Small business owners have long faced the frustration of having great personal finances and a solid business plan but having a loan rejected because they don’t have business credit.
A business credit score is important, and it is the first thing that financial institutions will look at when they are reviewing your business loan application. Knowing how to build business credit might sound like a complicated thing to do, but it’s not.
Let us look at the benefits of having a solid business credit score.
How To Build Business Credit
First off, let’s explain what business credit is.
Just like you have a personal credit score, you have a business credit score. A business credit score is a credit-risk assessment that indicates whether a business owner is a good candidate to receive a business loan based on past management of their credit or loans.
Having a good credit score is definitely an advantage and is very helpful when running a small business.
To establish business credit, you may first need to take the following steps:
1. Incorporate your business or form an LLC (Limited Liability Company)
This ensures your personal and business identities will be separate.
2. Get an employer identification number (EIN) from the federal business bureau
An EIN is like a social security number for your business. The more you use it, the more visible it makes your business. Use it as often as you can for all your business transactions.
3. Open a business bank account
Make sure you use your legal business name.
4. Get a dedicated business telephone
You’ll also want to make sure it’s listed under your legal, legitimate company name.
5. Apply for a business credit card and use it for your business transactions
Having a business credit card is more than a convenience; when used responsibly, it’s a crucial credit-building tool.
Having a high credit score will help you get a loan so that your business grows in the future.
To get a business loan, lenders evaluate the risk in lending to you based on your income and your existing debt payments.
Do you pay your credit cards, loans and other debts on time?
How do you use your credit?
Lenders want to know you have money to pay back your business loan and that you’re responsible when doing so.
It’s always important to monitor your credit report regularly. Monitoring your credit reports is always a good idea because your credit scores are based on your credit reports. Your credit score determines your ability to qualify for loans and to get better interest rates when borrowing. It shows lenders that you’re a responsible borrower.
Also, It doesn’t have to cost any money, although there are paid services available.
Your business credit report impacts the following decisions:
- The amount of credit issued to your business
- What the terms of repayment will be
- The interest rates you will pay
How Much Of A Score Do You Need To Have Excellent Credit?
The most recognizable credit score model is the FICO score and it was introduced by the Fair Isaac Corporation in 1989.
The FICO score is a number that ranges from 300 to 850 and represents how creditworthy you are to potential lenders as shown in the table below.
| Credit Score Range | |
| 800+ | An exceptional score. Only 1% of the borrowers in this category become delinquent |
| 740 – 799 | This is considered to be a high score. Delinquency rates are at 2% |
| 670 – 739 | Good – 8% delinquency |
| 580 – 669 | Fair – 28% delinquency |
| 579 and below | Poor – 61% of borrowers become delinquent |
Start building your business credit
Having bad credit doesn’t mean you’re automatically disqualified from getting a business loan. If you apply for a business loan having a low score, a few things could happen:
- it could be more difficult to get approved
- you could be denied
- you could end up paying more
Building your business credit is the key to smooth business deals and huge savings over time. So, if you’re either a new business owner or you are not new to the game and have been rejected before for a business loan, you should try building your business credit as quickly as possible.
A good credit score can be the difference between paying more or less each month: having a good score can lower your payments so that they are more affordable.
So, are you ready to start building the perfect credit score?