Like many business owners, you may wonder about the purpose of business credit and what you can do to improve it. I get a lot of questions and thoughts about this topic from small business owners.
In this article, I answer eight commonly asked questions about business credit.
1. What is business credit?
Business credit is part of your business profile and determines your loan repayment ability. Business credit will help you buy something now and pay it later. It would be best to have a good credit score to prove your business is trustworthy to creditors. A good score can help you negotiate lower interest rates or a more significant loan amount. Even if you do not think you'll initially need financing for your business, it's a good idea to build good credit now so you'll be in a strong position for financing options whenever needed.
2. How can I get business credit?
First, you need your business to be established. Register your business as a limited liability company (LLC), partnership, sole proprietorship or another business entity. Then, your business credit profile will be created. Parts of your business profile are included as public records, and keep in mind that anyone can view your business credit.
For many entrepreneurs, registering your business can be done at your local city government office and online with your state government office. The U.S. SBA offers helpful information on registering your business.
3. How can I create a strong business credit profile?
Fortunately, there are several ways to build a strong business credit profile, even as a new business owner. Here are two I recommend.
Open a credit card for your business. To apply, you’ll need your business contact information and information such as type of business, estimated monthly spending, estimated annual revenue and employer identification number (EIN). Make consistent credit card payments and pay off the amount owed whenever possible.
Ask your vendors for “vendor credit.” This allows you to purchase goods and services for your business without paying upfront. Vendors typically give a company 30-60-90 days to pay the amount owed. By paying your bills on time or early, you will also establish a good relationship with vendors, enabling you to negotiate better prices or payment terms. An important tip: Before you ask vendors for credit, ask if they report regularly to business credit bureaus and which ones. Those vendors are the ones you want credit from.
4. Where can I see my business credit profile?
There are several places you can go to view your business credit profile. All credit bureaus will give you access to view your score. They also want to ensure that your information and their records have the same accuracy. Therefore, it makes sense to review your profile regularly. There’s no penalty for inquiring about your business credit profile.
5. What are the main business credit bureaus?
The top business credit bureaus in the country are Experian, Equifax and Dun & Bradstreet. These three credit bureaus have slight differences. I recommend that you do good research on these three and decide which one is best for your business.
6. How often should I check my business credit profile?
I recommend that you check your report monthly. It’s the best way to find errors and fix minor issues quickly.
For example, due to fraud or a business mix-up, your business could be incorrectly showing a late payment or nonpayment to a vendor you never worked with. Or you’ve been in business for two years, but your credit report shows only one year. Being in business longer helps your business credit score and can help you get a loan if needed, so that is a minor issue that should be fixed immediately. It’s a good idea to check your credit report from all three main credit bureaus and report any problems to each.
7. How can I improve my business credit profile?
If you don’t like your business credit score right now, don’t worry. There are ways to improve it, but it takes effort. Pay off your business credit card often to keep your debt ratio low. Do not wait for monthly statements; make payments every week. You can pay online or on your phone for easy convenience.
Also, keep your credit account open. The length of your credit history matters.
8. Does my time in business affect the score of my business credit profile?
It does not necessarily impact your credit profile, but finding a small business loan will be more challenging if the business is in the early stages. Strong profiles showing credit and service debt histories can positively impact your profile. The longer your credit history, the more information your creditors can have in your profile to prove your creditworthiness, and they can determine if you have a good track record.
By understanding the basics of business credit and taking steps to build good credit, you're helping set up your business for success.
This article is sponsored by Goldman Sachs 10,000 Small Businesses. More than 14,000 business owners have graduated from the program across all 50 states, Washington, D.C., and Puerto Rico. Learn more at www.10ksbapply.com.
Goldman Sachs 10,000 Small Businesses is an investment to help small businesses grow and create jobs by providing them with greater access to business education, support services, and pathways to capital for growth-oriented entrepreneurs. Through the tuition-free program, participants gain practical skills across topics like financial statements, negotiations, marketing, and management, and receive the tools to develop an actionable growth plan for growth – at no cost. To date, more than 14,000 business owners have graduated from the program across all 50 states, Washington, D.C., and Puerto Rico. Invest in your future and apply today: www.10ksbapply.com
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.