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The Top Strategies for Building Business Credit And Unlocking Better Financing Options

Topics: Finance, Management

Building business credit means opening up more opportunities for your business to grow. Great credit can help set your business apart by landing low-cost financing options. But to build business credit, several business processes must be in place and continue on an ongoing basis.

In this article, we'll explore what those processes are and the top strategies for building business credit.

The Basics

Most businesses will already have the following, but it's important to mention them just in case:

  • Business checking account
  • Business credit card
  • Business phone number
  • Business address

The above is necessary because creditors will require them when evaluating your business for a loan or other financing options. 

Now that the basics are out of the way let's move onto a few strategies that will help accelerate building your business credit.

Separate The Business From You

Incorporating your business will create an entity that is separate from you. It will allow the company to set up checking accounts, open credit cards, and build business credit as its own entity and not under your personal name. There is also some legal protection when the business is incorporated.

Some business owners continue to use their personal checking and credit cards for business, even after incorporating the company. The sooner you can separate the business' finances from your personal finances, the stronger a foundation the business will have for building its credit. It also helps validate the company in the eyes of the IRS.

Establishing A Business Credit Profile

Just as you have a personal credit history, it's necessary that your business have a business credit profile. This allows creditors a way to validate your business' creditworthiness further.

Start by getting a DUNS Number on Dun & Bradstreet. D&B is a business credit bureaus used by creditors. By going through D&B, creditors can pull your business credit profile.

Another business credit bureau you'll want to set up a profile with is Experian. Experian handles not only personal credit reports but also business reports.

It's important to know that business credit bureaus work a little different from their personal credit bureau counterparts. Payments to creditors aren't reported automatically in some cases. When working with suppliers, be sure they have a way to report your on-time payments to each business credit bureau. Periodically log into your credit profile account as well to check that the reports are coming through. 

Given the opportunity to choose a supplier who reports to credit bureaus and one who doesn't, all else being equal, you'll benefit more from the one that does report.

On-Time Payments

Missing a payment can have a significant adverse impact on your business credit report. Multiple late payments can virtually undo all of your hard work and set your business credit profile back years.

It's not difficult to ensure you hit all of your payments on-time, every time. Proper processes around your payables can help to avoid late payments.

Just as you have a personal credit score, your business has what's called a D&B PAYDEX Score. The PAYDEX Score ranges from 1 to 100. A higher number suggests less risk of a company failing to pay its bills. 

You can use a high PAYDEX score to your advantage, as Tracy Becker of North Shore Advisory points out, "Smart business people with good credit will often print out their D&B report and include it along with a bid to a potential account or partner. What this does is it causes the potential account or partner to pull the D&B reports of competing companies. If the business’s credit is better than the rest, it might win them the deal."

Personal Credit

Depending on your business credit history, your personal credit may be evaluated by creditors. While you're trying to build business credit, don't overlook your own credit. It needs to be in top shape as well. This means no late payments and a high credit score.

Having a debt to credit ratio of about 30% is a good guideline. Meaning, if you have $100,000 of credit, you are utilizing no more than $30,000. Creditors will evaluate monthly income to expenses as well to make sure you aren't overextending yourself.

Establish Trade Lines Of Credit

Work with your existing suppliers to open up a trade line of credit for your business. This is a line that allows you to purchase products or services and pay for them later. Also, have your suppliers report your payments to the credit bureaus.

If you don't currently have any suppliers, look to some of your vendors or utility companies. Perhaps even the office supply store. Anyone of these businesses are candidates for establishing a trade line of credit. 

For any companies you work with, try to have them added to your D&B credit report as a trade reference. Be sure to check with D&B that the company is an acceptable type of trade reference first.

Organize Your Books and Monitoring Credit

Keeping your business accounts and books organized will make it easier for lenders and creditors to evaluate your business' financial strength. By starting now and getting your business in order, then putting in place process controls to keep them in order, you'll be ready for lenders.

Paying for a credit monitoring service can help detect activity on your credit report and take action if necessary. Dun & Bradstreet has a service called CreditSignal that can do just that.

Plan Your Use Of Credit

Building business credit takes time. It's difficult to say how much because every business' situation is different. But for most, after a year, you should consider pulling your business credit reports from the credit bureaus. Go through them and make sure everything is correct. After all, this is the same information lenders will see.

Knowing that business credit will take time to build allows you to plan financing. If you are just starting to build business credit, getting a loan now probably isn't an option. But perhaps in one to two years, you'll be ready to apply. Along the way, you may be prepared for a few alternative forms of financing that can still help grow your business.

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