What Is Business Credit and How To Get Started in 2023
Establishing your business credit is one of the most critical steps for a business owner to start a company.
It can open up a world of opportunities—including access to capital, better rates on loans and lines of credit, or even more favorable terms with suppliers.
Lack of credit can also lead to short and long-term business problems, including high-interest rates, a lower lending limit, or even denial of services.
In this article, I’ll explain what business credit means, how it works, and provide tips to help you get started.
What is Business Credit?
Business credit is a tool used by lenders and creditors to determine whether you are to borrow money.
Said differently, business credit reflects your company’s ability to meet its financial obligations on time.
Companies use financial history from your company and others to do this.
A good business credit score means lower interest rates and better terms when applying for loans or other types of financing.
Rated by business credit bureaus, such as Experian, Equifax, and TransUnion, your business credit score depends on payment history, number of open accounts, and outstanding debt.
Companies should ensure vendors accurately update information about the business in their business files held by the business credit reporting agencies.
How To Get Started With Business Credit
Taking the proper steps will help build business credit and improve your credit score.
Keeping up with payments and managing debt responsibly is the key to improving your business credit score.
Make sure all bills are paid on time.
Even if they’re just the minimum payments, you should work towards paying off any outstanding balances as quickly as possible.
Also, make sure that all information reported on your business credit report is accurate and up-to-date.
If there are any discrepancies, contact the reporting agency immediately to rectify them so that one can accurately reflect your actual financial standing on your report.
Additionally, it helps you become familiar with the different types of lenders available (e.g., banks vs. alternative lenders).
This knowledge ensures you get the best possible deal for your particular situation.
If needed, consider getting a business line of credit or taking out a short-term loan specifically designed for businesses with less-than-ideal credit ratings.
You can demonstrate responsible borrowing behavior over time and build up a positive payment history, which will help improve your score in the future.
Let’s explore more specific ideas for how to improve your business credit
Obtain an EIN
For small business owners getting started with building their credit, they can use an EIN to establish credit accounts with vendors and suppliers.
An Employer Identification Number (EIN) identifies businesses and other entities in the US
Obtaining an EIN is essential because it helps protect your personal information from becoming a public record.
You may need to obtain an EIN if you are a sole proprietor or are hiring employees filing taxes under your business name.
Form a Corporation or LLC
Before setting up business credit, selecting the proper business structure is essential.
Forming a corporation or limited liability company (LLC) is critical when setting up your business financially.
Doing this creates a separate identity for the company and protects it from personal liabilities such as debt and lawsuits arising from its operations.
Every new business should check with their state government for the requirements and regulations for starting an LLC.
Compared to sole proprietorship or partnership, corporations & LLCs tend to be more attractive for lenders since these entities typically have a much better credit standing.
An LLC is also essential for lenders considering granting a business loan, as it allows the entity to access capital more quickly than a sole proprietor.
Open a Dedicated Business Bank Account
Building good business credit allows issuers to gauge your company’s creditworthiness and manage risk.
When you open a business bank account, you can easily separate business expenses and get access to credit line options.
Lenders often require a dedicated business bank account when applying for a small business loan.
A bank account and a business credit card or loan can help you build up your business credit faster and give you access to financing options.
Moreover, a business checking or savings account will help you track income and expenses more accurately.
Take Advantage of Business Opportunities
Taking advantage of various opportunities available to small businesses is critical.
For example, reporting positive payment history on prominent box store vendors can help build credit over time, which can be beneficial when applying for loans in the future.
Just remember that utilizing any related business credit cards should be at most 30% available balance because this could negatively affect your overall credit score.
Sign Up with Dun & Bradstreet
You can unlock powerful data insights by signing up with Dun & Bradstreet (D&B) and utilizing their DUNS number tracking services.
Such insights help you understand how lenders view your company’s performance.
Many credit bureaus and lenders use the DUNS number to assess credit risk and determine the amount of available business credit.
This visibility allows for monitoring the overall credit score based on timely payments and regular invoice receipts.
It also helps ensure other agencies have accurate information about your company since they typically already monitor it.
This registration process involves providing your social security number, address, financial information, and an Employer Identification Number (EIN).
Take Advantage Of SBA Initiatives
Business credit is essential for many companies, especially when it comes to securing loans from the Small Business Administration (SBA).
The SBA offers several loan options, such as the 7(a) Loan Guarantee Program and the Microloan Program.
Business credit is a must-have to improve business finances and make qualifying loans from the SBA and other financial institutions more accessible.
By investing in potential SBA initiatives, you’ll also get an idea of what lenders may assume when they look at your business’s credit profile so that you can make changes accordingly.
Utilization of Credit
Credit utilization refers to how often a company uses its accounts to purchase goods or services (or pay bills).
A higher utilization rate means that a company is taking advantage of all the resources available through various accounts, which can be beneficial for increasing cash flow.
However, it can also hurt their overall rating if done excessively.
Payment history and credit utilization can influence your business’s credit score, so you must ensure you stay within your credit limit and make payments on time.
It’s essential for business owners to keep track of utilization rates and ensure they reach a manageable level since this can negatively impact their overall rating with lenders.
Traditional Term Loans
If a traditional term loan from a bank is more suitable for your needs, that option comes with the right business credit.
Following the steps to get a business loan, you can borrow more significant amounts than other financing forms.
This loan generally provides longer repayment terms with fixed monthly payments, making budgeting easier.
Consider Vendor and Service Credits
Another way to finance large purchases while improving business credit would be through vendor and service credits.
If approved by vendors or service providers, these credits allow businesses to purchase goods or services without needing to invest all their funds upfront.
Helping companies manage their cash flow while still being able to acquire the resources they need to stay competitive in their industry is critical.
Make on-time payments
A great way to ensure your business’s credit score is by making on-time payments.
The opposite is also true—if late payments become a habit, your credit score will take a hit, and it could not be easy to access new lines of credit.
Additionally, you can ensure that vendors and suppliers add your business phone number to their accounts for increased security.
Anything that can make your business look more reliable and trustworthy to lenders is beneficial.
The Benefits of Establishing Business Credit
The benefits of having good business credit are numerous.
Firstly, it allows you access to more funds since lenders tend to be more willing to lend money when they know they will get paid back.
Also, with good business credit, you can negotiate better terms with lenders and suppliers, potentially saving you money in the long run.
Having a solid business credit score also allows for better opportunities when seeking out new investments or partners for your venture.
They will trust that you have managed your finances well in the past and thus may be more likely to invest in your future endeavors.
Having good business credit gives you peace of mind as an entrepreneur.
Knowing that you are mitigating financial risks associated with running a business through wise decisions made in the past is excellent.
How To Interpret Your Business Credit Report
Understanding your business credit report is one of the most critical steps to managing a successful company.
In addition to other pertinent financial information, this report contains a comprehensive list of liens against the business and all bankruptcy filings initiated.
A business credit report also contains information such as payment history with creditors, the total debt amount, years in business, and the company’s current credit score.
Your report combines information from several different sources, like Dun & Bradstreet, Experian, and Equifax collections agencies and public records.
This information is all compiled into one comprehensive document.
It’s important to note that each bureau may report different facts due to their independent databases.
Businesses can access their reports to ensure lenders see accurate information about their operations.
When it comes to your business credit score, this three-digit number is essential to evaluating your financial standing with creditors and lenders.
Ranging between 0 and 100 (as opposed to being between 300-850 for personal ones), which measures how likely you will pay back a loan or line of credit on time and in full.
Your credit score provides lenders with an indication of your trustworthiness when it comes to money matters.
Depending on which bureau produced the score, this might be different.
However, all scores depend on factors such as payment history, the outstanding debt amount, and length of operation.
A good score indicates that you are reliable when paying off debts – while bad scores suggest that you may need more assistance from other sources.
Make sure you regularly review your reports and take action if necessary.
How Professionals Can Help With Business Credit
Professional advisors have experience in helping companies construct an optimal mix of corporate credit sources to help them achieve better results when working with lenders.
They also guide setting up accounts correctly so that payments are reported accurately, using them responsibly, and having a good reputation with lenders.
In addition, professional advisors can help businesses identify their weaknesses by examining their overall credit profile.
They also look at any past incorrect financial issues that creditors may inaccurately have recorded.
These factors include the following:
- Business financials
- Payment terms with suppliers
- Business risk profile
- Personal creditworthiness of business owners
- And more.
As a result, they can help shape business credit profiles and explain the implications of using business credit.
The Difference Between Personal and Business Credit
Business credit is used for business-related expenses, but what sets it apart from personal credit cards from the perspective of creditors and lenders?
While personal credit history depends on the individual’s creditworthiness, business credit reports focus on various factors.
Such factors include payment history, financial strength, and length of time in business.
Personal information such as income and employment influences personal credit reports.
In contrast, business credit reports depend on the company’s financials, payment terms with suppliers and vendors, and the overall risk profile of the business.
What Is Business Credit – FAQ
How Does The Employer Identification Number Help Business Credit?
An employer identification number EIN is a Social Security number for businesses.
This number is required for any business wishing to establish credit with creditors and lenders, as it allows them to track the business’s payment history and financial information.
What’s The Best Way To Establish Business Credit?
The best way to establish business credit is to ensure your company has a positive payment history with suppliers, vendors, and creditors.
In addition, the types of business credit lines you apply for should be appropriate for your business.
It’s also essential to understand the implications of taking on additional debt.
How Do The Major Business Credit Bureaus Rate Creditworthiness?
The major business credit bureaus use a variety of factors to calculate an organization’s creditworthiness.
Whether Dun Bradstreet, Experian, or Equifax, these bureaus analyze payment history, financial strength, time in business, and other criteria to determine an organization’s creditworthiness.
Does The Small Business Administration Help With Business Credit?
Yes, the Small Business Administration (SBA) offers various services to help entrepreneurs and small businesses establish and build business credit.
Starting a new business can be an overwhelming challenge, but business credit is an often-forgotten tool that can streamline operations and lower startup costs.
A good business credit profile will help you get the financing you need and secure better terms when applying for loans.
Understanding the nuances of how business credit scores work and the significant bureaus that calculate them is essential.
By following the above advice, you’ll be well on your way to a successful business in no time.
Further reading on AdamEnfroy.com: If you have a bad credit score, unsecured business loans can help give your business the boost it needs to succeed.
Moreover, peer-to-peer lending can be a great way to secure financing if you need capital.