You may understand the value of building personal credit, working your way toward better loan rates and easier credit applications in the future, but did you know your business should be building credit as well? Business credit is similar to personal credit, but it needs to be built somewhat differently—and it should be a part of almost any business’s strategy.
How to Build Business Credit
First, let’s talk about what business credit is. Like with personal credit, business credit is an indication of a business’s financial trustworthiness; with better credit scores, you should be able to qualify for more loans, better terms, and better rates.
If you want to build business credit, these are the steps you should take:
- Start an official business. It makes sense that you need a business to start building business credit, but simply selling baked goods to your neighbors isn’t going to cut it. In all likelihood, you’ll need to have an employer identification number (EIN), which functions kind of like a social security number (SSN) for businesses. You can get this by applying directly to the federal government, for almost any business, and it’s a requirement for most LLCs and corporations.
- Open an account. Next, you’ll want to open a business bank account and/or checking account, or a line of credit. It may be difficult to get a line of credit if you have no existing business credit, but as a temporary measure, you may be able to use your personal credit as a fallback to open one.
- Acquire credit cards (and use them responsibly). It may be easiest to start building your credit by using credit cards, since they should be readily available. Just like with personal credit, making purchases on credit cards and paying off the balances regularly is an ideal way to improve your score. Just make sure you comparison shop to find the best credit cards for your business, so you get a decent rate.
- Buy on credit where possible. If possible, consider buying on credit with your vendors. Even though this will be through another business, and not a financial institution, this kind of transaction will also factor into your credit.
- Be consistent with your payments. Like with a personal credit score, your business credit will depend on the history and reliability of your account. If you’ve gone many years without missing a single payment, your credit will be in much better shape than if you’ve just opened an account or if you’ve historically missed payments.
Your personal credit is most commonly described through your FICO credit score, but there’s no universal standard that fills the same niche for business credit scores. Many different credit bureaus may record your business’s credit, so you might see a slightly different picture depending on how you run your report. You should also be prepared to pay a fee when looking at your business’s credit report; you don’t get a periodic free review the way you do with your personal credit score.
The Benefits of Business Credit
So why would you go out of your way to build business credit in the first place?
These are just some of the benefits you’re going to receive:
- Easier loan access. For starters, if your business has more credit, you’ll find it much easier to access loans from banks. When it comes time to purchase that new piece of equipment or make a strategic acquisition, you won’t have to jump through hoops or put up collateral to secure your loan. This becomes increasingly more important as your business grows.
- Lower rates. In addition to getting loans more easily, you’ll also receive lower rates on those loans. For long-term loans, lowering your interest rate by just a percentage point can make a serious impact on your monthly payments, so it’s definitely worth pursuing.
- Better payment terms. You may be able to secure better payment terms with your vendors as well. For example, they might extend net-15 payment terms to new customers, or require you to pay immediately, but if you have a strong credit history, you may get net-30 terms or better.
- More sales (and a better brand reputation). Sometimes, clients will do research on your business before they’re willing to buy from you. If they see you have a strong credit history, they’ll think more highly of you, giving you a boost to your brand reputation and possibly earning you more sales in the process.
Put some effort into building your business’s credit. The benefits are enormous, and you’ll be doing most of the same things you’d do anyway. Just pay close attention to your balances at the end of each month and be consistent in your payments.