Establishing business credit is an important step for any business. However, building credit for your business can take precious time and often times, business owners get confused as to how they build credit for their business. In order to make your business as creditworthy as possible, here is a list of tips that can help you build business credit.
Pay attention to your personal credit rating
The biggest factor in many banks’ decision to initially lend businesses money is the owners’ personal credit ratings. In order to achieve a creditworthy score, be sure to practice methods, such as paying your bills on time and following through with payment terms. This will help ensure that your own personal credit score does not implicate the company.
Apply for credit before you need it
To begin building a credit history for your business, apply for at least some sort of credit soon after starting up. A business will often have to establish itself for two years before a bank feels comfortable offering a sizable credit line. But there are ways around that, such as applying for a small bank loan.
Build relationships with more than one lender
Banks can change lending policies at a moment’s notice and cut your credit limit overnight, so it can help to not have all your financial eggs in one basket. You might instead choose to consult smaller bank sources. With the smaller banks, you can actually speak to the one person who will put your loan package together and go to the board.
Remember that traditional banks are not your only shot at credit. There are a growing number of other options, such as securing investors. Using alternate channels can at least indirectly improve your chances of getting credit in the future.
Keep your information current with all credit bureaus
There are several credit bureaus that collect data and create business credit scores. Each business credit bureau has a different formula for calculating scores, and different lenders report different types of data.
Since you never know which credit bureau your vendors, creditors, or potential customers will check, it’s smart to update your credit across the board. You can update your basic business information, such as years in operation or number of employees, and you can upload financial statements. Ultimately, the more complete your profile is, the better.
Establish trade lines with your suppliers
If you buy supplies, ingredients, or other materials from third-party vendors, those purchases could help build your business credit. Many suppliers extend trade credit, which means they allow you to pay several days or weeks after you receive the inventory. If you have this type of accounts-payable relationship, ask your supplier to report your payments to a business credit bureau. Your business credit score will get a boost as long as you stick to the terms of the trade agreement.
Make payments to creditors on time or pay early
Although each credit bureau uses slightly different methods of crunching business credit scores, all of them consider your history of paying creditors. To ensure a good score, make sure your payments are on time or, even better, pay early.
Borrow from lenders that report to credit bureaus
Business loans can actually boost your business credit if you make all your payments on time and the lender reports to a business credit bureau. But not all lenders do. So if you’re intent on building business credit, ask the lender whether they report to a credit bureau before you take out a business loan. Banks typically report to credit bureaus, but if you have bad credit, you probably won’t qualify for a bank loan. Many online business lenders which are more willing to lend to bad-credit borrowers also report to credit bureaus.
Keep your public records clean
In addition to detailing your business’s history of paying creditors, your business credit report will have any public records filed in your business’s name, including bankruptcies and judgments. A judgment would be a court ruling. If the ruling is against you in a debt collection lawsuit, it will have a negative effect on your credit score. These negative marks on your business credit report can haunt you and can stay on your credit report for a couple of years.
Building good business credit can help you get lower-interest business loans and better terms from your suppliers. It may even help attract new customers, since anyone can check your business’s credit score as a way to gauge your trustworthiness and responsibility.
The best way to build business credit is to update your business information with business credit bureaus, establish trade lines, borrow from lenders that report to credit bureaus, and make payments early or on time.
However, in order to build your business credit, you need to know what your credit score is. Checking your credit score will equip you with current, comprehensive information in order to make the best financial decisions moving forward.