How to Build Credit 101 for Small Business Owners

Business owners who have been hustling for years may finally be ready to reap the benefits of a solid credit score. Unfortunately, building up this number can be difficult and time-consuming with so many steps involved. In order to help business owners learn more about their options for increasing their personal wealth, we’ve compiled a list of some common strategies that you might consider using as part of your company’s strategy going forward.

There are many ways to build business credit, and the “fastest way to build business credit” is a good option for those who want to start small. This article will tell you how to get started.

Borrowed money is used by many companies, big and small, to drive development and finance other business activities. To put it another way, borrowing is just one component of the issue. This implies that small company owners must be aware of how their credit affects their capacity to borrow more money than the typical consumer seeking to buy a home or a vehicle. 

In the United States, every small company owner has two credit profiles. Their personal credit score and credit history as a company. To comprehend how credit affects a company owner’s capacity to get borrowed funds, you must first comprehend both.

Why is it essential to understand personal credit?

Your personal credit history will be a part of every company creditworthiness discussion you have with a lender for most Main Street small business owners. Furthermore, one of the most underappreciated or misunderstood aspects of owning and operating a successful company is the significance of establishing and maintaining a credit profile that facilitates borrowing and offers financing alternatives that a bad credit profile does not.

Many small companies were turned down for essential Paycheck Protection Program (PPP) funding by the SBA in April and May of this year because they couldn’t satisfy the level of “acceptable credit” required by the SBA and their lenders.

As many small business lenders tighten their qualifying criteria and some have even walked away from small company financing for the time being, having a good credit record is more essential than ever. This occurred after the financial crisis in 2008, and it’s a trend I’ve seen repeat itself in previous recessions. Meaning, company owners that are the greatest at understanding, improving, and leveraging their credit are the most likely to get the money they need to grow—or even remain afloat—during the present health and economic difficulties.

What factors go into determining personal credit?

The FICO score is used by the majority of personal credit reporting companies to calculate credit scores. Their scores may differ somewhat, but the fundamental method they employ to compute them is the same. FICO calculates your score based on the following five factors:

1. Previous payment history (35 percent ) 

This is the most significant statistic and the one where you may have the greatest long-term influence on your credit score. It is the most effective method to increase (or improve) your personal score if you fulfill your credit commitments on time, in other words, if you make your mortgage, vehicle, and credit card payments on time every month.

2. The total amount owing (30 percent )

We’re talking about the quantity of credit you utilize in relation to the amount of credit you have available. Your credit score will be improved if you can maintain your credit usage (the industry name for this proportion) below 30%.

The smaller this proportion may be, the better. For example, if you have $10,000 in credit available on your personal credit cards and you consistently carry a debt of $8,000 to $10,000 (even if you pay on time every month), your FICO score will suffer. A debt of $3,000 or less (30%) is ideal, and if you can maintain your credit usage under $1,000 (10%), all the better.

3. Credit history length (15 percent )

Lenders want to see a track record of success. Basically, they’re attempting to predict what you’ll do in the future based on your previous actions. To put it another way, the more credit history you have, the better. So, that credit card you seldom use but have held for ten or fifteen years is really beneficial to your personal credit score.

You may have a newer card with higher rewards points that you use more often, but it may make sense to keep it active and shown on your credit report by periodically purchasing a tank of gas or supper at a restaurant. To put it another way, if you want to improve your personal credit score, resist the urge to tear up your credit cards and cancel accounts, even if you don’t use them very frequently.

4. The combination of credit (10 percent )

Creditors like to see a variety of credit on your record, and your score reflects this. A mortgage, an auto loan, and a credit card are all seen favorably in comparison to, example, only an auto loan.

5. There are new credit inquiries (10 percent )

Every time you apply for new credit, your personal credit score will be affected somewhat. This ding will be minor in the usual run of things, but you should be aware of it. Shopping for an auto loan or a mortgage is also treated differently by the credit bureaus than applying for every department store credit card available. It’s usually nothing to worry about, but it’s something to be aware of, and it shouldn’t stop you from getting the credit you need.

You may be wondering, “What is a decent credit score?” now that you understand how your personal credit score is generated.

What is a decent credit score for a person?

Although there may be variations across agencies, most personal credit scores are ranked in the following order (I’ve added the effect on a small business loan application): 

800+ Excellent Long credit history, with no missed payments or accounts in collections. With this rating, you’ll get the greatest prices from the top lenders.
750 — 800 Very Good It’s more likely to have a shorter credit history, but it’s still free of late payments and collections accounts. With the top lenders, this rating usually qualifies for low-interest rates.
700 — 750 Good There have been no recent late payments or collections accounts. You should be able to find a reputable lender, albeit at a somewhat higher interest rate.
650 — 700 Fair Although there have been any recent late payments or collections accounts, everything is presently in excellent shape. Some bank loans may be excluded because of this rating, however most alternative lenders will provide you a reasonable rate.
600 —650 Bad Late payments are a problem, and the account owner is dealing with collections. The same is true historically. Some lenders may accept loans with this rating, albeit at a higher interest rate.
Below 600 Very Bad The account owner is in the midst of a collection process and has had previous issues. You may be able to get a Merchant Cash Advance or a Cash Flow Loan, but the interest rates will be very expensive.

5 suggestions for boosting your personal credit score

Whether you’re applying for a small business loan, a car loan, or a new mortgage, lenders want to know whether you have the financial means to service debt and if you’ll be able to make all of your scheduled payments. These five recommendations are not just credit best practices; I’ve personally experienced improvements in my credit score as a consequence of them.

1. Be aware of your score.

It’s human nature to want to affect the things you care about the most, and this is especially true when it comes to your personal credit score. The first step is to keep track of your own score on a regular basis. I’ve had a long connection with Experian and have seen my credit score increase over time, owing to the fact that I pay attention to it every month (a monthly review is not too frequent). The first step is to understand your credit score, and although I paid a modest monthly charge to Experian for this service, there are a lot of free credit monitoring services available, such as Nav.

2. Make good use of credit

This may seem to be an oversimplification, but it isn’t. Avoid the temptation to spend all of your available credit just because you can. A decent rule of thumb is to limit the amount of credit you utilize to the amount of credit you have available below 30%. I’m extremely aware of how using a credit card, for example, would affect my ratio, and I’ve been rewarded with a better score as a result.

3. Don’t leap all over the place.

Transferring balances from one credit card to another will not improve your credit score and is regarded a blatant ruse that may potentially harm your own credit score.

4. Pay your bills on time

This should go without saying, but improving your score is the single most essential thing you can do. I’ve set up automatic payments to ensure that I never miss a payment, such as my mortgage or car payment.

5. Improving your score does not come with any fast solutions or shortcuts.

Slow and steady truly does win the race in this case. You’ll be amazed at how much of a difference these excellent credit habits may make over the course of six months or a year.

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What is the most important information you should know regarding business credit?

Your personal credit score and company credit history work together to demonstrate a prospective lender that you’ve met your personal and corporate financial commitments in the past. Your company credit history is a collection of scores, not a single score like your personal FICO score, and may differ from one business credit agency to the next. With that in mind, here are some of the items that a typical company credit report contains: 

Information about your business in general

Some of the information on your profile may be found on the internet. Annual income, the sector you work in, the length of time you’ve been in company, and the status of any existing liens or judgements are all pieces of information that end up in your credit profile. It may harm your profile if the information on file with the state where you conduct business is incorrect or out of current. A simple SIC (Standard Industry Classification) code error, for example, may place your company in a higher-risk category, making it more difficult to qualify for a small business loan.

Because errors in the public record are frequent, establishing a connection with the business credit bureaus is critical because it allows you to ensure that all of the information they have about your firm is correct. Fortunately, credit agencies are driven to rectify genuine mistakes in order to ensure that the data they hold on you and your company is as accurate and current as possible.

Do you pay your merchants and suppliers on time? 

Trade credit is an essential source of financing for all companies, but it is especially beneficial to young enterprises as a means to establish their credit profile. Dun & Bradstreet has been monitoring company credit for the longest and concentrates on this element of your credit profile, but the others also take into account how quickly you pay your vendors and suppliers. 

D&B provides potential creditors with several reports (such as their 100-point PAYDEX® report) that not only provide insight into how far you pay your invoices beyond agreed-upon terms, but also predict how likely you will stay current in the future, whether your business is under stress, and how financially healthy your business is. Experian and Equifax both offer comparable data about your company and rate previous success in order to forecast future performance.

How well do you keep up with your other debts? 

The business credit agencies include your payment history as part of your profile if you use a business credit card, have a business line of credit, or other small company loan. Equifax, for example, uses data from the Small Business Finance Exchange (SBFE), which is credit data gathered by the country’s top small company lenders as part of their report detailing how business owners pay credit cards and other business loans. Many banks use this report to assess your company’s creditworthiness since it is a direct representation of how companies engage with big business lenders.

Experian evaluates your credit by looking at the number of credit transactions, outstanding amounts, payment patterns, how much of your available credit you utilize, and the specifics of any existing liens, judgements, or bankruptcies. Experian, like Dun & Bradstreet, assigns a risk score to small companies ranging from 0 to 100, or High, Medium, and Excellent Risk, based on where your profile fits on their scale.

Don’t be hesitant to utilize your company credit. Establishing credit accounts, paying them off, and being current with suppliers helps you develop a solid credit record over time. If you’ve been able to maintain a solid credit history with your suppliers, the trade credit accounts you create early in the life of your company may be extremely significant down the line. The same is true for other types of company finance.

6 pointers to help you establish or enhance your company’s credit profile

1. Find out what your current profile looks like.

You’ll probably need to call more than one agency since your company credit profile doesn’t contain a universal credit score. While your Dun & Bradstreet profile contains much of the same information as Experian or Equifax, certain portions of the data may be valued differently. As a consequence, it’s important to understand what the various bureaus are reporting about your company.

2. Check for mistakes

A simple misrepresentation of your business may have a negative effect on your capacity to borrow money if that industry is deemed to be a higher risk than others. Furthermore, if your company’s information is incomplete and you don’t update your profile with current information, the bureaus will be obliged to make a “best guess” about the missing information.

3. Use personal credit for personal expenditures and corporate credit for company expenses.

Using your personal credit cards or other personal credit for company expenditures is tempting (and many business owners do it), but it’s not a smart idea and won’t help you improve your business credit. The quantity of accessible credit compared to what you presently utilize accounts for 35% of your personal credit score. Higher credit balances, which are often needed for company expenditures, may lower your personal credit score, making it more difficult to qualify for business credit with certain lenders in the long run. Using your personal credit card is often unavoidable for many new or early-stage companies, but you should keep the two separate as soon as feasible.

4. Ensure that your excellent credit history is reported by your suppliers.

As previously stated, your suppliers are not obliged to record timely payments, but you would want them to do so. While it’s important to cultivate positive connections with your individual creditors, if they don’t report, you won’t be able to establish a credit history, making it more difficult to establish new credit relationships with new creditors. Encourage your existing creditors to report to the business credit agencies if they don’t already. It’s also essential to inquire while searching for new suppliers.

5. Establish credit accounts for your company

Reaching out to existing suppliers and asking about opening a credit account is one of the simplest methods for an early-stage company owner to start developing a business credit profile. It may be tough to get a small company loan in the early years, but those vendor accounts can help you establish a solid credit profile early on, making it much simpler a year or two later.

6. Stay on top of your company credit obligations.

Paying your payments on time is the single most important advice for establishing a good company credit rating. Vendors, any debts you may have, electricity, and company taxes are all included. Paying late on a regular basis may have a negative impact on your credit score. It doesn’t take long for a single late payment to have a negative effect on your ability to get a loan. Your excellent credit conduct, on the other hand, will help you develop a better credit profile over time.

The significance of your credit report

You can’t afford to overlook either your personal or business credit scores since they both work together to answer three key questions that every lender needs answered (even if they don’t ask them this way).

  1. Are you able to repay a loan? Are you able to make regular loan payments due to your income and cash flow?
  2. Will you be able to repay a loan? Do you have a history of fulfilling your financial commitments that suggests you will continue to do so in the future?
  3. Will you continue to pay your bills on time if something unexpected happens?

If you can correctly answer these questions, your chances of obtaining a small business loan or company credit card will increase. Answering these questions requires you to manage your credit profile. A good credit score won’t ensure you’ll obtain the loan you want, but it will offer you choices that a bad credit score won’t. It will also make it simpler for a lender to approve your application.

The “how to build business credit with d-u-n-s number” is a blog post that tells small business owners how they can get started building their credit.

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Frequently Asked Questions

How can a business owner build credit?

A: Many businesses offer credit cards. This would be the perfect option for anyone looking to build their credit score, because you can always pay your bill on time and if something were to go wrong with your account, they will help you out as well.

What is the fastest way to build business credit?

A: The fastest way to build business credit is through a merchant account or by doing your own small business.

How can I improve my small business credit?

A: First, you must understand that your credit scores are calculated by how much debt you have. If you want to improve this number, it is best to reduce the amount of debt on your slate. You can start with calling up all your creditors and reaching out for new lower interest rates or even simply paying down some old debts with time in lieu of an additional large purchase.

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