If you have excellent business credit, you’ll have no trouble obtaining small business loans and funding to get your business up and running. The good news is that you can take steps regardless of your credit score to improve your small business credit and make it easier to get the funding your business needs. The key is to understand the different types of small business credit and take steps to improve your business credit score.
This article covers everything you need to know about how to build business credit for your small business.
What is Business Credit?
Credit is the ability to obtain funds quickly. In small business credit, the credit score is used to determine whether a business will be able to borrow money. The higher the credit score, the lower the interest rate. A bad credit score makes it difficult for a small business to get funding.
Many banks won’t loan money to unestablished businesses with a small credit score. That’s why it’s crucial to improve your small business credit score.
How to Build Business Credit
You can take several steps to improve your business credit score, but they depend on your unique situation. The following are some of the most effective ways how to build business credit.
Have a Good Accountant – Having an accountant will show that you have the necessary documentation to support your financial statements. This is important for improving your business credit score because it will show the credit agencies that you can manage your finances responsibly.
Close Unpaid Debts – One of the best things to improve your business credit score is to pay your past-due debts. Having bad credit will likely hurt your small business credit score because it will indicate that you will probably miss payments in the future. Make every effort to pay your past due bills before attempting to increase your credit score.
Keep Your Accounts Up to Date – Make sure all your business accounts are up to date. This includes keeping your driver’s license and vehicle registration up to date and providing your cellphone number and address. An updated address will show that you are operating a legitimate business, not a shell company.
Establish and Maintain a Good Credit History
One of the best ways to improve your small business credit score is to build a good credit history. A good credit history shows that you can pay your bills on time and in full. This will help your small business credit score and your overall credit score.
There are several ways you can build a good credit history. One of the best ways is to make on-time payments on all of your bills. If you have a price that is 30 days late, make every effort to pay it ahead of time. This can include making the payment in full, paying extra, or paying a one-time payment.
Keep a Low Credit Utilization (or Limit) – Keeping a low credit utilization will help your business credit score by showing that you can repay your debts. Ideally, you want to keep your debt to income (DTI) ratio below 45%. You shouldn’t spend more than 30% of your available income on debt repayments.
Keep Your Credit Utilization below 30% – The below 30% guideline will help your credit score even if you make payments on time and in full. It’s best to keep your credit utilization below 30%, as this will reduce the amount of impact a single payment will have on your credit score.
Have Excellent Credit Scores
You will have no trouble knowing how to build business credit if you have excellent credit scores. Many small business loans will only require that you have excellent credit.
To have excellent credit, you will need to show that you have the means to repay a loan and the ability to build a strong credit history.
There are several ways to show that you have the means to repay a loan. You can have a bank account with a large balance, stocks worth a significant amount, or a house paid off.
You can also show that you can repay a loan if you have a lot of credit card debt that you can pay off. An excellent way to do this is to make every effort to pay your credit card bills on time and in full.
Understand the Different Types of Small Business Credit
Several different types of small business credit are available. Understanding how to build business credit so the different types of business credit can help you decide which type is best for your unique situation. Business credit can come in several forms, but trade credit, term credit, and cash advance credit are common.
Trade Credit is when a business gets credit from a wholesaler or distributor. This kind of credit is usually given on a purchase order (or invoicing) basis.
Term Credit is when a business gets credit from a bank that is not based on the business’s creditworthiness. This is why it’s essential to keep your accounts current.
Cash Advance Credit is the riskiest form of small business credit. This is when a business borrows money from a lender, and the lender agrees to give the money back (plus interest) in a short amount of time. This type of credit is very uncommon and should be used very selectively.
Bottom line
Getting business credit is complicated. A few tips and steps will help you to understand how to build business credit and make it easier to get funding for your small business needs. Apply these tips. Our team can ensure that these will help you get the financing you need.
