Creating a successful small business has many challenges. Fit Small Business reports that approximately 50% of small businesses will fail within the first five years. About 21% of all small business owners have cited lack of available small business loans as a significant challenge to their business’s future growth and success, and many don’t know they have a business credit score, let alone how to build business credit or improve it.
Prosperous small businesses often secure outside funding through U.S. Small Business Administration (SBA) loans. These loans are anywhere between $50,000 and $5,000,000, with a loan term typically between 10 and 25 years. The SBA guarantees these loans, meaning they’re desirable for loan providers as well.
While SBA loans are easier to attain than a traditional bank loan, they’re still more difficult to get than most loans from non-institutional lenders. Lenders review credit checks, background checks, financial statements, and tax returns before an SBA loan approval. If you’re a small business owner, consider taking the proper steps to establish and build your business credit to receive an SBA loan and support your growth.
Having good credit is vital for any type of loan, since traditional lenders cite poor credit as the main reason behind rejecting most small business owners. Building your business credit score also leads to better rates and terms on any small business loan, and gives security of approval for emergency loans in case your business hits a rough patch down the road.
How to Build Business Credit
Business credit is calculated uniquely by business credit issuers. Each has its own ways of assigning a score, but common indicators include:
- How many years you have been in business.
- How many business credit lines you applied for in the last 9 months.
- How many business credit lines you opened in the last 6 months.
- Your small business’s last 12 months of payment history.
- The number of late payments on your accounts.
You have the ability to affect your business credit score. Here are some tips to help get you started:
1. Obtain an Employer Identification Number from the IRS & Register With Dun & Bradstreet
An Employer Identification Number (EIN) identifies your business for tax and credit purposes and is essential to get an SBA loan. This number helps separate your personal social security number from your business credit profile.
When you apply for any sort of business credit, suppliers and lenders will credit check your business through Dun & Bradstreet (D&B). To establish business credit, you’ll need to register under D&B’s database and set up your company’s profile. You’ll get a 9-digit DUNS number, which is the most widely-used number for identifying companies in the U.S., according to the SBA.
2. Open a Business Checking and Savings Account for Your Business
After obtaining your EIN and DUNS numbers, use them to open a checking account with your bank in your business name. These accounts help make it easy to protect your personal assets from liabilities your business incurs. Make sure you use your EIN and DUNS numbers and not your social security number.
Business savings accounts aren’t mandatory, but they’re a good idea for your company’s long-term financial health. Having a savings account helps plan for unexpected events, as well as save money for things like tax payments. Savings accounts also earn interest while protecting part of your business funds.
3. Apply for a Business Credit Card
Business credit cards are a great way to establish and build your business credit while earning rewards and benefits on business expenses. Researchers have found that small businesses with business cards typically have more employees and more assets, loans, and revenue. Just like personal credit, business credit issuers rely on your business credit report to determine if you’ll be approved for a credit card and set your credit limit.
Some advantages of having a business credit card include:
- Managing your business’s cash flow by having 20 to 30 days to pay off business expenses without interest.
- Getting a higher credit limit than a personal consumer card.
- Establishing a professional and credible image.
- Earning rewards like points, cash back, or free nights at hotels on business purchases.
- Added security with merchandise discounts, purchase protections, warranties, theft protection, and insurance.
- Reporting positive activity to business credit bureaus, which improves your business credit.
4. Manage All Business Finances With Discipline
As with personal credit, good business credit requires self-discipline and the ability to budget funds appropriately. Make sure you know all the terms of your credit cards and accounts inside and out.
Your business credit will grow as you pay your bills on time and in full every month. It’s extremely important to make all your business payments on time; late payments on your business credit card could end up on your personal credit reports. You’ll also avoid any interest or late fees associated with credit cards.
Use a variety of credit accounts to help keep credit utilization low. Credit utilization refers to the percentage of your total business credit card balance that is currently put to use compared to the total credit limit.
Business Credit Is the Foundation to Success
As a small business owner, building credit is a foundation to success. Demonstrating good credit habits helps your business secure more favorable options for credit cards and loans. Always remember to use any business loans or credit with discipline. Your result is a growing business credit score and a flourishing business.