Building Business Credit

Many businesses start small. Really small. You might even have started yours in your basement or garage. When companies start that way, they’re usually funded with personal savings, personal credit cards, or by getting customer payments upfront. 

But if you do things right, your business won’t stay in the basement or the garage for long. Sooner or later, you’re going to move into larger premises. You’ll expand. Hire people. Get more customers. Get bigger orders. At some point, you’re probably going to need to access external business finance. 

This is why building business credit matters, and here’s how you do it. 

How Does Business Credit Work?

Business credit is like personal credit, except it’s a loan or financing agreement between a lender and a company or corporation rather than an individual. 

Just like personal credit, you need to have good business credit to access this kind of funding. That means you need to have a credit record, and it needs to reflect that you pay your bills on time, every time, that you don’t have any defaults, judgments, or bankruptcies on your record, and that you pay your creditors on time. 

Lenders, including traditional business finance providers like banks, suppliers who offer payment terms, and others who provide business financing, will look at this record, decide if you are a reasonable risk for them, and then approve or decline your business finance request accordingly. 

How to Build Business Credit

The problem with any credit is that not having any credit record is almost as bad as having a poor credit record. If there’s no history to review, most lenders will be wary of extending large amounts of credit to you. So, you can’t go from zero to full speed in one step! 

If you are looking for business finance for the first time, here’s what you can do to make the process a little easier:

• Make sure your company is registered appropriately – a corporation is a separate legal entity, whereas a sole proprietor is essentially an individual (so your credit score and your companies will be basically the same thing)
• Make sure you have all your legal ducks in a row – a business license, tax account in good standing, and other legal requirements matter to lenders who are considering offering you business finance
• Get a business bank account – you will need to provide statements when you apply for any kind of business finance or credit
• Start applying for credit before you think you need it – when you do, you will have some positive history to provide to potential lenders
• Start small – ask your suppliers for payment terms, and get a small credit limit at first
• Ask your suppliers to report every payment to credit bureaus – some only report negative information like late payments – you should ask them to report on-time payments and positive information too
• Gradually increase your credit limits, but make sure you continually pay your bills on time
• Review your business credit reports regularly – if there is any incorrect information, get it fixed as soon as possible, so it doesn’t prevent you from gaining access to financing when you need it
• Build a list of credit references – many lenders and business financing companies will ask to see a list of contactable trade references, and not every company will do this for you, so make sure you ask before you add them to your list! 

Managing business credit is a lot like managing your personal credit health. You need to have accounts and credit agreements. Those people and companies need to report positive information to credit bureaus. You need to make sure that you pay bills on time. 

What to Do If Things Go Wrong

Business finance is a complex thing that’s reliant on many different factors. It’s essential to have a plan when things go a little wrong. 

Sometimes, you are expecting a hefty payment that doesn’t arrive on time. That might mean that you’re not able to pay your creditors on time. Never assume that they will be okay with waiting. Always call your creditors as soon as you find out there may be a delay in paying your bill. Request an extension on the due date for your payment. 

Not all creditors will be willing to extend your terms, but many will if this happens occasionally and you usually pay your bills on time. Even a little breathing room from some of your creditors can help you reshuffle your finances and keep late payment information off your credit report. 

Make sure that you manage your accounts receivables too. If your customers are habitually slow to pay, eventually, that will affect your own ability to stay in good standing. It’s all about balance and staying on top of your financial situation, but good business credit depends on it.