An established small business credit history can help you qualify for a greater variety of small business financing options, and ensures that you aren’t forced to rely on your personal financial history when you need to obtain funding for your business. Here are some ways you can take those first critical steps to building your small business credit.
5 Ways To Build Your Small Business Credit
1. Keep your business and personal finances separate
If you don’t already have an EIN (like a social security number for a business) and a distinct business checking account that you use to exclusively manage your business’s finances, establish one now. While specific details about your bank accounts may not get reported to business credit bureaus such as Dun & Bradstreet, Equifax and Experian, some of the information in a business credit history is related to public records that could be an indicator of your business’s net worth and financial health. Plus, you’ll need to have a business account to reference when you’re ready to apply for business credit.
2. Apply for credit
If your deposit accounts are held with a financial institution or credit union that also offers small business credit cards, consider applying for a credit card in your businesses name. While you may not be approved for a major credit card without any type of business credit history, some financial institutions may be more likely to extend credit to small businesses that have other relationships with it, including deposit accounts.
If you are approved for a business credit card, use it to pay for some business purchases. You’ll ensure that the card remains active and in good standing, and your credit use will be reported to the major business credit bureaus monthly. The more consistently you use the card, the less time it will take to build your business’s history of responsibly using credit and making timely payments.
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3. Monitor how much of your credit is used
Though your business credit history and personal credit history reports contain different types of information, some of the common advice for building positive credit as an individual applies to business credit, too. For example, financial experts commonly recommend that individuals not use more than 50 percent of their available credit line, because some lenders consider it a measure of potential lending risk. Likewise, when you use too much your business’s available credit, it could make lenders and creditors perceive your business as one that lacks sufficient cash flow.
4. Apply for credit with suppliers you buy from often
If you’re not approved for a major small business credit card, you may still have an opportunity to build your business credit history through trade lines and credit relationships with vendors such as office supply stores, equipment and technology providers, and even office furnishing providers. (You will, however, need to confirm that they report account activity to the major credit bureaus for it to appear on your formal business credit reports.)
5. Confirm that the information in your credit reports is accurate
Though all three of the major credit bureaus’ reports contain different types of information, Dun & Bradstreet and Experian both consider factors such as a business’s publicly reported financials, trade relationships and lines of credit use to assess a business’s potential risk, relative to the type of business you operate and the risk that industry inherently presents. Confirm that the information the bureaus have on file for your business is accurate, including its assigned SIC code.
It takes patience and consistency to build your business credit history, but it’s time well spent when it comes to your business’s future growth and borrowing options. The more established your business credit history, the empowered you are to choose which lenders you want to work with when the time comes to invest in your businesses future expansion.
Tim Roach is the co-founder of Lendr, a leading provider of merchant cash advances for small businesses. Roach holds a B.S. in Finance from Linfield College, and previously served in the United States Navy. Before joining Lendr, he founded Oak Street Trading, a proprietary trading firm, in 2002.