For many small business owners, business credit is an incredible enigma. Some feel it is unnecessary for their smaller business, thinking that their personal credit is sufficient. Others never even give it a thought. They don’t concern themselves with how to build business credit.
The latter is often a result of the fact that when they went to apply for a startup business loan, their personal credit is what the lender used. The reason for that was that there was no established business credit to consider.
The fact is, if your business has been open for any amount of time, it has credit. It is just combined with your personal credit if it isn’t established as a separate entity. Payments made, or not made, by your business can affect your personal credit score unless you establish and build business credit.
If you are brand new, you may not have anything to affect your personal credit yet. That doesn’t mean it won’t in the future. Solid business credit is vital for success. Without it, you will not only find it hard to get approval when you apply for a business loan, but you can also have difficulty doing business with vendors.
Having access to financing is essential for business growth. If you want to expand to meet demand, you are going to need financing. Or if you need to replace equipment, you are going to need financing. If you want to take advantage of a promotional price to stock up on inventory that you know is a hot seller, you are going to need financing.
None of it is possible if you do not build business credit.
Wondering where to start? These 5 tips can help.
Start building business credit now. Whether you are a start-up or you are already established, it isn’t too late. Some of these tips are easier to accomplish on the front end, but they work at any stage. You just have to bite the bullet and get it done.
When someone seeks to contact your business, is the number they use under the name of your business or your name? When they look up your business in the directory, is the phone number your personal number?
Get your business a separate phone number and list it, along with the address, in directories such 411.com.
List this information under the business name. If your business doesn’t already have a DBA (doing business as) consider either getting one or incorporating as a corporation, S-corp, or Limited Liability Corporation.
Incorporation in some form provides even more defined separation than a DBA, which is helpful when trying to build business credit.
Apply for a small business credit card. Find a starter vendor. Apply for a business loan with an alternative lender. Even if you do not need the funds currently, you need some credit lines to make payments to be making on time debt payments. Use the funds to invest back into your business but be certain not to take on more than you can pay.
If you are an established business check with current vendors and utilities to determine if they report to any of the three business credit agencies. Dun & Bradstreet is the most common, but Experian and Equifax are also judging your business’s ability to pay its bills.
This is the only way to build business credit. None of the other steps matter if you cannot do this one thing. It sounds simple, but you have to plan for it. When you are working toward building credit remember not to overdo it.
Get the credit card, take out a small loan, work with your vendors, but always keep in mind you have to make those payments. The first time your order more than you can pay for or take on more debt that you can make the monthly payment on, you are in trouble.
If you miss a payment one month, you are then either playing catch up and have to make up for it the next month, which will put you short on cash again. It is a vicious cycle.
Here is the key. Build business credit before you need business credit. Then when you need the larger loan for expansion or want the business credit card with lower interest and cash back, you already have the credit in place to get the best terms.
Pretend you are the neighborhood watch for your own credit. You should keep an eye on things continuously. The easiest way to do this is with a credit monitoring service. Most of them offer access to your score and what is affecting it at any time and update at least monthly.
When you see a negative impact, consider what you can do to reverse it. If you see a mistake, report it to the appropriate agency in detail and send in all supporting documents. Remember to make copies. Never send originals.
Keeping your credit report free of mistakes and taking action when you see a negative change are major components of building business credit that are often forgotten.
The monitoring service offered by CreditSuite.com is an effective and affordable option.
Here is an example of how business credit can make or break the success of your business. Business A and Business B are both doing great. Their income is growing, they can cover their expenses, and demand is growing.
In fact, demand is growing so much that each business needs to expand in an effort to keep up with it. Business A is a pizza parlor and Business B is a bakery. They each need to add freezer space and a couple more industrial ovens, as well as expand their in-house seating.
The pizza parlor is considering adding a party room and the bakery thinks a patio may go over well.
Neither of them has the cash on hand to finance the expansion, so they head to their financial institution to apply for a business loan. Business A has been working to build business credit for years and has a solid score.
Business B didn’t think about separating business finances from personal finances until the business began to grow. The business itself doesn’t have much to report in the way of credit, and though they are doing great now, there are some issues on the owner’s personal credit that have not cleared up yet.
They are both able to get a loan. Business A gets a traditional, term loan with manageable terms. They purchase their ovens, add the party room and continue growing and meeting demand.
Business B has to go to a lender that offers high risk small business loans due to the lack of business credit. To lenders, no business credit is bad business credit. The terms are not as favorable. The higher interest means he has to choose between payments they cannot handle or not expanding as much.
At this point, either choice could be bad. The better choice is to stay with payments you can handle and try to refinance and do more after you build business credit by making the payments on time. This would probably mean choosing to purchase one oven and hold off on the patio.
The problem is, if it isn’t enough they still will not be able to keep up with demand. Customers will become frustrated and the business will start to falter.
If they choose to continue with the entire expansion project, income could increase enough to cover the payments, but it will take a while. You will have to start making payments on the loan while the work is in progress. In this case, it is highly likely that making the payments will be difficult if not impossible. Business credit will only get worse, and the business will falter.
Of course, you can never predict what will happen with a business, but I think we can all agree that the business that already has strong business credit in place has a better chance of success.
The fact is, financing is almost always necessary to grow a small business. Strong, established business credit is vital to obtain financing with favorable terms. If you begin building business credit before you need it, then you have a strong foundation in place to nurture success when it comes.
As your business flourishes, much like a plant, you have to water and fertilize it. You also have to prune the weak parts so they do not take nourishment from the strong parts. This enables to strong parts to grow stronger.
When you work to build business credit, you are watering and fertilizing. When you cut out those things that negatively impact your business credit, you are pruning.
While it is definitely better to build business credit before you need it, hope is not lost. Just start where you are. If you are not currently in need of financing, start with the tips mentioned above and watch your score grow.
If you do need financing now, still work toward establishing your business as an entity separate from your personal finances and make consistent payments on whatever financing you are able to get. Go ahead and get a modest business credit card and make payments while you are also making payments on your business loan. Ask vendors to report payments and make payments to them on time.
As you build business credit, you can negotiate for better interest rates and terms, which will only nourish your business more. Today we want to know what you think about these 5 ways to build business credit.