ability to service debt over time.
Fortunately, more and more business lenders are reporting to credit agencies as they see the value in having accurate business credit scores. Not only does it make their job easier but it is also a prerequisite for many lenders who rely in algorithms to decide who they will lend to.
What This Means for You
Having a clean credit history is a must in today’s economy and this starts by taking control of your record and working with vendors to build the right track record. In addition, building your business credit means that you won’t need to lean on your personal credit. Ultimately, the ability to access business credit is a good way to grow your business.