The Secrets to Building Better Business Credit

Building credit is confusing and often disappointing for many small business owners and entrepreneurs. The maze of paperwork and preparation behind it may seem endless and uncertain.

Credit approval is a meticulous process, especially for startups. It requires planning and familiarity.  That’s why hundreds of executives just like you rely on outside services to help them become creditworthy in the shortest time possible.

Not sure how to establish business credit? You’ve come to the right place.

Where do you start?

When they start, small businesses are financed with their owners’ assets, like personal savings. However, this is not sustainable, especially when the business grows exponentially.

That’s when business owners realize that obtaining a business loan is far more complicated than obtaining personal credit. The success of many business enterprises has been cut short because few small business owners know how to find credit or investment solutions to fund their business growth. You need to build a business credit profile. 

Advanced preparation will significantly improve your chances of approval for your business loan. Business credit is a wide net that can encompass several terms. For clarity, credit is in trade credit and bank financing. Your objective should be to set up freely spendable working capital that you can use to start, build, and grow your business.

How Do I Begin Building Business Credit?

Step 1: Pre-Qualification Credit Analysis

The first step in the credit acquisition process is to analyze where you currently stand with a business credit analysis. This is the same first step a potential lender will take. 

A business credit analysis will identify your company’s status by building a business credit profile that will make your application more likely to succeed. The first step towards obtaining financing for your business is a pre-qualification process. A certified FICO professional will fully assess your current personal and business credit status using a proprietary diagnostic checklist that reveals the truth about your options. 

When applying for a business loan, most lenders look at your personal and business credit profiles to determine if you’re suitable for one. From there, they determine the amount and terms of that loan. That way, you will be a step closer to getting business credit.

Step 2: Consultation

Depending on your credit status, your business might be eligible for funding immediately with no further steps. Your credit report might also have some “blemishes” that must be fixed before proceeding. Whatever your financing needs are—whether you have poor credit, okay credit, or good credit—it is possible to obtain a loan for your business. 

Getting the financing you desire is knowing where to go and understanding the processes involved. If your credit does not meet the minimum underwriting criteria, there are several credit improvement strategies and resources to help you improve your credit.

Step 3: Strategic Planning

This phase involves several sub-steps:

Separate Business and Personal Finances

It all begins with establishing your business as a separate legal entity. This entails obtaining a separate legal entity for your business, such as a corporation or LLC, and opening dedicated business bank accounts and credit lines. Mixing personal and business finances can complicate accounting and hinder your ability to build strong business credit.

Obtain an Employer Identification Number (EIN)

Also known as a tax ID, an EIN is a unique nine-digit tax identification number the IRS assigns to businesses for tax filing and reporting purposes. Getting an EIN is key to ensuring your business operates as a separate legal entity and is often required when applying for business credit. You can easily obtain an EIN online or request assistance for good measure. 

Keep Your Information Current  

Several credit bureaus, including Dun & Bradstreet, Experian, and Equifax, collect data and create business credit scores. However, unlike personal credit scores, which follow the standards set by Fair Isaac Corp. to produce a standard FICO score, business credit scores are much less streamlined. Each business credit bureau has a different formula for calculating scores, and different lenders report different data types.

In any case, borrow from lenders that report to the credit bureaus!

Establish Trade Lines with Suppliers

This goes without saying. Your vendors can extend a trade credit, allowing you to offset the time it takes to pay for your supplies. Making an Accounts Payable relationship with your vendors means they report your payments to a credit bureau. Stick to the terms of the trade agreement and watch your credit score rise to new heights.

Make Payments to Creditors on Time (If Not Early)

Each bureau applies different methods to arrive at its assigned number, but some will only award perfect scores to those who pay early. Payment history, in addition to credit utilization, will always be a contributing factor to your credit score. 

Although it’s great to have access to credit, the best practice for increasing your credit score is to avoid reaching the limit. Instead, try to stay within a 20-30% range.

Be Mindful of Your Credit History

It’s important to know that your credit history knows about your public records. As a result, your score will take a hit with bankruptcies, liens, or debt collection lawsuits. These discrepancies can last 7-10 years, so it’s best to avoid them at all costs.

Step 4: Apply and Get Approved

Start the application process once you’ve applied the abovementioned strategies and your credit score is acceptable. When your business passes pre-qualification and lender preparations, you will have an outline of accessible funding options.

Step 5: Gradually Increase Your Credit Limits

As your business credit profile strengthens, consider requesting credit limit increases on your existing credit accounts. A higher credit limit provides greater financial flexibility and demonstrates to creditors that your company can responsibly manage higher credit levels. However, exercise caution and avoid overextending your company’s finances beyond its means.

Key Takeaway

Learning how to build business credit might seem daunting, but with the right help, the process is quick, easy, and worth it. Good credit will get you those low-interest-rate loans, business credit cards, and even better terms on those vendor agreements. Your business credit score is also public information, so always tell your customers you excel with finances.

Are you ready to learn how to get business credit and build your profile? Turn to the credit experts at NCH today. Call us at 1-800-508-1729 for a complimentary consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.