Most small businesses and start-ups rely on business credit to finance the growth of their organisation. Short-term loans can cover costs such as equipment, stock, and even payroll. Furthermore, business credit cards can be used for regular expenses such as fuel or office supplies.
However, getting hold of loans and credit when you’re just starting out can be challenging. Most lenders will check credit ratings before lending and will want assurances that they’ll be paid according to the payment plan.
So, how can you build your business credit? This article looks at what business credit is and how you can boost your rating at the start of your journey.
Just like everybody else, businesses have credit reports and ratings too. Companies such as Experian, Equifax, and Dun & Bradstreet keep records of payments, debts, credits, and other credit information about businesses.
Lenders, suppliers, creditors, and insurance companies use your credit rating or report to evaluate trustworthiness ahead of business deals, credit applications, and insurance applications.
It takes time to build a good credit score, especially with the fallout of the Covid-19 pandemic affecting the economy negatively.
However, there are several ways to build credit when starting out in business. You may own your business, but you still have to improve your credit score from scratch regardless of your personal credit rating. We take a look at some of the typical ways below.
One of the first things you should do when trying to establish a credit rating is register your business as a separate entity. The structure of a business can affect how lenders judge its credit, so it’s vital to be set up legally away from your personal credit score.
A sole trader’s credit score and liability are tied to their personal finances. In contrast, a limited company or corporation are linked to the business. Consequently, their credit score is a blank canvas from the start – which is why you have to build credit from scratch.
So, to get the ball rolling, you should register your business and establish its name to begin building credit.
Part of establishing your business’s name and credibility is opening a business bank account. This account should be used for company purposes, such as direct debits and purchases.
A business bank account can help you build a track record with the bank you choose. Therefore, helping you when you do apply for credit as you’ll be coming as an existing customer.
As most major credit cards report to large commercial credit reporting agencies, opening a business credit card is ideal for establishing business credit.
Having at least one available credit card is wise, but having more than one is also helpful. Be mindful of having too many, though, as overstretching your business finances could leave you in trouble.
Your personal credit may be impacted when you first apply for a business credit card, but once it’s open, it stays separate from your personal credit.
Later down the line, if you want to apply for a loan as your business expands, your business credit (built by opening a credit card) will help approve the loan. But, of course, that all depends on keeping up with repayments.
Unfortunately, building your credit score isn’t a one-time operation. Once you’ve established it, it will need regularly reviewing and checking.
New information and factors can impact the score or rating both negatively and positively. To avoid a decline in your score, you should check in regularly and make relevant adjustments to keep it positive.
Indeed, if you spot something that shouldn’t be there or something that is incorrect, you should report it immediately to avoid bad credit.
When running a business, lenders need to know that they’ll get a return on their investment. The best way to prove this is by paying creditors on time, every time. It also means paying early if you can.
Failing to pay creditors could mean a negative impact on your credit rating or your creditors submitting a negative report to business credit agencies. In addition, bad credit history could cause problems in the future when it comes to borrowing money.
Dun & Bradstreet are a global provider of business decisioning data, providing businesses with credit reports.
Registering for a Dun & Bradstreet D-U-N-S Number is a way to identify your business uniquely. In addition, this number allows lenders and potential business partners to check your company’s credit rating.
Consequently, you should have this in place before applying for a loan.
It may always seem like an uphill battle to improve your credit score, but you can have a positive impact by taking the proper steps early on.
As mentioned, it’s crucial that you regularly check your score and report. Nasty surprises are as harmful as they are unwelcome, so avoid them by keeping tabs on your score.
Remember never to overstretch yourself, too. Although your positive credit may allow you to borrow more than you need, the last thing you need is not to be able to pay on time.
Avoiding adverse credit is the best thing you can do to protect your business and stay sustainable.
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