Building a business takes more than setting up an online presence or a physical store. One of the main goals when starting a business is to maximize productivity and profitability in everything that you do. It is, therefore, crucial to build a solid business credit profile as part of your business development.
Simply put, business credit signals your business's ability to properly handle its purchasing power, finances, and debt. It is an important step for businesses and is no different from personal credit, as you have to build it over time. In this article, we will look into the steps you need to take to establish and build good business credit.
Does Good Business Credit Matter?
Any business owner can attest to the fact that creating and executing the perfect business plan from scratch is no easy task. But do you need the additional hassle of building your business credit?
Yes, you do. And here is why it matters.
First, your business credit affects your ability to get loans and the rates that you'll be offered. This is crucial as your business needs financing as you begin and as you grow. Additionally, investors also look at your business credit when you apply to raise money for your business. In the event of a financial crisis, good business credit is the best safety net you can rely on to cover your business expenses.
These are just a few reasons why business credit matters. While it can be more complicated than personal credit, the outcomes are definitely worth the effort, and the good news is that you can start right away with this guide.
Tips for Building Business Credit
Whether you're just opening the doors to your new business, or you have been running one and you've heard of business credit, here are some tips to get you going.
1. Build a Foundation
Business credit is an extra benefit for a business with a strong foundation. This means that it's crucial to establish your business first before focusing on building your business credit. This mostly applies to new businesses, as you need to take time to make it look professional.
A strong business foundation involves getting a business phone line and listing it in the directory assistance. Other items include using a professional email address and a business post office box address, or your home address if you're just getting started.
2. Register Your Business
Most American states require all businesses to be officially registered and licensed. To make your business a distinct legal entity, you have to register it as an LLP, LLC, or corporation. This is because sole proprietorships don't create separate business entities in most states. Annual filings will be required, and you will also need to register with your home state if you formed the business in another state.
3. Work With Vendors Who Report Payments
As you buy supplies, inventory, and services from vendors and suppliers, they report the credits and corresponding payments to business credit reporting agencies and bureaus. You can use this to your advantage, as it is one of the easiest ways to build business credit.
If you have vendors who you pay on terms, ask them to report the payments to the agencies. This simply creates and strengthens your business's credit profile and business credit profile. The more credit lines you have reporting the higher your business credit score will be.
4. Pay Vendors Early
The concept of paying on time is all too familiar, as it's the most important factor for calculating any type of credit score, especially business credit. Business credit reports use the term "Days Beyond Terms," which determines how many days beyond the due date that a payment is due.
Paying even one day late can affect your business credit negatively. On the other hand, paying on time can get you a good business credit score, so you need to ensure that all vendors and suppliers, especially those that report, are paid early.
With strong and established business credit, you are more likely to get higher credit approvals, better interest rates, and flexible repayment terms on loans. Therefore, it's crucial to monitor your business credit reports regularly to avoid errors and fraudulent activity.