Gaining access to business credit and financing is a tough thing to figure out when just starting out. But when start-up costs and growth strategies are taken into account, it makes sense to establish strong credit for times when it will be needed the most.
Why Is It Important?
Good credit is important, as most adults should know. However, business credit is a bit different than personal credit. Let’s explore the benefits of this particular kind of credit a bit more.
A business credit score that’s high can help the owner:
- Access lower interest rates on any loans they might need
- Decrease the chance that they’ll need to prepay or pay deposits for products or services
- Secure strong relationships and good trade terms with the suppliers they work with
Many people don’t fully understand their credit, however, and that gets in their way. Studies have even found that business owners are often denied funding opportunities because they don’t understand their financial situation. Simply knowing what’s going on with their score would give them better chances to use it.
In addition, a strong business credit score can also help anyone offset the need to offer any personal guarantees on their loans. Rather than guaranteeing the use of their own personal assets should the company be unable to pay back its full debt, a business owner can instead use their business credit to mitigate the need for a personal guarantee on a business loan.
How to Build Business Credit: 7 Simple Steps
Business credit building starts with planning and organization and requires patience and time. By following these 7 steps below, any business owner can establish their credit and use it to bring company goals into fruition.
1. Get the Business on the Map
The first step to building business credit is really establishing the business. Get the company on the map by setting up a phone line and getting it listed in the city’s directory. In addition, the owner should get themselves listed on the many directories online and get a business bank account opened for bills and accounts receivable.
2. Create Good Credit Relationships
Next, the owner will want to solidify good relationships with relevant industry vendors and supplies, as this kind of credit is truly like gold. When they have a good relationship with a vendor, they’re less likely to be required to pay upfront and will rather have the ability to pay with net-30 terms or something similar. With just a few companies (maybe 3-5) reporting these credited payments, they’ll begin to build business credit fast in their industry.
3. Register for an EIN
It’s important to have a Federal Tax Identification Number (also known as EIN), as this acts as a sort of “social security” number for any company. An EIN is required to incorporate, and it may also be required to open up a business bank account or to secure certain contracts. It also becomes crucial every year during tax season. It’s very important that no one skips this step.
4. Always Pay on Time
A rule that should be committed to memory when it comes to credit is that paying on time is the most important thing. Paying all credited bills on time shows the creditor that the owner is trustworthy and is an effective manager of their business’ finances. When an owner builds up a history of late or delinquent payments, their score will be brought down, and their profile negatively impacted.
5. Use a Business Credit Card
The next big step an owner should take is opening and using a business credit card. Having one is important and having two may also be beneficial. It’s important to note, however, that over-extending any business finances could lead to trouble paying it back. Just because there is credit available doesn’t mean it should be fully utilized. The card should only be used by authorized personnel and should be closely monitored to avoid exploitation.
6. Consider Incorporation to Create Distance
At this point, it’s a good idea to consider incorporation. By adding something like Inc. or LLC to the tail end of the name, it legally separates the owner from the company, credit included. Otherwise, the owner’s personal financial history will remain legally attached their business, which could spell trouble further down the road.
If that’s not the preferred road, an owner can still keep their finances separate from their business ones by obviously separating expenses and remaining vigilant about the paperwork on both sides.
7. Always Monitor
Credit isn’t a one-and-done type of thing. Instead, it needs to be an ongoing process of monitoring, adjusting behavior, and monitoring some more. Keeping close tabs gives greater opportunity to recognize errors on the report and dispute them quickly, maintaining the precious balance of the credit score.
Grow the Score
Once the score has grown to a comfortable place, the next step is continuing to grow it over time! The two most important tips for a score that goes up instead of down is always paying on time and ensuring that all business accounts are with firms that report to the credit agencies. This makes sure that all the hard work doesn’t go to waste.
Paying on time sometimes actually means paying early, as sometimes it’s possible to earn “extra” credit for being an early bird. This is especially true for business credit, as the reports are far more detailed than for personal accounts.
If a business owner is loaning money from and paying that money back to a company that does not report it to the proper credit agencies, there’s no record of those positive interactions to raise the business’ credit reputation. Therefore, trading and repayment will go unnoticed.
Having strong credit grants future opportunities to businesses that they otherwise might not have access to. It’s one of the smartest ways any owner can invest in their own business. It will also remind you to always keep tabs on your personal credit score as well. Don’t take it for granted!
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