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How to Establish Business Credit

by Angel Morales
business credit

It’s not unusual for many business owners to use personal funds to finance their companies when they are just starting. However, as your company grows and financing demands increase, you will most likely want to establish business credit. It will significantly reduce the strain on your personal finances and provide a host of other benefits as well.

What is Business Credit?

Business credit is a contract between your company as a borrower and a lender, such as a bank. It’s also a measure of how creditworthy your company is and how lenders assess its ability to repay loans, lines of credit and credit cards.

Typically, business credit is scored from 0 to 100, unlike a personal credit score which is between 300 and 850.

10 Types of Business Credit

  1. Startup Loans
  2. Term Loans
  3. SBA Loan
  4. Business Credit Cards
  5. Lines of Credit
  6. Microloans
  7. Invoice Financing
  8. Invoice Factoring
  9. Merchant cash advances
  10. Working capital loans

What You Will Need to Qualify

Lenders consider business credit to be riskier than personal, which means it is harder to qualify for these types of financing. Before approaching a lender, make sure that you have all your ducks in a row.

Here is some of the information a lender will need to consider your application:

  • Company’s legal name and contact details
  • Business structure or entity (e.g., LLC, corporation)
  • Industry
  • Business licenses and permits
  • Federal tax ID Number or EIN (some sole proprietors exempted)
  • Age of your business
  • A sound business plan
  • Good credit history
  • Cash flow and income statements
  • A healthy debt-to-income ratio
  • A DUNS (Dun & Bradstreet) number
  • Collateral

Benefits of Business Credit

Once you secure business credit, you can finance purchases without dipping into your savings or personal credit. Even better, business credit is frequently available at low interest rates. Some credit cards, for instance, are available with zero percent APR (annual percentage rate) for a specific period, such as one year.

As you borrow and pay off your loans or credit cards regularly and reliably, you will qualify for even higher financing. This is vital when you consider that 33 percent of small businesses struggle because of a lack of capital. And, according to a U.S. Bank study, more than 80 percent of small businesses fail because of insufficient capital.

There are some other benefits of business credit as well. You can collect rewards, such as air miles and cashback that you can use for other expenses. Plus, business credit helps you to keep your personal and business finances separate. You will be better able to track your business expenses and accounting will be less complicated.

Build Your Credit History

When you are just starting your business, your personal credit score is crucial when it comes to establishing business credit. If you don’t have a credit history, it’s time to start building it.

First, always pay your bills on time. Apply for a secured credit card and deposit between $50 to $300 dollars on it. A bank will extend a credit line to you based on the amounts you have deposited, and report activity to the credit bureaus.

Other options to build your credit history include applying for a credit builder loan, or a retail credit card, which is usually easier to obtain than a major credit card.

Protect Your Business Credit

Once you have established business credit, be sure to keep it on good terms and monitor it regularly, as you do for your personal credit. Good business credits lets you avoid prepaying for products and services. Plus, you will get better credit terms and interest rates from your existing lenders, as well as from new vendors and suppliers.

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