A business credit card with a credit limit of a few thousand dollars may not suffice when you need to pump cash into new product or equipment. More than ever, this is the time when a good business credit score will solicit hearty approvals for all your credit requests. If you haven't yet established business credit or have an unsatisfactory score, you may need to start with some groundwork before reaching out to lenders and suppliers.
1. Ensure that you have a good personal credit score
During the initial stages of your business, banks will rely on your personal credit score to get an idea about your risk profile. It is common practice for lenders to check the personal credit of a business partner who holds a stake exceeding 20% in the business. If your score isn't over 630, work to improve it, whether that means slashing the balance on your credit cards to less than 30% of your limit or paying bills on time.
Though you may have to provide a personal guarantee initially, apply for business credit, and keep your personal and business credit separate to make the most of available tax benefits. As your business loans and credit card payments won't be factored in your personal credit, your score won't be impacted in any way by your business debt.
2. Get listed to establish your business credentials
Once you have formed your corporate structure, the next step should ideally be to list your phone number on the directory assistance listings database with the correct business name. Also confirm if you have the appropriate licenses that serve as evidence that your business is legitimate and credible.
Call up your mobile phone provider to re-register your phone under your business name and EIN. Follow suit with equipment leases any vehicles. By making timely monthly payments to these services, you can start building a positive credit pattern early on.
3. Register your business with the big three business credit bureaus
Registration at Dun and Bradstreet, Experian and Equifax is free, and can be easily completed at the respective websites using your Employer Identification Number (EIN). This is a necessary step to initiate the official tracking of business credit.
4. Explore your options in business credit cards and lines of credit
Set up a meeting with the manager of the local bank to understand the financial products you qualify for. You can either opt for a major bank or a small bank; the former is bound to have a bigger product portfolio and a large presence, while the latter is likely to provide personalized attention and bespoke solutions to win your patronage. A good banking history with regular deposits and healthy bank balances can boost your chances of getting credit without much hassle.
You can also get credit lines through a local credit union. To identify options other than banks and credit unions, consult with your local Small Business Administration office. They can point you to asset-based lenders who mainly consider collateral as opposed to your creditworthiness.
5. Register your billing cycle with credit agencies
If you haven't already set up a billing cycle with frequent suppliers, request for a change and register the billing with credit agencies. A billing cycle is a win-win for both you and the supplier. You can receive supplies and have 30 or 60 days to make the payment. Billing cycles help suppliers show consistent revenue and strengthen their own credit histories.
6. Don't delay setting up credit
To build credit fast, apply for it soon after you set up your business. Banks and lenders are partial to businesses that have established themselves for at least two years. You don't have to take out a big loan; apply for a small one or get a business credit card to get the ball rolling. Consider a secured credit card with a low limit if you fail to get a loan. Another option is to secure a commercial credit account with major retailers to start building a credit history.
7. Don't forget to read the loan terms carefully
Number crunch to ensure that the total cost is not too high. If you have applied for a business credit card, check the interest rates carefully and choose products that offer you competitive terms. The last thing you want is to sign up with a lender who charges a high default rate for missed payments or sizable outstanding debt.
8. Use business credit cards prudently
While a business credit card is a great tool to meet ongoing capital requirements and establish your credit history, it can become a double-edged sword if you rake up a large debt. Besides making sure that you don't amass a huge balance, here are some more tips to consider when you shop for a business credit card:
- Check out the rewards offered by different cards. Some credit card issuers offer excellent initial rewards and bonus points, which can be used to pay towards a campaign or business trip.
- See if you can find products that offer zero introductory rates on purchases and balance transfers. This is a great opportunity to pay off debt faster.
- Leverage business credit cards based on the type of transaction. For instance, you can use a business rewards card for day-to-day expenses, and pair it with a zero-interest personal card for funding.
As the payment information on business credit reports is more detailed than in individual/consumer reports, it helps if you can pay bills before they are due, to present a good image and bolster your creditworthiness.
Errors on business credit reports are quite prevalent, so it is in your best interest to monitor your credit from time to time.