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How to Build Strong Business Credit from Scratch

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Tony Peachey
How to Build Strong Business Credit from Scratch

Good business credit is one of a small business's most valuable goals to reach long-term success. Building up good credit for their company may be daunting for new business owners. However, it is essential. Established credit allows businesses to secure better financing options, obtain favorable terms on business loans, and maintain access to resources when unexpected costs arise. This article will discuss business credit for small businesses, why it matters, and steps that any small business can follow to build strong credit.


Why business credit matters:


Business credit acts as a financial tool that directly impacts a company’s ability to grow and sustain operations as they do so. Access to capital is essential for a business’s growth and long-term success. A business with solid credit can qualify for business loans, lines of credit, and other financing solutions with lower interest rates and more flexible repayment terms from lenders. With these options available, small business owners may need to rely less on personal capital and credit when applying for a business loan, helping them to keep personal and business finances separate. Building business credit can empower companies to:


- Access larger credit limits than personal credit options

- Establish credibility with lenders, suppliers, and vendors

- Secure lower interest rates on loans and other financing options


This allows small businesses to access critical resources when they want to scale up, expand their operations, or navigate cash-flow challenges.


Steps to establish and build healthy business credit:


1. Legal business structure: In order to qualify for business credit, you must have a legal business structure (such as an LLC or corporation) set up. This clearly distinguishes between an entrepreneur and their finances and business finances.

2. Register for a DUNS number: Major credit reporting agencies use a Data Universal Numbering System (DUNS) number to track a business’s credit activity. Many lenders and vendors use this identifier to evaluate a business’s credit health before doing business with it.

3. Open dedicated business accounts: Setting up a business checking account and obtaining a business credit card will be vital to establishing credit. A business checking account will provide a clear financial record for business partners to review (separate from the owners’ transactions) and help to establish trust with lenders. Using our business’s credit card responsibly is an excellent way to help you quickly establish a credit profile and qualify for a business loan or line of credit.


Best practices for managing and improving business credit:


Once you have received the initial credit score for your business, maintaining and improving it is essential for you to grow and have access to more funds in the future. Below are some best-practice tips to follow:


1. Always make payments on time: Timely payments show lenders that you are financially responsible, increasing your likelihood of future credit and helping to improve your credit score. Late payments can negatively impact small businesses, especially as they emerge in their industry. The last thing you want is a reputation of a bad debtor.

2. Monitor credit utilization: You need to make absolutely sure that everyone with access to your business’s credit facilities uses them responsibly. Many companies provide their employees with business credit cards to cover expenses. This is a huge plus, but you need to closely watch these accounts. Consistently high credit use ratios can signal to lenders that your business is a financial risk or that company funds are not being responsibly managed.

3. Check business credit reports regularly: Business owners must be aware of their credit scores and spending activity. Having a sound budget in place will help with tracking, monitoring, and identifying best practices. It can also help identify inaccuracies or signs of fraud that could negatively impact their credit score.


How does business credit impact access to loans?


Strong business credit can greatly improve a company’s ability to qualify for loans and lines of credit and receive favorable terms. When reviewing loan applications, lenders may strongly consider business credit scores (in addition to other financial and legal documentation). Companies with established credit are more likely to be approved by lenders and may receive lower interest rates and larger credit limits. This kind of access can be crucial for small and emerging businesses that need access to financial resources to grow and become more profitable for entrepreneurs.


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