Building Business Credit: A Comprehensive Guide for Small Business Owners

A 2022 survey revealed that business financing approval rates had declined for the second consecutive year, falling significantly below pre-pandemic levels. Accessing venture capital funding has shown to be even more difficult in 2023, so establishing a solid business credit history is essential to increase your eligibility.

Thankfully, small business owners can help establish business credit by taking several proactive measures. This article will discuss the steps you should take to maintain good credit.

What is business credit and Its importance?

Data from the Federal Reserve in 2022 showed that almost 40% of companies that applied for financing in 2020 were not granted the capital they required to expand. This is frequently the result of inadequate or bad credit history, which can be a significant barrier for companies looking for financing.

Strong business credit increases the likelihood of financing approval as it assures lenders that you can make repayments on time. Lenders typically need to see that you have a credit score of at least 500 to approve a business loan. If you're applying via a bank, this prerequisite may be closer to 700.

Here are all the reasons why establishing business credit is important:

1. Simpler access to funding

Potential investors, including angel and venture capitalists, are much more inclined to make an investment when they see that your company has excellent credit. Other funding options, such as conventional bank loans and credit lines or alternative online lenders, will become available if you have a good credit rating. This adaptability may prove advantageous in unpredictable economic times.

2. Enhanced cash flow and reputation of the company

Good credit can help you obtain financing more quickly and better manage your cash flow because it can boost your company's finances during recessions. This is particularly crucial if your company experiences seasonal sales or has to buy inventory to keep up with increasing client demand.

Good credit can help you establish credibility and trust with other businesses and investors. This can increase the likelihood that clients will do business with you and give your company a competitive edge in the marketplace.

3. Enhanced ability to negotiate

A high credit score can give you negotiating power over terms and prices. This can be particularly useful in sectors like professional services, where contracts are continuously negotiated.

Steps to Enhancing Business Credit

Formalizing your company structure, requesting an EIN, and opening credit accounts reported to business credit bureaus are all steps toward building business credit.

After your company has received credit, you can focus on raising your score. The following is a comprehensive guide that will help you establish and grow your business credit:

1. Make your company's structure official

You must create a legal entity, such as a corporation or LLC, to build your business credit. This limits your liability and keeps your personal and business finances separate.

2. Submit an Employer Identification Number (EIN) application

For your company, an EIN is comparable to a Social Security number. If their company is in the US, sole proprietors and single-member LLCs can apply for an EIN on the IRS website. This number is used to identify your company when opening different accounts with lenders and filing taxes.

3. Open a bank account for your company

You can further safeguard your finances from any financial or legal ramifications arising from your business by opening a separate business bank account. You must submit your company's EIN, legal documents, and additional information to confirm your company's identity to open a business bank account.

4. Build a positive reputation with suppliers and vendors

Developing credit with suppliers and vendors is one way to improve your company's credit. Begin by requesting to switch from paying cash upfront to a net 30-day payment term. The invoice has a net 30-day payment term, and you will have 30 days from receipt to make payment. Making your payments on schedule will show that you are a responsible financial citizen and might improve your chances of getting bigger loans.

5. Collaborate with suppliers who submit data to the main credit bureaus

Major business credit bureaus do not receive reports from all suppliers and vendors. The three credit bureaus referred to as "major credit bureaus" are Equifax, Experian, and Dun & Bradstreet.

To establish business credit, it's crucial to investigate potential suppliers and confirm that they provide payment details to the relevant credit agencies.

6. Pay on time

Maintaining your credit score after you've built credit with suppliers and vendors depends on your ability to make prompt payments. This will contribute to developing a solid payment history, one of the most important elements in raising your company's credit score. Additionally, you'll free up available credit, which can improve your creditworthiness and overall credit utilization.

7. Frequently review your credit reports

Regularly reviewing your company's credit reports is essential if you want to be able to correct any mistakes or inconsistencies promptly. Reviewing your reports should be done at least once a year or quarterly.

One of the three main business credit reporting bureaus offers single business credit reports; alternatively, you can order a package of reports to review all three simultaneously. This will assist you in monitoring your company's financial data and gradually raise your credit score.

8. Apply for a corporate or business credit card.

You can establish your business credit by applying for a corporate or business credit card. With a corporate card, you can monitor your spending to stay within your budget, and you or your staff can make purchases up to a predetermined limit.

9. Establish a rapport with lenders

Developing a rapport with lenders who are acquainted with your enterprise is essential when submitting a financing application. A lender familiar with your business and finances will be better able to assess your eligibility for financing and provide more affordable interest rates.

Maintaining a positive rapport with your lender may also help your business if you cannot make a full or partial payment, as you may be eligible for payment accommodation. Naturally, you shouldn't experience this frequently, but a positive relationship can benefit you and your business if you find yourself financially bound.

10. Maintain active accounts

Like individual credit accounts, maintaining older accounts open for longer can help raise your credit score, just like with personal credit accounts. You want to keep accounts open for as long as possible because accounts with longer histories are viewed more favorably.

How long does a company take to establish a strong credit rating?

A company may need to invest up to three years in developing a solid credit score. If you're just getting started, it's crucial to understand that businesses with a track record of on-time payments and prudent money management can establish credit more quickly than those with none.

Build your Business Credit!

Establishing a solid reputation is important because it is the foundation for your company's financial stability. Keeping your personal and business finances separate will help you maintain good standing with the IRS.

You can ask your accountant for advice, but review your score at least frequently. Investing in a monitoring service that can provide reports and notify you if your credit score drops could be worthwhile if you're trying to establish credit.

Maintaining your company's credit score will help you finance expansion and solve cash flow issues.