Business credit is the lifeline of corporations of all sizes. Whilst business owners might have perfect personal credit, it would not be wise to take out loans based on this score as it would incur personal liability. Doing so could render the owner exempt from the protection of limited liability and they might be required to assume their business’s debt. Should the business face rocky times, the debt would be reflected on the owner’s personal credit report.
For these reasons, it’s in any business owner’s interest to build business credit before applying for loans and capital with its business’s score instead. Despite the importance (and clear benefits) of good business credit, many small businesses struggle to build it up, with 36% of small businesses being denied a loan because of their credit score.
Importance of Business Credit
Better business credit scores open more doors financially for a corporation. There are several reasons for this but concept overarching all of them is that lenders view such companies as a safer bet and are thus more likely to loan that business money. This then results in multiple secondary benefits.
Since lenders trust these companies will repay their loans, they are often willing to offer more favourable interest rates than to those with a bad credit history. The access to loans that good business credit provides grants businesses the ability to invest in itself in ways it would not be able to do by itself.
On top of this, good credit enables businesses to be protected with a safety net should they be surprised with any unforeseen circumstances. If profits are down out of the blue, the reserve capital that loans provide will protect against problems surrounding paying company’s rent and employees’ salaries.
Ways to Build It Quickly
Form an LLC
It is almost always better to establish a business as a legal entity when looking to acquire loans. This is because banks and other lenders generally prefer such businesses as the protection of limited liability they receive from their corporate structure will extend to them as a lender and safeguard them from risk. This is due to the distinction LLCs make between business and personal assets.
Establish Net-30 Vendor Accounts
For those that haven’t already, businesses looking to improve their credit score need to establish Net 30 accounts. These accounts enable businesses to buy stock from some retailers on credit, receiving an invoice instead of a receipt and having up to 30 days to repay it.
Sellers that accept Net-30 as a method of payment often report these transactions to the major business credit bureaus; this provides businesses with no credit history an opportunity to establish tradelines on their credit profiles and build business credit. Assuming repayment is made on time or earlier, the business’s credit scores will keep improving – which only makes it easier to secure capital from lenders later.
Business Credit Card
Taking out a credit card in the name of the business is another extremely effective way of building business credit. By being prompt with repayments and limiting spending to up to 50% of the credit card’s ceiling, a business will consistently increase the credit limits they are able to qualify for as time passes.
Therefore, through responsible management of current credit, a company can build their business credit fast.
Apply for a Business Loan
Once a business has sufficiently increased its credit score, it will have access to previously out of reach business loans. These loans provide companies with the capital they need to expand and develop.
Approval for business loans (preferably with favourable terms) is the light at the end of the tunnel for companies trying to build their business credit. Those that follow the advice above and manage their current credit responsibly will put themselves on the best path towards this ultimate goal.
Whilst the value of business credit is quite self-explanatory, many companies struggle to achieve a score good enough to apply for loans with because they don’t know how to build business credit. With the knowledge laid out in this article, any business can set themselves up to build their business credit in no time. For more information on building business credit, The Really Useful Information Company (TRUiC) provides comprehensive and in-depth resources that are free to check out.