Build Business Credit: A Beginner’s Guide

Building business credit is essential for any entrepreneur who wants to establish a solid financial foundation to maximize their growth potential.

Business credit measures a company's ability to borrow money, access credit lines, and establish relationships with vendors and suppliers. By building strong business credit, you can increase your access to capital, reduce the risk of personal liability, and establish a solid financial profile that will help you achieve long-term success. In this blog, we'll explore the strategies and best practices for building business credit, from establishing credit accounts to managing your bank account and finances effectively. Whether you're just starting out or looking to take your business to the next level, building business credit is critical to achieving your goals.

What is Business Credit?

Business credit allows companies to establish creditworthiness and access financing based on their business’s financial history and performance rather than their personal credit history. Similar to personal credit scores, several business credit scoring models evaluate factors like payment history, credit utilization, length of credit history, and public records. Building business credit requires establishing accounts with vendors who report payments to commercial credit bureaus and making timely payments on those accounts. With time and responsible borrowing behavior, you can both build credit and a solid reputation and become more attractive to lenders.

Why Is It Important to Build Business Credit?

Strong business credit can go a long way when securing loans, lines of and business credit cards, or supplier trade credit. The rule of thumb is the higher your business credit score, the better the terms. Your business has its own credit history and score, which can be checked by lenders, suppliers credit reporting agencies, and other companies considering working with you. A high business credit score is beneficial when securing financing, as it signals that your business has been financially responsible in the past, increasing the likelihood of repayment of any loan or line of credit granted. Companies may enjoy better loan terms and access to better supplier trade credit. It is a misconception that having good business credit means lenders won't check your personal credit score; some small businesses will require a personal guarantee no matter what. A strong business credit rating can also help in this situation, making securing favorable terms and interest rates on loans easier.

Benefits of having a good business credit

A strong business credit score can provide myriad benefits for businesses of any size. Here are just some of the advantages of having a good business credit file and rating:

Access to favorable financing terms.

A higher credit score can enable businesses to take out loans and lines of credit at more favorable rates, with lower interest rates or extended repayment plans. It may also open up access to larger loan amounts.

Improved supplier relationships.

Good business credit increases the likelihood that suppliers will extend trade credits and offers other incentives, such as better payment terms or discounts on goods purchased. This helps businesses save money in the short term and builds stronger relationships over time, as suppliers will be more likely to negotiate terms with them in the future.

Reduced risk for lenders.

By showing lenders that a business is financially responsible, lenders are much more likely to extend financing at more attractive rates. They know less risk is involved when lending to companies with good credit ratings, giving them a reason to trust that they will get their money back over time.

Greater credibility with customers.

Businesses with good credit have higher credibility when working with customers or potential partners than those with poor credit scores. Customers know they can trust them to fulfill their obligations now and in the future, which makes it easier for businesses to build long-lasting relationships and secure repeat purchases or referrals from satisfied customers.

Increased financial security.

With good business credit comes increased financial security as they are more likely able to obtain financing or increase their line of credit if necessary without facing huge penalties or interest rate hikes from lenders due to their poor rating. This allows businesses to remain competitive in their respective industry and endure shifts in market conditions without having their livelihood threatened by sudden increases in cost or lack of access to capital resources.

High rankings from search engines & directories.

Most search engines & directories factor in business credit when deciding where your company should appear on searches and listings. A high ranking can help you gain visibility among potential customers and make your presence felt across multiple platforms, including social media outlets like Yelp, Google Maps & Apple Maps, and local directories like your Chamber of Commerce & Better Business Bureau websites. With a strong business credit score, companies can stay competitive while enjoying increased financial security and access to better financing options when needed most - ensuring they are prepared for whatever comes next.

Ways to Build Business Credit

Improving your business credit is essential for accessing the most attractive financing terms, leveraging better supplier relationships, and increasing your presence in search engine results. Whether you’re just starting or seeking to rebuild your current score, here are some tips on how to improve your business credit:

Check your credit report regularly.

The first step to improving business credit is monitoring it regularly. Three major business credit bureaus – Experian, Equifax, and TransUnion – generate and report this information. Each business credit bureau calculates its own ratings using a different system, so it’s important to check all three of them for accuracy and for potential negative information older than two years that may be outdated or inaccurate. You can access these reports for free at least once a year through the Annual Credit Report website.

Establish business credit separately from personal credit.

If you haven’t already done so, set up separate business accounts from personal accounts and get a taxpayer identification number (TIN) from the Internal Revenue Service (IRS). This will help differentiate you as legal business from other potential businesses with similar names and make sure lenders can access accurate financial information about your company when approving loans or lines of credit.

Pay bills on time.

Payment history accounts for 35% of your business credit score, so making timely payments should be a priority to maintain good standing with lenders. Strive to pay all debts within thirty days after receiving invoices to avoid late fees or negative marks appearing on your business credit report.

Keep balances low.

The utilization ratio, which measures the amount of outstanding debt relative to available credit, makes up another 30% of the Experian commercial score calculation. Keeping balances low relative to available limits signals confidence in repayment ability. Regularly update requested documentation, such as bank statements & income tax returns, when applying for any new business financing opportunities or updating existing creditor terms & conditions.

Use trade references & payment plans.

Set up payment plans with suppliers and vendors if needed but always keep records of any agreements made regarding purchases & services rendered. This helps demonstrate long-term commitment, which counts towards improving overall ratings with creditors & banks. When dealing with repeat customers, always utilize trade references provided by those same entities. This shows an established relationship between both parties, further expediting processes of obtaining better terms from higher amounts financed by lending institutions.

Develop positive relationships with lenders.

Maintaining positive relationships with lenders is essential for getting favorable loan terms, especially after missing payments on past-due accounts. Not only does this show willingness when negotiating better rates, but it also demonstrates dedication to rectifying any mistakes that occurred during separation. Communicate openly, writing letters detailing reasons behind any delays or payment issues while negotiating timely payments along future projected dates. Doing so will ensure vigilance needed going forward while slowly rebuilding ratings accordingly over time without sacrificing future options for a small business loan or cash advance.

Monitor credit reports for fraud & identity theft.

Businesses must stay vigilant when monitoring their credit profiles for any signs of fraud or identity theft. Regularly checking your reports will help you catch any suspicious activity as soon as it occurs and alert the credit bureaus if needed to start recovering any lost or stolen funds.

Leverage professional services.

If your time is limited, consider hiring a professional service specializing in small business' credit monitoring and repair processes. They can assist with obtaining copies of reports, disputing negative items on those reports, and providing customized advice tailored to the needs of each business owner.

Ask for higher limits.

Lenders may be willing to increase the limit on existing accounts based on your past payment history and current repayment ability. By doing so, you’ll be able to demonstrate that you can meet financial obligations while also increasing available cash flow and spending power. This helps you generate additional revenues from large purchases made throughout the year – something both lenders & businesses alike will appreciate seeing a long-term win-win situation.

Avoid judgments and liens.

Knowing how judgments, liens, and bankruptcy filings can negatively affect your business credit score is important. Unpaid taxes or business debt may result in creditors obtaining a legal right on your property to satisfy the debt. Unpaid debt may even lead to court rulings — or judgments — against your business. These negative remarks can remain on your Experian credit score report for a long time - with bankruptcies remaining for 10 years, and tax liens, judgments, and collections for almost seven years. Therefore, it is wise to avoid them as much as possible.

Establish business credit with a corporate card.

Consider applying for a business credit card that offers rewards such as cashback or travel points. This will help build your business profile by demonstrating its ability to pay off accounts in full and on time every month. Additionally, higher limits may be available as your business grows, and you can demonstrate an established favorable payment pattern from lenders’ perspectives.

Seek advice from experienced business owners.

Don't be afraid to seek advice from more experienced entrepreneurs. Their knowledge can come in handy when considering potential courses of action regarding dealings with creditors while staying financially afloat. Networking with industry professionals can also grant access to other benefits such as discounted rates, referral bonuses, free events, etc. – all of which have potential benefits for improving credit scores.

Keep your business information up to date.

Your business information, such as your address, phone number, and legal or business entity structure, can also impact your credit profile. Make sure to keep this information up to date with the credit bureaus and your lenders. This can help ensure that your credit report is accurate and up to date, which can help you secure better financing and terms.

Consider working with a credit repair service.

You may want to consider working with a credit repair service if you have significant negative items on your credit report, such as bankruptcies or collections. These companies can help you dispute inaccuracies on your credit report and work with lenders to negotiate payment plans or settlements. Remember that not all credit repair services are reputable, so be sure to research and choose a company with a good track record.

Be patient.

Improving your business credit takes time. It's important to be patient and consistent in improving your credit profile. Focus on paying your bills on time, reducing debt, and building a positive business credit history first. Over time, your credit score will gradually improve, which can help you secure better financing and negotiate better terms with suppliers.

Frequently Asked Questions about Business Credit

How long does it take to establish business credit?

Establishing strong business credit typically takes three to six months, but it can vary depending on the steps taken and how quickly they are completed. Once the new accounts appear on your business credit reports, you’ll need a few months of on-time payments to establish a good credit score. With consistent effort and proactive budgeting, you can create good business credit relatively quickly.

Can I establish business credit if I have bad personal credit?

Yes, you can still establish business credit even with bad personal credit. However, it may be more difficult and require more effort. You may need to start with secured credit cards or alternative financing options and work on improving your personal credit in parallel to establishing business credit to improve your chances of success.

Do I need an EIN to establish business credit?

Yes. An Employer Identification Number (EIN) is necessary to establish business credit. An EIN is a unique nine-digit number the IRS assigns to identify your business for tax purposes. You can apply for an EIN for free on the IRS website.

How soon can I start building business credit?

You can start building business credit as soon as you establish your business. The sooner you start, the quicker you can benefit from having good credit.

What is the starting credit score for businesses?

The business credit score or number varies. For instance, Experian and D&B Paydex have business credit scores that start at 0 up to 100, while other companies have different numbers. Even if you’ve been in business for many years, having a low or no credit score is common. A low business credit score doesn’t mean you have bad business credit or negative accounts; it may mean you have insufficient payment history or credit references.

How can I check my business credit score?

You can check your business credit score by purchasing them from commercial credit agencies like Experian and Dun & Bradstreet.

Final Thoughts on How to Build Business Credit

It's important to remember that building business credit takes time and effort, but it's a crucial step in securing financing and negotiating better terms with suppliers. By following the tips and strategies outlined in this guide, such as paying your bills on time, reducing your debt, and building a positive credit history, you can improve your credit profile and increase your chances of success. Additionally, utilizing credit monitoring services and seeking professional help can help you stay on track and make informed decisions. So don't get discouraged if your credit score isn't where you want it to be. With patience, consistency, and the right mindset, you can build strong business credit and set your company up for growth and success.