In this article, youâll learn all about building business credit, including the following:
- Why build business credit?
- Business credit vs. personal credit
- 10 ways to build business credit fast
As a small business owner, your business credit score affects your access to the capital you need to cover day-to-day expenses and make long-term investments. But many entrepreneurs have a credit rating that is too low to qualify for financing; according to the NSBA Small Business Access to Capital Study, 20% of small business loans are denied due to business credit.
Thereâs an obvious need to build business credit if you are one of those small business owners whose loan application has been rejected due to business credit. But what if you havenât had trouble getting funding for your small business? If that is the case, it still makes sense to build your business credit.
Why Build Business Credit?
Here are three reasons why every small business owner should start building their business credit today:
- Secure a lower interest rate: a higher business credit score shows lenders that you are less likely to default on your small business loan. Since lenders price their loans based on the risk of the borrower, a lower risk of default translates into a lower interest rate. While you might not save much money on a short-term loan, you may experience massive savings on a long-term loan.
- Increase your financing options: according to Bolt Insurance, one-third of small business owners borrow money from family and friends. While itâs great to get that support from your personal connections, youâre putting your business in a precarious position if you donât have the option of getting financing with attractive repayment terms from a traditional or alternative lender. What if your friends and family are unwilling or unable to provide you with financing in the future at a key time for your small business?
- Give yourself time: according to Cardhub, it typically takes a business 12-18 months to improve its credit score. We are going to give you ways to start building your business credit in less than a year, but the point is that thereâs a long road to fully maximizing your business credit score. If you decide you want to take out a huge loan in 18 months, youâre going to only wish you started sooner.
Business Credit vs. Personal Credit
While business credit and personal credit serve the same purpose â acting as a measure of a borrowerâs creditworthiness â there are some differences in how they are set up, calculated, and reported. Here are a few of those differences:
- EIN vs. SSN: your business credit is linked to your Employer Identification Number (EIN), while your personal credit works with your Social Security Number (SSN).
- Numbers are different: your personal credit score can be as low as 300 or as high as 850. The range for a business credit score is narrow â between 0 and 100.
- Credit bureaus: the three main business credit bureaus are Equifax, Experian, and Dun & Bradstreet. Equifax, Experian, and TransUnion are the three main credit bureaus for personal credit history.
- Factors: your personal finances are likely a lot less complicated than your business finances. So, you may not be surprised to learn that there are more factors that impact your business credit. Your business credit and personal credit are both determined by when you make payments, credit card usage, and your loans. But your business credit, in addition, takes your vendor credit history, public record information, and maybe more â depending on your type of business â into account.
Okay, without further ado, letâs look at 10 ways to build business credit fast.
10 Ways to Build Business Credit Fast
The bad news is that there is no magic pill to build your business credit fast. But the good news is that there are so many simple and straightforward ways to increase your business credit â by doing some or all of them, you are likely to see a noticeable boost in your business credit.
1. Pick a Business Nameâ¦ and Stick with It
A stable business is more likely to pay back a loan. A tell-tale sign of an unstable business entity is one that is constantly changing its company name.
For example, a small business owner called Patty originally names her new business âHub Household Appliancesâ but decides to niche down to kitchen appliances a year later and changes the name to âHub Kitchen Appliances.â A couple of years later, thereâs another pivot and she changes the name one more time.
The above is an extreme example, but the point is you want to do the opposite of Patty â pick one name and stick with it. Since itâs impossible to predict the future, pick a business name that doesnât need to be changed if/when you pivot.
2. Get an EIN
An EIN is a nine-digit number that you can apply for online with the IRS. You can use an EIN to file tax returns, open a business bank account, and apply for a small business loan.
3. Get a Business Bank Account
After getting an EIN, you can open a business bank account. A business checking account helps you build credit because it provides lenders with information on your business credit history.
4. Check Your Business Credit Score
According to the Nav American Dream Gap Survey, 72% of small business owners donât know where to find information on their business credit score. Itâs actually not too hard to check your business credit score, though. You can get your credit score from any of the major business credit reporting agencies (Equifax, Experian, and Dun & Bradstreet). With Experian, for example, you can fill out a quick application and get your business credit report.
With your business credit score in hand, you can get a better idea of what needs to be done to build good business credit. If you have bad credit, you should focus on the fundamentals (but you might not have to wait to get a business loan). If your score is on the higher end, you might have to search a little harder for areas where improvement is possible.
5. Apply for a Business Credit Card
As youâve surely realized, your business history impacts your business credit profile. By applying for a business credit card, you give yourself the opportunity to build a strong reputation.
6. Improve Your Credit Utilization Ratio
Your credit utilization ratio is calculated by adding up all of your credit card balances and dividing them by the sum of your cardsâ limits. A ratio of under 30% is healthy in the eyes of most lenders, as your credit limit is one indicator of how much debt can be handled by your business.
There are a couple of ways to lower your credit utilization ratio: lower your credit card balances or ask the lender to increase the credit limit.
7. Avoid Late Payments
Your payment history affects your business credit. By paying your credit card bill on time every month, you build your business credit. If you make late payments, on the other hand, your score might go down. As an added bonus, paying your bills on time allows you to steer clear of double-digit APRs â which can be disastrous for your small business.
8. Donât Cancel Old Accounts
So, you have a few old credit card accounts and youâre thinking of canceling them. It seems to make sense, as the cancellations would simply your financial life. But keeping the credit accounts open is the right move â account closures actually lower your business credit score.
9. Build Relationships with Vendors & Suppliers
You can build business credit by applying for net terms with vendors and suppliersâ¦ as long as they report to business credit reporting agencies. You should build several relationships with vendors and suppliers â not only to improve your business credit score but also to increase your number of trade references for future credit applications.
10. Keep Checking Your Business Credit Reports
Our fourth way to build business credit fast is to check your business credit score â but that shouldnât be a one-time thing. You have to continually monitor your business credit reports for a couple of reasons:
One is that you want to see whatâs working and not working. Say youâve carried out some of our recommendations, but you havenât seen the improvements you were expecting. In that case, you might want to revisit this article and see where you went wrongâ¦ before you need business financing and itâs too late to make improvements.
Another is that the credit reporting agencies arenât perfect â they make mistakes. You should review your business history on a regular basis to see if there are any errors. You can file a dispute with the credit reporting agencies if you identify any errors.
The Bottom Line
After you build your businessâs credit, youâll have the ability to get financing with better terms to expand your business.
But imagine the following scenario: you put a lot of effort into improving your business credit score and you go to apply for a small business loan from a traditional lenderâ¦ and you have to wait months to get approval. This scenario is, unfortunately, very common.
With Biz2Credit, however, you can quickly get funding for your small business.
Gauntlett Eldemire, who operates GSE Laundry, was trying to get financing through a local bank for a new laundromat. But the bank was struggling to approve loan applications in a timely manner due to the coronavirus. He decided to turn to Biz2Credit, and in his words, âthey took over the loan application and came through for me.â
Learn how Biz2Credit can help fund your small business expansion.