Introduction
As a small business owner, you probably already know that establishing and maintaining business credit is crucial to the success of your company. Business credit is an evaluation of your business’s creditworthiness, just like your personal credit score. However, building business credit can be a challenging process for many small business owners, especially those starting out.
In this article, we’ll explore a step-by-step guide on how to establish business credit and provide tips for maintaining a good credit rating.
Step-by-Step Guide
Before we dive into the actual steps involved in building business credit, it’s important to understand the definition of business credit and the factors affecting creditworthiness. Business credit is a measure of your business’s ability to pay back debts or obligations based on its track record. The higher your credit score, the more likely lenders are to consider your business as a reliable borrower.
To build business credit, you need to follow these steps:
1. Get a DUNS number
A DUNS (Data Universal Numbering System) number is a unique nine-digit identifier used by businesses to establish credit with other companies. Dun & Bradstreet, the agency that provides DUNS numbers, collects and maintains information on millions of businesses worldwide, which is used by credit reporting agencies and creditors to assess creditworthiness.
To get a DUNS number, simply visit the Dun & Bradstreet website and provide your business information. It’s a free process that can take up to 30 days to process.
2. Open a business bank account
Opening a business bank account is essential to separate your personal and business finances. It’s the first step to creating a credit profile that lenders can trust. Demonstrating a solid financial history is a critical component of building business credit.
To open a business bank account, you’ll need to provide your business’s legal name, tax ID, and business documentation.
3. Apply for a business credit card
Using a business credit card to make small purchases can help establish credit and build a good credit history. Remember to make timely payments in full and avoid carrying high balances to maintain a good credit score.
When applying for a business credit card, consider the rewards they offer and how they fit into your business needs.
4. Use trade credit
Trade credit is when suppliers or vendors allow businesses to purchase goods or services on credit for a net 30 to 60-day payment period. It’s an effective way to build business credit when payments are made before or on the due date.
Remember, negotiating payment terms and building strong business relationships with your suppliers are essential in maintaining good trade credit.
5. Apply for a small business loan
Applying for a small business loan is an opportunity to demonstrate the creditworthiness of your business. Start by researching lenders that specialize in small business lending. Consider their interest rates, terms and conditions, and reputation.
Remember, you’ll need to provide documentation and present a detailed business plan to secure approval.
Credit Score Boosting Techniques
Building a good credit score requires consistent effort. To maintain or boost your score, keep these tips in mind:
1. Make timely payments
Paying your bills on time is crucial to maintaining a good credit score, regardless of the amount. Late payments can negatively impact your credit score and reflect poorly on your business’s creditworthiness.
2. Maintain low credit utilization
Keeping your credit utilization below 30% is an excellent way to boost your credit score. A high utilization ratio signals your business is reliant on credit and potentially overextended.
3. Diversify your credit accounts
Having a range of credit types, such as lines of credit, mortgages, and loans, helps improve your credit mix and demonstrates your ability to manage different financial obligations.
Improving your Credit Score when Your Business is New
When starting a new business, acquiring credit can be challenging, mainly if you don’t have a track record. To boost your credit score from the ground up, consider these tips:
– Offer collateral when applying for loans or lines of credit.
– Use a cosigner with good credit to secure credit.
– Keep business finances separate from personal finances.
– Build trade credit with vendors and suppliers.
Choosing the Right Lender
There are various types of lenders that offer funding for small businesses. It’s essential to choose the right one based on your needs and creditworthiness.
1. Banks
Banks are traditional lenders that offer competitive rates and the opportunity to build relationships with bank representatives.
However, they have stricter requirements and longer application processes, making it more challenging to obtain funding.
2. Credit Unions
Credit unions are nonprofit financial institutions that are member-owned. They offer competitive rates and can be more flexible in lending requirements.
However, membership eligibility and availability of loan programs can be limited.
3. Online Lenders
Online lenders are a new concept in small business lending. They offer fast applications and competitive rates and have leniency when considering less established businesses.
However, online lenders often charge higher fees and may have hidden costs not immediately visible when applying.
Building Credit through Strategic Partnerships
Establishing strong relationships with suppliers and vendors can help your business build credit via trade credit. Choose strategic partners based on their ability to help you grow your business while maintaining a positive credit history.
To create good relationships with strategic partners, consider making timely payments, providing ample business, and communicating frequently.
Avoiding Common Small Business Credit Mistakes
Avoid these common mistakes when it comes to building business credit:
1. Using Personal Credit for Business Expenses
Using personal credit can blur the line between personal and business finances and hinder your ability to establish a business credit profile.
2. Applying for Too Many Loans at Once
Applying for too many loans can signal that your business is overextended, and multiple credit inquiries within a short span can negatively impact your credit score.
3. Failing to Monitor Credit Reports
Reviewing your company’s credit reports regularly allows you to detect inaccuracies or fraudulent activity and correct any errors before it’s too late.
Tips for Maintaining Good Credit Rating
Keeping your credit rating healthy involves consistent effort and prudent management. Consider these tips:
1. Monitor Your Credit Regularly
Stay up-to-date on your credit reports to monitor changes and identify any discrepancies that may lead to negative credit scores.
2. Manage Credit Accounts and Debts
Keep your credit accounts in good standing by making timely payments and monitoring your credit utilization.
3. Consider Professional Help
If managing credit accounts becomes overwhelming, consider seeking professional help from financial advisors or credit counselors. They can offer advice on managing finances and suggest strategies to improve credit scores.
Conclusion
Building business credit takes time and effort, but it’s crucial for your long-term growth and stability. Follow these steps, maintain good credit habits and avoid common credit mistakes to establish a solid credit history for your business. With patience and consistency, you can achieve a credit score that opens doors to many financing opportunities and helps you grow your business for years to come.
