Small businesses need to build their business credit because lenders and suppliers use your business credit score to determine your creditworthiness. Businesses with higher credit scores are more likely to get approved for credit with the best terms. We spoke with the experts who shared different tips to increase business credit for your business.
The following are the top 22 tips to build business credit from the pros:
1. Apply for Starter Business Credit Cards at Office Supply Stores
Jason M. Kaplan, Account Executive, The Credit Pros
Apply for starter business credit card accounts with Office Depot, Staples, and Home Depot. These accounts are easy to get. They will require a personal guaranty by the business owner, but the standards are typically low. Even if you do not need these accounts for your business, the purpose of opening them is so that your Dunn and Bradstreet number starts to reflect lines of credit to establish a business credit history.
2. Consider Entering into a Sale Leaseback Arrangement
Charles Krawitz, Vice President of Commercial Lending, Alliant Credit Union
If you are a small business that owns the building in which you operate, consider entering into a sale leaseback arrangement. This will enable you to pull capital out of the building and redirect it into your business. These funds can be used to retire debt and improve the overall cash flow of your business. In turn, this money can be reinvested in your business over time in the form of expanded marketing, leasing equipment that lowers your cost of production, or upgraded staffing. At the end of the day, you want to create a virtuous cycle, and the money from a sale leaseback, if invested properly, can accomplish just this. These strategic activities are likely to result in an improved bottom line, and with it, your business’ credit score is bound to increase. This is particularly true now, as commercial real estate is generally trading at near record prices, and the returns your business can generate should exceed that of real estate ownership.
3. Conduct Business Through an Established Business Entity
Brian Rogers, Attorney, Blue Maven Law LLC
One important way to increase your business credit is to organize your business as a corporation or limited liability company (LLC) and conduct all business through the entity. This also helps protect your personal assets from your business’ liabilities.
4. Establish Open Trade Lines
Chad Otar, Managing Partner, Excel Capital Management
It is recommended that small business owners have open trade lines that reflect on credit and that they pay on time. Whether it be a business credit card or vendor account, most alternative lenders look at how trade lines are paid to determine approval. For businesses with no trade lines, most institutions will not grant good offers.
5. Develop & Expand Lines of Credit Before You Need Them
Bill Bender, Owner, Boulder Tire
One of the most important things to do to increase your business credit score is to develop and expand lines of credit when you don’t need them. Lenders are reluctant to extend loans and credit lines to businesses that have low or abysmal revenues coming in or that don’t have an optimistic forecast for future repayment. That’s why when you’re flush with disposable savings, it’s beneficial to get higher thresholds. So if you’re stuck with a significant financial obligation, such as recovering from a powerful storm that hits your region (even if insurance covers the damage, you’ll have to pay the deductible), having that parachute in place can really save your year or even your business.
6. Work with a Lender Who Reports to Business Credit Bureaus
Sarina Siddhanti, US Head of Commercial, Funding Circle
Just like personal credit, your business credit is built over time based in large part on your history of repaying debts. But unlike personal credit, you can’t always assume that business lenders you work with will report to commercial credit bureaus. This means that even if you take out business financing, your hard work in paying it back on time may not necessarily be reflected on your commercial credit report. Before you sign on the dotted line with any lender, ask if they report to commercial credit bureaus.
7. Bank with Your Local Credit Union or Hometown Bank
Dr. Daniel Pozarnsky, Founder, Balance Chiropractic & Rehab
It’s better for small business owners to bank with their local credit union or their hometown bank. Large organizations are much less willing to work with local businesses. They have less invested in the community and because they have millions of customers worldwide, you’re literally a number. However, if you work with a credit union or the actual local bank, you’re much more likely to receive better service, such as extensions, increases in credit limits or lines, and so on. It’s about supporting other community members who are employing in the community.
8. Pay Your Bills on Time
Parris Sanz, CEO, CAN Capital
The most crucial way to improve your credit score is to pay your bills on time. Be sure to also monitor your credit file closely and be aware of any changes before they begin to affect your relationships with clients, customers or financial institutions. Having good business credit helps you secure lower interest loans, credit cards and the best possible terms from your suppliers. When you stay in the know and monitor your credit, you’ll appear trustworthy and stand out among competitors.
9. Reconcile All Bank Accounts & Credit Card Accounts Monthly
Ruth Urban, President & CEO, On the Money LLC
It is vital to reconcile your business bank and credit card accounts monthly, as this is where businesses will usually find errors and sometimes fraud on their accounts. There is a lot more to accurate accounting than reconciliations, but this is one of the most important components. Reconciling credit card accounts is just as important as reconciling bank accounts.
10. Open a Business Bank Account
Paola Garcia, Small Business Advisor, Excelsior Growth Fund
Commingling personal and business funds makes business deductions and taxes more complicated, and you don’t want negative events in your personal finances to potentially impact your business. Opening a separate bank account for your business will help you establish your business’ credit history properly, right from the start.
11. Use Passive & Active Credit Building Strategies
Barbara Weltman, President & Founder, Big Ideas for Small Business
To increase your business’ credit rating, you have to take a multi-faceted approach. Use passive strategies, such as paying your bills on time and limiting your debt, and active strategies, such as working with lenders that report to credit rating bureaus.
12. Make Sure Your Accounts Are Accurate & Up to Date
James Sinclair, Trade Finance Marketing Manager, Trade Finance Global
Make sure your accounts are accurate and up to date. This includes details of address, directors and shareholders, ensuring there is no discrepancy in the data. Bureaus are able to keep details of bankruptcies for up to ten years, as well as late payments, so be sure that the business history is kept clean.
13. Use Credit to Make Routine Purchases
Libba Durrett, Founder, Sparklers Online
Business owners should keep a running list of available credit cards or loan offers they’ve been offered that have 0 percent APR or the lowest APR they can find. Utilizing credit is part of the U.S. financial system and as long as you have a handle on it, keep meticulous financial records with payment due dates. Many businesses are seasonal or cyclical. Use credit to purchase inventory in advance of that rush season, so you can fulfill orders with ease and make as many sales as possible. Once orders hit, where you make a bulk of your revenue, you’re able to pay off all your obligations in full without having to get dinged on APR. It’s essentially using someone else’s money for your needs without having to pay it back with interest. You can’t find that kind of offer in many places, so use it. What’s nice about this route is that you’re actually displaying good credit usage behavior, which can positively impact your credit score.
14. Get a DUNS Number
William Schroeder, Co-Director & Counselor, Just Mind
One of the first things that you should do is to get a DUNS number (from Dun & Bradstreet). This is necessary especially when you’re applying for a line of credit for your business. Getting a business credit line is essential in building your business credit even if you do not really use it.
15. Maintain Both Your Personal & Business Credit
Megan Hanna, Editor, Fit Small Business
If you own a business, you need to make sure you’re maintaining both your personal and business credit. Some of the ways you can increase your business credit are similar to methods used personally, such as making your payments on time and keeping your revolving balances to 20 percent to 30 percent of the credit limit. However, this assumes you have a business credit score. This starts with such things as forming a business entity (e.g., an LLC), getting an EIN, and opening a bank account in your business name. Once this is done, you should establish business trade credit with companies that report information to a credit bureau. As an example, if you own an auto repair shop, you might establish a credit line with a large automotive parts supplier. Establishing trade credit, and then always paying your suppliers on time, is one of the best ways to increase your business credit.
16. Check Your Credit Reports Regularly
Matt McDonald, Operating Partner, San Jac Saloon
Make sure your business information, both credit information and public information, are correct. Business owners should check their credit reports from each of the three credit bureaus independently and regularly for accuracy. This is because business scores are calculated differently from one bureau to another; there’s no streamlined or universal process that’s accepted across the board. Since you don’t know which bureau a supplier, vendor, or lender uses to check a new customer’s credit score, it’s better to be sure that your credit record with all credit bureaus is free from any error.
17. Don’t Max Out Your Credit
James Garvey, CEO, Self Lender
Credit utilization is an important factor in determining your personal credit score—it makes up 30 percent of the FICO score. On the business side, however, there are different credit scores (Experian, Equifax, Dun & Bradstreet) and they likely have different calculations than consumer credit. Experian, for example, says credit utilization is a factor, but D&B heavily weights payment history. The bottom line is you probably don’t want to be maxing out your credit lines. Consider using the same rule of thumb as you do for your personal credit score—keep credit utilization below 30 percent of your available credit.
18. Get a Business Loan from an Online Lender
Richard Best, Personal Finance Expert, DontPayFull.com
With the proliferation of online lenders, it has become easier to obtain a business loan. They tend to be more expensive than bank loans, but they are much more flexible in their lending standards. After completing a quick online application, loans are generally funded within a few days. Online lenders such as OnDeck and Kabbage issue businesses 12- to 36-month loans up to $500,000 based on the business’ length of operating history (at least one year) and annual revenues ($50,000 to $100,000 minimum). OnDeck does report to the business credit bureaus while Kabbage does not. Lending Club and Fundation are a couple of other online lenders that report to the business credit bureaus.
OnDeck suggests working with vendors and suppliers that report your payments to the credit bureaus. Your credit and payment history will impact your business credit only when it is properly reported. If you work with vendors that don’t report to the commercial credit bureaus, your timely payments will not have a positive effect on your business’ credit profile.
Before you apply for a business loan, First American Merchant recommends that you first find out whether accessing your credit history is going to be a hard pull or a soft pull. A hard pull can have a negative impact on your credit score, so be careful when applying with lenders that do this kind of credit inquiry to avoid unintentionally damaging your business credit.
According to Better Credit Blog, you may negotiate for a pay-for-delete with the creditor or collection agency where you have an unpaid balance. Offer to pay your unpaid debt if they agree to delete the negative entry from your credit report. Make sure to do this in writing so you will have an evidence of the agreement.
Score Association reminds business owners to keep their personal and business credit separate at all times. This is especially necessary even during the early years of your business. It’s important to establish your own business’ credit and avoid using your personal credit for business use, and vice versa.
Your business credit is one important factor that determines your creditworthiness. Creditworthy businesses find it easier to get approved for a loan and receive favorable terms. Whether you are a new or established business, it’s essential to ensure that your business is of good credit standing. Use the above expert tips to help build and increase your business credit.