Even with a strong personal credit score, you may not get that business loan if your business’ credit score is less than satisfactory. Your business’ success depends on how healthy your business is.
Like personal credit, business credit refers to the three-digit number used by lenders to determine if they should offer you credit or not. The number also determines the terms of the agreement. With a high credit score, the lenders ascertain that you can pay off your debt in time – this helps lenders to minimize risks when lending money.
Why should you work on your business credit? First, a good business credit will protect your personal credit score while limiting personal liability. Since lenders can trust you with more money, a good business credit helps increase your credit capacity by helping you secure more and even favorable loans – when borrowers trust your business to repay loans, they charge lower interests. At the same time, you qualify for the affordable insurance premium. You will leave a good impression to partners, clients, investors and vendors evaluating your business. Lastly, your business credit score lets you take on a business loan without having to sign a personal guarantee in case of liability.
Keep in mind that most vendors only report delinquencies and they do not care about your financials when your business is running smoothly.
Note, however, that unlike the personal credit score which ranges from 300 to 800, business credit scores are on a 1-100 scale and a 75 is an excellent score. Also, businesses will have employer identification numbers (EIN) rather than social security numbers (SSN), and the business scores are available to the public, unlike personal scores.
So, how can you build good business credit or credit trustworthiness?
- Building a business entity and get your tax identification number
If you’re about to set up your business, first identify the kind of business entity, you wish to be identified as. While partnerships and sole proprietorships are easy to operate, they aren’t incorporated, and you’ll carry the burden of unpaid loans.
To protect personal finances, you could opt for a C Corporation, an S corporation, or a limited liability corporation (LLC).
Once you establish a business structure, get your tax identification number (EIN)from the federal government – the IRS. Don’t forget to set up a business bank account after. Once you have these documents and detailed furnished, get a business credit card.
- Keep accurate financial information
This doesn’t ensure that your credit score is accurate but also protects you from tax fraud Canada. With the right information, the credit firm will contact your easily in the event of fraudulent activity reported.
- Get standard business loans
To build your business’ creditworthiness, you need to get a standard business loan from your bank. This loan is similar to most short-term personal loans – you’re to repay it in full (plus interest) within a short period of time. But, before you sign off on loan, ensure that the bank will report the transaction to the credit bureaus.
- Get your books in order
As mentioned above, you need to consider registering your business as an incorporated business. The reason for this is that you will receive protection from liability. All that’s needed from you is accurate and professionally kept books of account and records. These records will legitimize your company while showing your lenders that you’re running a financially sound company with well-maintained books. Since lenders consider every aspect of your business, you need to have professional take care of the books if you cannot.
- Take financial responsibility
This means paying your bills on time – it boosts your creditworthiness. On the other hand, late payments will impact your credit rating negatively. And that’s not all – how you handle cash flows will determine your business’ creditworthiness. So, if applying for credit, ask yourself whether the money is for use in income-generating activities or not.
- Work with suppliers who report their financials to credit bureaus
You need details of business transactions and payments to increase your credit score. This means that your suppliers should report to the credit agencies and your only role will be paying these suppliers in time. Don’t forget to review your credit report annually to ensure that the correct information is recorded.
- Get a corporate credit builder
Some agencies offer plans for credit building to small business. These credit builders will build the vendor or the trade credit and help you establish a good credit profile.