The Definitive Guide to Building Business Credit

Small businesses won’t get anywhere without clear and surefire paths to reliable sources of funding.

Since attaining that funding so often is reliant upon an entrepreneur’s ability to get approved for financing, or convincing potential investors that getting in on the ground floor of a new startup is a wise business decision, it’s vital for a company owner to build good business credit.

The Small Business Association (SBA) offers its own time-honored guidance for entrepreneurs on how to establish and enhance their business credit and receive small business funding.

The SBA suggests:

Choosing the appropriate business structure

Choose both a title and a category that are neutral, because that will potentially open your company up to more generic funding avenues rather than limiting it by genre. You can always establish more specific “brands” underneath the overall banner of the generic category later in the process. Also, whatever company name you decided upon, stick to it; don’t change it. Lenders value stability and dependability, and a name change(s) might suggest otherwise.

Getting a Federal Tax I.D. Number (EIN)

An EIN (federal tax identification number) is sort of a social security number for a business, and it’s a requirement on federal tax filings and to open a business bank account in the name of the corporation or LLC. To stay in compliance with the Internal Revenue Service, some bigger companies also require an EIN from their vendors in order to pay them for services provided. Credit issuers who are skeptical that your business is merely a hobby and not a full-fledged enterprise will be convinced of its credibility if they see that your company has a Federal Tax I.D. Number of its own.

Also, consider getting a DUNS number from Dun & Bradstreet. You’d have to register your business on the D&B website in order for them to issue one to you. But aA DUNS number (Data Universal Numbering System) will differentiate your company from others, even ones that might have a similar name. The purpose of a DUNS number is to establish the creditworthiness and credit history of your business. This system was established nearly 60 years ago to standardize business information in order for banks and other creditors to understand what they are looking at when your business applies for credit or a loan. Obtaining a line of credit for your business definitely will be more difficult on your own, but having and using a DUNS number can help you establish a verifiable positive credit history that can help elevate the perception of your company in the eyes of a lender.

Opening a separate bank business account

Use the legal business name of the company to open an account separate from your personal savings. Then, always pay the financial transactions of the company from that account. Also, it’s advisable to open up a savings account or CD connected to the business checking account. Then make sure that some money goes into that account.

Establishing credit with vendors and suppliers who report

After all accounts have been established, then proceed with building a business credit profile for yourself and your company. Put your business phone number in the name of your business, and not your personal number, personally, with your phone carrier. Any utility bills connected with your business should be handled the same way.

Keeping track of your business credit reports

Your business credit score is important because your track record of how your company attends to its financial responsibilities will be a guide for potential lenders or investors to determine the trustworthiness of your business. A credit score usually has a range from 0 to 100, with higher scores being better and indicating that the business is less of a risk to deal with. Keeping track of your credit score will prevent you from being surprised by any negative news, as well as letting you know if any aspect of your finances needs immediate attention. The credit information in your score may include the payment conduct of your business, trade experiences, and any patterns that may have become the norm. A business credit report helps define a profile of your business’ practices and habits and helps others decide whether your company is worth doing business with.

Even small business owners who might not feel a current need for more funding should be wary that extended funding could always become an eventual necessity, and, because of this, they should still be working on building up their business credit for the day that time may arrive.

Lenders don’t have blind faith in the businesses that are applying for credit. That has to be earned. Business ratings and credit scores are a guide that lenders will use to determine whether your company is a good risk. Continue to build your business credit so that you are able to display that your company is capable of sustaining credit accounts.

A business credit file consists of general information about a company, its payment history, credit ratings, and credit scores. Prospective lenders, suppliers, and partners use this information as a test of a business’ credibility and its financial stability. Dun & Bradstreet gathers data points from financial statements, news reports, and any other information that is publicly available.

Are you able to repay your business debts? The sooner that you can establish that you can, the more you will be capable of building robust business credit scores. But paying on time is only part of the equation.

Other factors that go into the construction of viable business credit include establishing your startup as an independent entity such as a corporation or an LLC (Limited Liability Corporation). This practice separates the company from the individual, treating the company as something that is judged—good or bad—on its own financial merits, without regard to the owner’s past credit history. However, there may be some lenders who would rather evaluate the merits of a business on its own personal credit records.

The roadmap to strong business credit consists of:

Paying off your bills on time

If you don’t pay creditors when they expect you to, how would that engender the confidence of a lender who needs verification of your company’s reliability? Failure to pay creditors could result in your business generating negative reports to credit bureaus. If you delay payment or default on a loan, it’s going to impact your company’s ability to earn credit or show another company that your business is solid and solvent.

Monitoring your business credit scores and ratings

Regularly monitor what your ratings and scores are. If there’s a problem, it’s better to be out in front and know about it as early as possible rather than to be surprised at a most inopportune time by something you didn’t expect. In addition to D&B, Experian and Equifax are other business credit rating bureaus whose data on your business could be critical in making or breaking your financial reputation.

If you don’t have any activity in your accounts, that inactivity might cast your business in a negative light and have a negative impact on your company’s credit score. Not using your credit at all can be as damaging as abusing your credit.

Applying for business funding is a wise avenue for many entrepreneurs regardless of their present needs. The ability to exhibit a strong and reliable business credit history signals to potential lenders, investors, or partners that your company has been fiscally responsible. That history is a prerequisite for getting approval for a small business loan.

What are the Requirements for a Small Business Loan?

A business owner’s personal credit will come under scrutiny by lenders when a company applies for a small business loan. Maintenance of a solid personal credit profile is almost as essential as a good business credit rating in the eyes of lenders.

Lenders also will be looking at the debt-to-income ratio of a business to see if the company’s cash flow is favorable and if the income is consistent. The more income versus debt that a business can show, the better the creditworthiness of the business in the eyes of the lender.

A small business that is not yet well established might have more difficulty getting approved for a loan. Lenders do not like uncertainty, and a fledgling company has not been around long enough to establish its financial soundness or credibility. A business that’s been around for a while has been able to build up a financial history upon which a bank can inspect to ensure that approving the loan application is a worthy risk.

How long does a company need to be in business before beginning to establish more reliable credibility with potential lenders? At least a couple of years would be a good baseline. A bank is also likely to look at annual revenue and how much current debt a business is carrying and what collateral the business is backing that debt with.

How to Apply for a Business Loan

Lending standards can make the process of getting approval for a small business loan an arduous undertaking. It can be sort of a circular predicament: In order to get a small business off the ground, the company often will need a loan, but getting approved for a loan is a lot more difficult for a business that has not yet established itself or its financial stability.

The application process for a small business loan starts with proper preparation. A bank may start by questioning the need for the loan. The business owner should decide what type of loan is the best fit for the company. Getting a loan to launch a business is a tall task in a company’s first year because banks need to see cash flow as evidence that a borrower will be able to repay the loan on time.

Small businesses often rely on personal financing, business credit cards, or crowdfunding in their first year as a means of helping them become established. Once a company has a business history and has forged some kind of a credit record, more financing possibilities should open up.

Business lines of credit, small business loans, term loans, and invoice factoring are financing options that are more likely to be on the table for a company that has been in business for a year or two than they would be for a company just starting out.

Small business loans–while not easy to secure for new businesses–can be accessed from banks, online lenders, or nonprofit microlenders. Compare annual percentage rates and terms before making a decision.

How Can Businesses Secure Working Capital?

A government agency that provides support for entrepreneurs, the United States Small Business Administration (SBA) backs small business loans issued through their lending partners to help lower financing rates for business owners. The SBA also can help entrepreneurs to qualify for loans for working capital. The SBA has a loan program with the purpose of making access to capital more attainable to business owners. Featuring low down payments and interest rates that are below market rate, the SBA 504 Loan Program allows small and medium-sized businesses to invest in their facilities and expand their reach, giving them more stake in their community. The SBA 504 program was developed with the intent of aiding small businesses in the creation of wealth.

Working capital loans secured through the SBA usually mean a larger selection of loan sizes, repayment terms that are lengthier, and interest rates that are not exorbitant. Other means of short-term funding options usually don’t offer annual percentage rates as low as SBA loans.

SBA loans require a lot of paperwork, with a considerable amount of applications to fill out. Approval also will depend heavily on the applicant’s business history and credit score. But if you are willing to deal with all the red tape that goes with applying for an SBA loan, the upside is markedly lower financing rates and generous lengths of time to repay the loan than is the case with other loan options.

The length of an SBA loan can range from between five and 25 years. Although loans backed by the SBA give small business owners more access to financing, those loans still are competitive.